Regulation reference · Treas. Reg. § 1.469-1T(e)(3)(ii)

The 75/55 rule (STR loophole) for cost segregation.

The "75/55 rule" is informal shorthand for the short-term rental classification rules at Treas. Reg. § 1.469-1T(e)(3)(ii) — the 7-day average customer-use test and the 30-day-with-substantial-services test. Properties meeting either test are reclassified from rental activity to non-rental trade or business under 26 U.S.C. § 469, exempting accelerated cost segregation losses from the passive activity loss limit. Combined with material participation, this is what lets W-2 earners offset ordinary income with rental losses — without qualifying for real estate professional status.

The two prongs of Treas. Reg. § 1.469-1T(e)(3)(ii)

Prong Threshold Typical applicability
(e)(3)(ii)(A) — 7-day rule Average customer-use period ≤ 7 days/year Airbnb, VRBO, vacation rentals with weekly turns. The most common path.
(e)(3)(ii)(B) — 30-day variant Average ≤ 30 days/year AND substantial services provided Aparthotels, serviced apartments, corporate housing with hotel-style services.

Why this rule matters for cost segregation

By default, rental real estate is a passive activity under § 469. Cost segregation losses on a passive rental are limited to passive income — they don't reduce W-2 or active-business income. The STR loophole at Treas. Reg. § 1.469-1T(e)(3)(ii) reclassifies qualifying short-term rentals from rental activity to non-rental trade or business. The passive loss limit doesn't apply. Combined with material participation under Treas. Reg. § 1.469-5T, accelerated depreciation from cost segregation offsets W-2 income directly — the most powerful Year-1 setup in real estate for non-REPS taxpayers.

The 7-day average customer-use test

Average period = total customer-use days ÷ number of customer-use periods (bookings) during the year. A property booked 200 nights across 50 bookings has a 4-day average — passes. 300 nights across 12 bookings = 25-day average — fails. Personal use is excluded; only paid bookings count. The test is applied annually — same property can qualify one year and fail the next.

Practical tip: Airbnb/VRBO operators with mostly weekend-and-weeknight bookings clear this easily. Corporate-housing operators with month+ stays do not — they need the 30-day variant. Property managers should pull a booking export from their PMS (Hostfully, Guesty, OwnerRez, or platform exports from Airbnb/VRBO) annually and compute the average. The IRS examines this on audit per IRS Pub 925.

The 30-day variant (substantial services)

For stays up to 30 days where the owner provides substantial services. "Substantial" means daily housekeeping during the stay, daily linen changes, daily meal delivery, concierge, or other hotel-style hospitality. Standard end-of-stay cleaning between guests does NOT count. This prong is used by aparthotels, serviced-apartment operators, corporate housing with concierge, and some boutique vacation-rental brands offering daily housekeeping packages. Ordinary Airbnb operations rarely qualify under this prong — they should rely on the 7-day test instead.

Material participation still required

Meeting the 75/55 rule reclassifies the activity, but you still need to materially participate to be treated as an active participant. Under Treas. Reg. § 1.469-5T any one of seven tests works — the most common for self-managing STR owners is "≥100 hours AND more than anyone else." Keep a contemporaneous time log: messaging guests, coordinating cleaners, restocking, maintenance, listing optimization, accounting. Cleaner hours don't count against you under "more than anyone else" because contractors aren't comparing on the same axis as the owner-operator. See the REPS page for the full material-participation rules.

75/55 vs REPS — when to use which

Both unlock the same outcome (rental losses against ordinary income). They apply in different fact patterns:

  • 75/55 (STR loophole): when the property is a short-term rental (≤7-day average or ≤30 days + services). No 750-hour requirement. No 51% test. Just material participation in this property/activity.
  • REPS: when the property is a long-term rental and you can pass the 750-hour AND 51% tests. Then aggregate the portfolio and materially participate in the aggregate.
  • Neither: passive activity. Cost seg losses suspend until disposition or passive income arrives. Still valuable on long holds; not immediate Year-1 offset.

