This tool models the federal and state tax economics of a short-term rental investment over a user-defined hold period, including: § 469 material participation analysis, the § 461(l) excess business loss limitation, § 172 NOL carryforward with the 80% limitation, federal and state-level depreciation (including the OBBBA-restored 100% bonus depreciation under § 168(k) for property acquired and placed in service after January 19, 2025), sale-year recapture and capital gain treatment, and an after-tax internal rate of return.
This tool is informational only. Material participation, eligibility for the § 1.469-1T(e)(3)(ii) short-term rental exception, and the calculation of cost segregation reclassification are fact-specific determinations that depend on the particular facts and circumstances of each matter, the engineering basis for any cost segregation study, and the proper application of multiple loss-limitation rules. The tool produces an estimate based on simplifying assumptions and the inputs provided. Specific facts may produce a different result. Engage qualified counsel before any investment decision.
The § 1.469-1T(e)(3)(ii) short-term rental exception treats a property as a non-rental activity if the average customer use period is 7 days or less, in which case material participation is determined under the seven tests of Reg. § 1.469-5T. The most reachable test for a W-2 earner is Test 3 (more than 100 hours, with the taxpayer’s participation not less than that of any other individual).
Purchase price and basis allocation. Land is not depreciable; allocate land at acquisition based on assessor records, appraisal, or comparable land values.
Mortgage parameters. The model assumes a fixed-rate loan with monthly amortization over the term. The cap rate is assumed equal to the mortgage rate (a simplifying assumption that produces NOI = property value × rate, before debt service).
Filing status, tax year, and income profile. Year affects the § 461(l) threshold ($313K/$626K for 2025; ~$256K/~$512K for 2026 due to the OBBBA reset).
Hold period determines when the property is sold and IRR is computed. The model assumes 3% annual escalation on rents, expenses, and property value, and 7% selling costs at exit.
Important. This tool produces estimates based on simplified assumptions and the inputs provided. Material participation under § 469, the § 1.469-1T(e)(3)(ii) short-term rental exception, real estate professional status under § 469(c)(7), the § 461(l) excess business loss limitation, the § 172 NOL carryforward rules, the cost segregation reclassification percentages, federal and state depreciation conformity, sale-year recapture under § 1245 and § 1250, the § 1411 net investment income tax, and state-level tax treatment all involve fact-specific determinations that this tool does not and cannot fully model. Specific facts and circumstances may produce a different result. The state conformity table reflects information current as of May 2026 and is updated periodically; users should verify state-specific rules before acting. The cost segregation reclassification percentage entered must be supported by a qualified engineering-and-tax study to be defensible on examination. Reading or using this tool does not create an attorney-client relationship with Donovan Legal PLLC or any of its attorneys. Engage qualified counsel before any acquisition, contribution, or other transaction in reliance on the projections produced by this tool.
The firm represents real estate investors and high-income professionals on the structuring, documentation, and post-acquisition tax compliance for short-term rental and other tax-driven real estate strategies. To discuss your specific facts with the firm, contact us directly.
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