High-net-worth individuals (HNWIs) invest in short-term rentals (STRs) not just for immediate cash flow but for long-term financial advantages that go far beyond simple revenue minus expenses calculations. On paper, an STR may not always appear profitable when considering gross income and operational costs, this narrow view overlooks key wealth-building strategies. Through tax optimization, depreciation benefits, asset appreciation, and strategic reinvestment opportunities, STRs provide investors with powerful financial leverage that compounds over time. Tools like bonus depreciation, 1031 exchanges, and the step-up in basis for heirs allow investors to minimize tax burdens and maximize returns even in fluctuating markets. By understanding the bigger financial picture, HNWIs use STRs as a sophisticated investment vehicle to build, protect, and transfer wealth for generations.
1. Significant Tax Benefits & Bonus Depreciation
- Under the 2017 Tax Cuts and Jobs Act (TCJA), STR owners can take advantage of bonus depreciation, allowing them to deduct the cost of eligible property improvements upfront instead of over many years. The rate of eligible bonus depreciation changes year to year.
- Depreciation deductions can offset any income, significantly reducing taxable income.
- Expenses such as mortgage interest, property taxes, repairs, and management fees are also deductible.
2. Use the Short-Term Rental (STR) Loophole
- Since short-term rentals (STRs) are not considered “rental real estate” by the IRS, they do not require full REPS qualification. Instead, Airbnb hosts can claim non-passive status by meeting one of these Material Participation Tests:
- Spend 500+ hours per year managing your rental(s).
- Spend 100+ hours, AND more time than anyone else (this includes cleaners, property managers, or assistants).
- Be significantly involved and prove you materially participate (e.g., handling guest communications, maintenance, and marketing).
- If an Airbnb owner meets one of these criteria, the IRS treats STR income as active, meaning they can use losses (from depreciation, mortgage interest, etc.) to offset W-2 or business income.
3. Passive Income & High Cash Flow Potential
- STRs can generate higher rental yields than traditional long-term rentals, especially in high-demand vacation destinations.
- HNWIs use STRs as a cash flow hedge, diversifying their income sources beyond stocks and bonds.
4. 1031 Exchange for STR Tax Deferral
- 1031 exchanges allow investors to defer capital gains taxes by reinvesting proceeds from an STR sale into another investment property.
- This strategy enables portfolio growth without immediate tax liabilities.
5. Asset Appreciation & Wealth Preservation
- STRs, especially in prime locations, benefit from long-term real estate appreciation.
- Real estate is a hedge against inflation, preserving purchasing power over time.
6. Step-Up in Basis for Heirs
- Upon the investor’s death, heirs receive a step-up in basis, meaning the property’s value is adjusted to current market value.
- Capital gains taxes on past appreciation disappears, allowing wealth transfer with minimal tax liability.
7. Portfolio Diversification & Recession Resilience
- STRs diversify an investment portfolio, balancing risk across asset classes.
- Unlike stocks, STRs offer tangible asset protection and can perform well in downturns, particularly in high-tourism or business-travel markets.
8. Personal Use & Lifestyle Flexibility
- Investors can use the property for personal vacations while renting it out for income the rest of the year.
- STRs offer a lifestyle investment, blending personal enjoyment with financial returns.
Conclusion: It’s a Financial Vehicle
HNWIs invest in STRs not only for passive income and appreciation but mostly for the powerful tax advantages that come with real estate ownership. By leveraging bonus depreciation, tax deferral strategies, and wealth transfer benefits, they optimize their portfolios while minimizing tax liabilities—making STRs an attractive investment vehicle.
Since 2017, Grant Hammond has successfully sold and closed over 500 short-term rental properties in the Nashville area, guiding hundreds of high-net-worth investors in leveraging short-term rentals to build generational wealth. A recognized authority in the field, Grant also shares his expertise by teaching a short-term rental investment course at the Nashville School of Law. Grant hold a real estate broker’s license and is not a CPA or tax attorney. Please consult your representatives prior to make all financial decisions.
