Section 469(c)(2) states a rule that surprises every new real estate investor: a rental activity is passive per se. It does not matter how many hours you work, how actively you manage, or how clearly it is your business — if it is a “rental activity,” the loss is passive and cannot offset your wages. The escape, when there is one, is almost never to work harder. It is to show that the activity is not a “rental activity” in the first place.
The definition does the work
“Rental activity” is a defined term, and Reg. §1.469-1T(e)(3)(ii) lists six categories of property use that are carved out of it. Fall into any one and the per se rule never applies; the activity is then an ordinary trade or business, and whether its losses are passive turns on the general material-participation test. These six are independent doors — you need only one.
| Exit | Test | Typical fact pattern |
|---|---|---|
| (A) | Average customer use ≤ 7 days | Airbnb / VRBO / vacation rental |
| (B) | Average use ≤ 30 days + significant personal services | Serviced or extended-stay rentals |
| (C) | Extraordinary personal services (use incidental to the services) | Boarding school, hospital bed |
| (D) | Rental incidental to a non-rental activity | Land held for investment; property used in your business |
| (E) | Available during business hours for nonexclusive customer use | Golf course, parking facility |
| (F) | Provided to a partnership / S-corp / venture you own, for its non-rental business | Owner contributes property to the entity’s operations |
What happens after the exit
Clearing one of the six does not make a loss deductible; it changes the question. The activity becomes a trade or business, and the loss is passive only if you fail to materially participate under §1.469-5T. That is why exit (A) — the seven-day rule — is the spine of the short-term rental play: it converts a per se passive rental into an ordinary business in which the owner-operator can materially participate.
A different route: the real estate professional
It is worth keeping the two escape paths distinct. The six exits change the character of the activity — it is no longer a rental at all. Real estate professional status under §469(c)(7), by contrast, leaves the activity a rental but removes the per se presumption for a taxpayer who clears the 750-hour and 50% gates. Different doors, different facts, and the firm maps each client’s property to whichever one its facts actually fit — the analysis behind our structuring engagements.