Can your rental loss offset your income?

It is the rule that can let a short-term rental's loss offset your wages or business income in the same year. Normally the passive loss rules let a rental loss offset only passive income, such as profit from other rentals. But a property with an average stay of 7 days or less is not a "rental activity" under those rules. If you also materially participate in it - work in it enough to pass one of the IRS hour tests - its loss is not passive. Other limits still apply. The basis and at-risk limits cap a loss at roughly what you have invested or could lose. The vacation home rules cap deductions at the rental income if your own use is over the greater of 14 days or 10% of the days it is rented. The excess business loss limit can defer part of a very large loss. Without material participation, the loss is passive like any other rental loss. Source: Treas. Reg. §1.469-1T(e)(3), IRC §§280A, 461(l), 465, 469, 704(d), 1366(d).

Add up the nights the property was rented during the year and divide by the number of separate stays. A year of 200 nights across 40 bookings is an average of 5 days. Nights you or your family use the property don't count as rental nights. Source: Treas. Reg. §1.469-1(e)(3)(iii).

Usually more than 500 hours in the year, or more than 100 hours and at least as many as anyone else, including your cleaner or co-host. Doing substantially all the work yourself also counts. Your spouse's hours count with yours. Four other tests exist for less common situations. You don't need a daily log kept at the time. The IRS accepts other reasonable proof of your hours, such as a calendar, appointment book or written summary. Source: Treas. Reg. §1.469-5T, IRS Pub 925.

Probably. California adopts the federal regulations, including the one that creates the 7-day rule, unless they conflict with California law, and nothing in California law conflicts with it. No FTB form or instruction addresses short-term rentals directly, so treat this as the likely answer rather than a settled one. Source: R&TC §17024.5(d), FTB 3801 instructions.

It is a federal status for people who work mainly in real estate, and California does not recognize it. You qualify if more than half of your working hours, and more than 750 hours, are in real estate businesses you materially participate in. On a joint return, one spouse has to meet both tests alone. You then still need material participation in each rental. Because California has no such status, the same loss can offset your income federally and stay passive in California. Source: IRC §469(c)(7), R&TC §17561.

It lets up to $25,000 of loss from a rental you help manage offset your other income each year. It covers only a rental activity under the passive loss rules. A property with an average stay of 7 days or less isn't one, and neither is one averaging 8 to 30 days where you provide significant personal services. You need to own at least 10% and help make the management decisions. The allowance shrinks by 50 cents for every dollar of modified AGI (your adjusted gross income figured without certain items, such as passive losses) over $100,000 and is gone at $150,000. Married filing separately, it is $12,500 if you lived apart all year, phasing out from $50,000, and nothing if you lived together at any time. California applies the same allowance. Source: IRC §469(i), Treas. Reg. §1.469-1T(e)(3), FTB 3801 instructions.

It isn't lost. A suspended passive loss carries forward with no time limit and offsets passive income in later years. Releasing the rest generally takes a fully taxable sale of your entire interest in the activity to an unrelated buyer. If several properties are grouped as one activity, selling one of them usually doesn't release the losses. The part sold counts as separate only if it is substantially all of the activity and you can show its share of the losses with reasonable certainty. Source: IRC §469(b) and (g), Treas. Reg. §1.469-4(g).