Is the STR Tax Loophole Going Away? What OBBBA Actually Changed

When new tax legislation passes, real estate investors often wonder whether the strategies they've been using will survive. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, generated exactly this kind of uncertainty. Here's the clear answer: the STR tax loophole not only survived OBBBA — it is materially stronger because of it. But there are nuances worth understanding, including a bifurcated rule for properties placed in service in early 2025.

What the STR Loophole Is and What It Was Before OBBBA

The short-term rental tax loophole is rooted in Treasury Regulation §1.469-1T(e)(3), which has not been changed by OBBBA. The mechanism — average stay of 7 days or fewer + material participation = active loss treatment — remains intact. OBBBA did not touch the passive activity rules at all.

What OBBBA did change is the power of the deductions generated within that framework. Specifically, it permanently reinstated 100% bonus depreciation — the tool that converts cost segregation study results into massive first-year write-offs.

The Bonus Depreciation Timeline

Here is the full bonus depreciation history relevant to STR investors:

The phase-down from 2023 through early 2025 significantly reduced the STR loophole's effectiveness. An investor who purchased in 2024 could only immediately deduct 60% of their reclassified assets — the remaining 40% depreciated over the standard MACRS schedule. OBBBA restored full 100% deductibility.

The January 19, 2025 Cutoff — What It Means

"Placed in service" means the property is in a condition to be rented — not necessarily that it was rented on that date. A property that closed January 5 but wasn't available for guests until February 1 was placed in service in February and gets 100% bonus depreciation under OBBBA.

This bifurcation affects a relatively small window of buyers. If you're in this situation, your cost segregation study should use the component-by-component approach — some shorter-lived assets placed in service before January 20 may need to be bifurcated from those placed in service on or after that date. An Abode study handles this calculation automatically.

Other OBBBA Changes That Strengthen the STR Strategy

• Section 179 expansion: The maximum Section 179 deduction was doubled to $2.5 million (up from $1.16M), with a phase-out starting at $4 million. Section 179 is an alternative first-year expensing method that can be used instead of or alongside bonus depreciation on personal property. For most STR investors, 100% bonus depreciation is simpler and more effective, but Section 179 has specific advantages for certain asset types.
• QBI deduction made permanent: The 20% qualified business income deduction under Section 199A, which was set to expire at the end of 2025, is now permanent. STR investors who materially participate (and thus treat the activity as a trade or business) may qualify for the QBI deduction on net rental income, further reducing their effective tax rate.
• No changes to §469 passive activity rules: The passive activity framework — including the non-rental classification for short average stays — is unchanged. The STR loophole's legal foundation is intact.

Is the Loophole Under Political Threat?

Every year, tax advocacy and policy circles discuss whether the STR loophole should be closed. The same arguments arise: it benefits high-income investors disproportionately, it removes properties from long-term rental markets, and the IRS has increased audit scrutiny of material participation claims.

The reality is that OBBBA moved tax policy in the opposite direction — it expanded, not contracted, real estate investor benefits. There is no active legislative proposal to eliminate the STR loophole as of early 2026. However, the IRS has signaled increased examination of STR material participation claims, which reinforces the importance of thorough contemporaneous documentation.

What Investors Should Do Right Now

1. If you bought in 2025 or later: Order a cost segregation study immediately. With 100% bonus depreciation permanent, every month you delay is a month of deductions lost.
2. If you bought before 2025 and never did a cost seg study: You can claim all missed depreciation via Form 3115. The retroactive benefit is substantial. Learn how →
3. If you're evaluating a purchase now: The combination of the STR loophole + 100% permanent bonus depreciation is the strongest it has been since 2022. The tax math has not been more favorable in years.