If you’re a physician, you already know the sting of a high tax bill. Between W-2 wages, practice income, and limited deductions, many doctors end up paying some of the highest effective tax rates in the country. That’s why more and more physicians are looking at real estate, not just as an investment, but as a way to legally reduce taxes.
One of the most powerful strategies is through short-term rentals (STRs) like Airbnb or Vrbo. When set up correctly, this so-called “STR loophole” allows doctors to use property deductions to offset their ordinary income, something that isn’t possible with long-term rentals. Done wrong, however, the opportunity of the short-term rental tax loophole disappears or, worse, you may trigger self-employment taxes.
The 7-Day Short-Term Stay Rule
The rule at the heart of this strategy is simple: keep your average guest stay at 7 days or less.
If your property meets that threshold, the IRS does not treat it as a traditional, long-term rental. That means it can escape the usual “passive income” label. And if you can also show that you actively participate in managing it, losses from the property can offset your ordinary income, including W-2 wages or medical practice income.
As long as you keep guest stays to 7 days or less, you don’t need to qualify as a “real estate professional”, like long-term landlords do, to use this strategy.
How Doctors Can Meet the Material Participation Test
To unlock the benefit, you must show that you are actively involved in running the property. You’ll need to keep a log of your time, a simple calendar or spreadsheet that records guest messaging, supply runs, or vendor coordination is enough.
There are two realistic paths to meeting the IRS test:
The 500-hour test: If you or your spouse put in at least 500 hours over the year, you qualify. That includes time spent messaging guests, coordinating cleanings, restocking, managing vendors, or updating the listing.
The 100-hour “most hours” test: If you spend at least 100 hours AND more time than anyone else, like your cleaner or handyman, you qualify. This option is often more realistic for doctors with busy schedules.
Maximizing Short-Term Rental Tax Deductions for Doctors
This is where the savings can become meaningful. Real estate owners can deduct depreciation, which helps spread the cost of the property over several years. With STRs, you can accelerate those deductions.
Here are two ways:
Accelerate Depreciation by doing a Cost Segregation Study
Instead of treating the building as one 27.5-year asset, a cost segregation breaks it down into shorter-lived components (like flooring, appliances, or landscaping). These can be depreciated in 5, 7, or 15 years. That’s bigger write-offs in the early years.
For a high-income doctor, that means you can use more of the property’s cost now to reduce taxable income, instead of waiting 27 years to get it all.
Use Bonus Depreciation by Timing Your Property Setup
For 2025, you can deduct 40% of qualifying assets immediately. The percentage is phasing down each year, but it can still create a large upfront deduction if you time things right. The key is when your property is “placed in service,” meaning it is furnished, listed, and available for rent.
If you get everything rent-ready before December 31, 2025, you lock in the 40% deduction for 2025. Wait until 2026, and the percentage drops to 20%. That means the sooner you finish setting up and making the property available, the greater the benefit in the first year.
How to Avoid Self-Employment Tax on STR Income
One trap for new hosts is accidentally turning their rental into a hotel business. If the IRS sees your STR as offering substantial services, equivalent to those of a hotel, the income could be hit with self-employment tax.
Here are some examples of how the IRS differentiates between service levels:
- Safe services (lodging level): Cleaning between stays, providing linens, and stocking basic supplies.
- Risky services (hotel-like): Daily breakfast, daily housekeeping, concierge services, or shuttles.
To avoid triggering self-employment tax, doctors should focus on providing lodging-level services and prioritize amenities that matter to guests, such as comfortable beds, fast Wi-Fi, smart locks, and a well-designed space.
4 Steps to Leveraging the Short-Term Rental Tax Loophole
Here’s how doctors can take action without turning this into another full-time job:
Step 1: Measure average stays the right way
Each booking counts as one stay, regardless of the number of nights. Add up the total nights and divide by the number of stays. Keep a simple log to make sure your yearly average is 7 nights or less.
Step 2: Track the hours you spend operating the property
Count only hands-on work, including pricing, calendar updates, guest messaging, coordinating turnovers, managing vendors, stocking supplies, and updating listings. Investor-only activities (like browsing Zillow) do not count. Keep all your hours in one log.
Step 3: Set your service level
Stick to lodging-level services. Cleaning between stays, linens, and starter supplies are fine. Avoid hotel-style services, such as daily breakfast or concierge support.
Step 4: Consider a cost segregation study
If the numbers justify it, a study can accelerate your deductions. Coordinate with your CPA to determine the property’s “placed-in-service” date so you can maximize depreciation in the correct year.
Frequently Asked Questions About the STR Tax Loophole
Do I need a real estate professional status (REPS) to use the STR tax loophole?
No. Unlike long-term rentals, STRs with average stays of seven days or less are not considered rental activities. You still need to show material participation, but you don’t need REPS.
Can short-term rental losses offset my W-2 or medical practice income?
Yes, if you materially participate. That’s the main benefit of the loophole: it allows STR losses (often from depreciation) to offset your ordinary income.
What is the seven-day rule for short-term rentals?
The IRS says if your average guest stay is seven days or less, your property is not treated as a rental activity. This allows you to deduct losses against your regular income.
Will I owe self-employment tax on STR income?
Not if you stick to lodging-level services (cleaning between guests, providing linens). If you offer hotel-style services, such as daily housekeeping or breakfast, your income may be subject to self-employment tax.
What is bonus depreciation, and how does timing affect it?
Bonus depreciation lets you deduct a big chunk of certain property costs in the first year. In 2025, the rate is 40%. To qualify, your property must be furnished, listed, and available for rent before December 31 of that year.
Get Expert Tax Planning That Pays For Itself
For many doctors, taxes can feel like an uphill battle. Between your salary, practice income, and limited deductions, it often feels like you have few options to meaningfully lower your tax bill. Short-term rentals, when structured correctly, can be one of those rare opportunities to transform an investment into a powerful tax-saving tool.
At MedTax, we specialize in helping physicians and medical practices understand tax strategies, such as the STR tax loophole, and apply them correctly. If you’re considering a short-term rental as part of your financial plan or simply want to lower your tax bills, we’d love to create a customized plan for you.
Ready to see if this strategy can work for you? Contact MedTax today to schedule a consultation.
