Does Travel Time Count Toward Material Participation?

In this Q&A episode, Thomas & Ryan tackled the most common (and confusing) tax questions real estate investors are asking right now, especially those using the short-term rental (STR) strategy.

[00:03] Thomas Castelli, CPA:
Thanks for tuning into this week’s episode of the TaxSmart REI Podcast! Today, we’re back with another Q&A episode, taking questions from our TaxSmart Investors community. Topics include:

• Short-term rentals
• QBI deductions
• The 14-day rule
• And more!

Let’s jump in.

Do Active STR Losses Carry Over to Next Year?

[00:45] Thomas:
If you qualify for the short-term rental loophole—meaning your rental averages 7 days or less, and you materially participate—the losses will be considered active and can offset your income in the current year.

If your total losses exceed your taxable income, the excess becomes a Net Operating Loss (NOL) and carries forward to future years. Just remember: it always offsets the current year’s income first.

Does Travel Time Count Toward Material Participation?

[03:27] Ryan:
Great question. The answer is no, travel time generally doesn’t count toward material participation. It’s considered too risky and has been rejected in almost every court case we’ve seen. We strongly recommend excluding travel time from your participation log.

Thomas:
Just to clarify: while travel time doesn’t count, you can deduct the mileage. So if you’re driving to your rental, those miles are deductible as business miles—but the time spent traveling is not.

Can You Recommend a CPA Familiar with STR Loophole?

[05:00] Thomas:
We get this one a lot! If you’ve been listening for a while, you know we practically brought the STR loophole into the spotlight. We even wrote a book on it—Short-Term Rental Tax Secrets, available on Amazon for a dollar.
✅ Want hands-on help? You can book a free discovery call.

Can You Group K-1s for the QBI Deduction?

[06:41] Ryan:
Short answer: yes, you can group them—but they need to be all residential or all commercial.

Most rental real estate qualifies as a trade or business, so the 250-hour safe harbor isn’t always necessary. But if you want to guarantee eligibility, then yes, the safe harbor can apply across grouped properties.

Thomas:
Exactly. The safe harbor was created to help clarify whether rentals qualify as a Section 162 trade or business. Anyone—not just you—can meet the 250 hours: employees, agents, etc.

Converting a Primary Residence to a STR Mid-Year

[09:00] Thomas:
If you rent out your entire home for fewer than 14 days, you don’t report the income at all—thanks to the 14-day rule. But if you go over that, you must report it.

Now, if you convert your primary residence into a full-time STR mid-year and meet material participation, then you may qualify for active losses starting from when it’s placed in service.

Ryan:
Right—but if you used the property personally during part of the year, those personal days matter. You’ll need to allocate personal vs. rental use. It gets complex, and your ability to take losses may be limited.

Thomas:
This is one of those “don’t get too cute” situations. It’s murky. Definitely speak with a tax advisor for personalized advice.

Bonus Depreciation: What Happens When You Sell?

[13:30] Thomas:
If you take bonus depreciation, you’ll deal with depreciation recapture when you sell.

• Straight-line depreciation (over 39 years for STRs) is taxed up to 25%.
• Bonus/accelerated depreciation is recaptured at ordinary income rates (up to 37%).

To avoid paying taxes at sale, consider strategies like:

• 1031 exchanges
• “Lazy” 1031 (using passive losses to offset gain)

Just remember: depreciation recapture applies no matter what rental strategy you use.

Improvements to Personal Residence: Do I Report Them?

Ryan:
Nope, you don’t submit anything annually. Just keep all receipts for improvements and track them in a spreadsheet or Google Doc. When you sell, those costs increase your basis, reducing your capital gains.

For example:

• Buy for $500K, add $100K in improvements = $600K basis
• Sell for $1.2M
• Married couple gets $500K capital gain exclusion
• Taxable gain = only $100K, not $200K, because of those improvements

So yes—keep track of everything, but don’t submit it unless audited.

Clarifying the 14-Day Rule

[18:28] Thomas:
If you live in a home for more than 14 days, it’s considered a residence.

• Rent it for 14 days or less? → You don’t report any income = Augusta Rule
• Rent it for more than 14 days? → You must report the income, but losses are limited

If it’s a pure rental (not a residence)? → You can report all expenses and take a loss if you meet the STR loophole

Summary: The 14-day rule only applies to properties you live in.

Join the Community / Closing Thoughts

[21:19] Thomas:
If you have more questions, come join our TaxSmart Investors Facebook Group—just search for us and request to join.

Or if you want one-on-one help, book a free 30-minute discovery call.

We’ll see you in the next episode—maybe answering your question next time!

Want personalized tax strategy related to your portfolio? Schedule a consultation with our team.

Disclaimer: This podcast summary and transcript were partly generated and may contain some errors or miss key points from the audio recording.