It is the question I hear most from busy investors: can I hire a property manager and still use the short-term rental tax strategy? The honest answer is that a full-service manager usually makes the strategy very hard to use, and a smaller helper team often does not. The difference comes down to how the IRS counts hours.
The IRS counts hours person by person
The tests for material participation are in Treasury Regulation 1.469-5T. Three of them matter for a short-term rental, and every one of them looks at what other people are doing on your property, not just what you do:
- The 100-hour test: you spend more than 100 hours and no other individual spends more time than you do, including people who do not own any of the property. I explain it in the 100-hour rule, in plain English.
- The 500-hour test: you spend more than 500 hours in the year.
- The “substantially all” test: your participation is substantially all of everyone’s participation in the activity.
There is also a catch-all “facts and circumstances” test, but it has two hard limits. You must spend more than 100 hours, and your management work does not count at all if someone else is paid to manage the property or if anyone else spends more hours managing it than you do.
What a full-service manager does to each test
| Test | With a full-service manager |
|---|---|
| 100-hour test | Hard. Guest messaging, pricing, check-ins and coordination are exactly the hours a manager takes on, and one person on their team can easily out-hour you. |
| 500-hour test | Unrealistic for a single rental if someone else is running it. |
| Substantially all | Unrealistic, because the manager’s hours are most of the total. |
| Facts and circumstances | Blocked, because a paid manager means your management work does not count. |
This is why I tell buyers that the strategy is built for owners who actually run the rental. It is not a passive investment, and it is not meant to be.
The hybrid approach: run the guest side, hire out the rest
Many owners handle the parts of the work that count as management, such as the listing, pricing, guest messages and coordination, and hire out cleaning and maintenance. That keeps your hours high and the manager question off the table. There is one thing to watch closely, and it surprises people.
A busy rental can give a single cleaner a lot of hours. Here is simple arithmetic, not a rule: if a rental turns over 100 times a year and each cleaning takes 2.5 hours, one person doing every cleaning logs about 250 hours. That is more than the 100 you are trying to reach. Because the 100-hour test compares you with each individual, it matters whether one person does all the cleaning or the work is shared among several people. How cleaning hours are counted is a question for your CPA before you build your plan around it.
If you want a manager anyway
Plenty of investors decide they would rather have a hands-off property and skip this particular strategy. That is a legitimate choice. If you go that way, ask your CPA how your losses would be treated (generally as passive losses, which can offset passive income or carry forward) and whether another path, such as real estate professional status, fits your situation. The tax strategy should not drive you into running a property you do not want to run.
Questions to ask before you hire anyone
- Exactly which tasks will you handle and which will they handle, in writing?
- Can they give you itemized time records for the work they do?
- Will one person do all the cleaning, or will the work be spread across a team?
- How will you log your own hours day by day?
- Has your CPA reviewed this split before you commit?
If you are buying before the end of the year, your hours are measured over a short window, so the split matters even more. My year-end timeline walks through the dates. To see how the deductions fit together, start with the bonus depreciation guide and the tax savings estimator. If you want to talk through how your own hours would work on a Sedona property, book a 15-minute call.
Disclaimer: William Hamburg is an Associate Broker with Realty ONE Group Mountain Desert in Sedona, Arizona. He is not a CPA or tax attorney. This article summarizes general information from the federal passive activity regulations (Treasury Regulation section 1.469-5T) as of its publication date and is not tax, legal or investment advice. How these rules apply depends on your individual facts, and rules can change. Confirm every item with your own CPA or tax advisor before making any purchase, hiring or filing decision.