Documentation discipline

Three pieces, all contemporaneous: (1) a per-booking log showing dates and stay length — most PMS exports work, but verify the format makes the average computation reproducible; (2) a time log demonstrating material participation under § 1.469-5T (Toggl, Harvest, Excel, paper); (3) the cost segregation study itself + Form 3115 if a §481(a) catch-up applies. The IRS Cost Segregation ATG (IRS Pub 5653) and Pub 925 both flag inadequate time logs as the #1 reason STR loophole claims fail at audit.

Frequently asked

The 75/55 rule, in detail.

What is the 75/55 rule in cost segregation?
The '75/55 rule' is informal shorthand for the short-term rental (STR) loophole under Treas. Reg. § 1.469-1T(e)(3)(ii). It refers to two parts: the 7-day average customer-use test (the property's average rental period is 7 days or less) and the 30-day-with-substantial-services test (rentals up to 30 days where the owner provides hotel-like services). Properties meeting either test are not treated as rental activities under § 469, so accelerated depreciation losses are not subject to the passive activity loss limitation and can offset W-2 income without real estate professional status (REPS).
Where does the name '75/55' come from?
It's a memorable label that tax practitioners have used informally — the numbers don't appear in the regulation text. The actual statutory thresholds are 7 days (the 7-day average rule under Treas. Reg. § 1.469-1T(e)(3)(ii)(A)) and 30 days with substantial services (under (e)(3)(ii)(B)). The '75/55' phrasing seems to combine those two thresholds in a slightly garbled way. The regulation itself, not the nickname, is what controls — see § 1.469-1T(e)(3)(ii).
How is the 7-day average computed?
Total customer-use days divided by the number of customer-use periods (rental bookings) during the year. A property booked for 200 nights across 50 bookings has an average of 4 days per booking — passes the 7-day test. A property booked for 300 nights across 12 bookings averages 25 days per booking — fails. Personal-use days are excluded; only paid-customer rental periods count. The IRS examines this at the property level annually.
What counts as 'substantial services' for the 30-day variant?
Daily cleaning during the stay, daily linen changes, daily meal delivery, concierge services, or other hotel-style hospitality. Standard end-of-stay cleaning between guests does NOT count. The IRS distinguishes between (a) ordinary services landlords provide (which are not 'substantial') and (b) hotel-style ongoing services (which are). Aparthotels, serviced apartments, and corporate-housing operators typically qualify under this prong. Routine Airbnb operations with end-of-stay cleaning only typically do NOT — they have to clear the 7-day average test instead.
Why does the 75/55 rule matter for cost segregation?
An STR meeting either prong is reclassified from 'rental activity' to 'non-rental trade or business' under § 469. That means cost segregation losses are NOT subject to the passive activity loss limit. Combined with material participation in the activity (under Treas. Reg. § 1.469-5T — typically the 100-hour-and-more-than-anyone-else test for self-managing STR owners), the accelerated depreciation deductions offset W-2 income directly. This is the 'STR loophole' that lets W-2 earners legally use real-estate losses against ordinary income without qualifying for REPS.
Does the 75/55 rule require REPS?
No — that's the entire point. REPS is needed when the activity IS a rental and you need to escape the passive loss limitation. The STR loophole reclassifies the activity as a NON-rental trade or business, so the passive loss limit doesn't apply at all. You still need material participation (most commonly the >100 hours AND more than anyone else test under § 1.469-5T) to be considered an active participant, but you don't need to satisfy REPS's 750-hour and 51% tests.
What documentation does the IRS expect for a 75/55 / STR loophole claim?
Three pieces: (1) a per-booking log showing dates and stay length for the year (PMS exports from Airbnb, VRBO, Hostfully, or Guesty are accepted); (2) a contemporaneous time log demonstrating material participation under § 1.469-5T (>100 hours AND more than anyone else is the common path); (3) the cost segregation study and Form 3115 (if a §481(a) catch-up applies). The 7-day calculation should be shown explicitly on the return or in workpapers. See IRS Pub 925 for passive activity audit guidance.
Can a single property qualify under the 7-day rule one year and fail the next?
Yes — the test is applied annually. A property booked mostly for 3-night stays in 2026 (passes) may be re-listed for monthly rentals in 2027 (fails) and the activity classification flips. Cost segregation deductions claimed in a qualifying year are not clawed back if the property later fails the test — the qualification is per year, not retroactive. Owners should track the average annually to know their tax position for that year's losses.
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