Average guest stay is total days of customer use divided by the number of separate stays during the year. Treasury Reg 1.469-1T(e)(3)(ii)(A) provides that when that average is 7 days or less, the activity is not treated as a rental activity under the passive loss rules of section 469. That single computation is the gate to the short-term rental loophole.
How the math works
Count every night of guest occupancy for the tax year, count every separate booking, and divide. A cabin rented for 292 nights across 52 bookings has an average stay of 5.6 days and passes. Vacant nights do not enter the calculation; only periods of actual customer use count. The test is applied year by year, so a property can qualify in one year and fail the next without anything about the building changing.
The long-booking trap
Longer reservations pull the average up quickly. Suppose a ski condo hosts 20 bookings of 4 nights during the season, 80 nights, then fills the shoulder months with 3 bookings of 30 nights each, 90 nights. That is 170 nights across 23 stays, an average of 7.4 days. The property fails for the year and the automatic passive label returns, even though most individual guests stayed under a week. Owners chasing the strategy often decline monthly bookings for exactly this reason, or accept them knowing the current year's losses will be passive.
The 8 to 30 day alternative
Reg 1.469-1T(e)(3)(ii)(B) offers a second door: an average stay of 30 days or less combined with significant personal services also escapes the rental label. The catch is that hotel-style services push the activity toward Schedule C and self-employment tax, so most owners prefer to qualify on the 7-day prong with ordinary between-stay turnovers.
What passing does and does not do
Passing removes only the automatic passive classification. The losses still require material participation under Reg 1.469-5T to become non-passive, and the hour comparison includes cleaners and co-hosts. The rule also has nothing to do with depreciation life: a sub-7-day short-term rental is still 39-year nonresidential property under the IRS Pub 946 transient-use test. The two rules run on separate tracks and are routinely confused.
Why the rule matters with cost segregation
A cost segregation study on a short-term rental, combined with 100 percent bonus depreciation under IRC section 168(k) for qualified property acquired after January 19, 2025, can produce a six-figure first-year loss. Against W-2 income, that loss is worthless if it is passive and powerful if it is not, and the 7-day computation is the first domino. Amadae's free Tax Strategy Projector models the short-term rental plus cost segregation strategy, and its cost segregation screen estimates the first-year benefit before you commit to an engineering study.