For married couples who co-own real estate — especially in an LLC — this is one of the most strategic and misunderstood tax planning questions:
Can one spouse’s involvement unlock tax benefits for both?
The answer, when applied correctly, is yes. But it depends on the strategy, the structure, and how you file.
Let’s break it down clearly and professionally.
Understanding the STR Loophole for Married Couples
The Short-Term Rental (STR) loophole is one of the most powerful strategies available to offset active income. It allows certain rental activities to be treated as non-passive — even if you don’t qualify as a Real Estate Professional.
Here’s the key: Material participation is what matters, not real estate professional status.
So, what happens if only one spouse materially participates in a short-term rental?
Under IRC §469(h)(5), when a couple files a joint return, material participation by either spouse counts for both. This means that if your spouse qualifies, both of you benefit.
What This Looks Like in Practice:
Let’s say:
- You and your spouse co-own a short-term rental in a 50/50 LLC (filing a partnership return).
- The property is rented out with an average guest stay of 7 days or less.
- Your spouse manages all communications, cleanings, bookings, and supervision.
- She logs 100+ hours, and more time than any other person involved.
Even if you didn’t participate at all, as long as you file a joint 1040, your spouse’s participation allows both K-1s (yours and hers) to reflect non-passive activity. This means both of you can deduct 100% of the rental losses — including depreciation — against your active income, like W-2 wages or business profits.
This is a huge win for couples looking to lower their taxable income using real estate.
What If You Own the STR Through an LLC?
You can absolutely own the property through a 50/50 LLC. Just know that the type of state you live in affects how the IRS views the entity.
- In community property states (e.g., California, Texas, Arizona), a married couple can elect to treat a 50/50 LLC as a disregarded entity, which simplifies reporting. You’ll report rental activity on Schedule E as if you owned it jointly, not as a partnership.
- In non-community property states, the LLC must file as a partnership using Form 1065. Each spouse receives a K-1 for their 50% share.
Either way, material participation by one spouse is sufficient on a joint return, as long as the activity qualifies under STR rules.
Real Estate Professional (REP) Status and Married Couples
Now let’s shift to the Real Estate Professional (REP) status, which is a separate strategy from the STR loophole and comes with its own requirements.
Unlike STR material participation, REP status is determined on an individual level. It cannot be shared or averaged between spouses.
To qualify as a Real Estate Professional, a spouse must:
- Spend more than 750 hours in real property trades or businesses in which they materially participate.
- Devote more than 50% of their total working hours to real estate activities.
Once a spouse qualifies as a REP, all of their rental activities (in which they materially participate) become non-passive, even if those are long-term rentals. That means those losses — depreciation, repairs, interest — can now offset active income, just like in the STR strategy.
Here’s where it gets powerful for couples:
If one spouse qualifies as a Real Estate Professional and both file jointly, the full set of losses from jointly owned properties can be deducted, as long as material participation is also met.
So even though REP is individual, the benefit flows through the joint return.
Material Participation Still Matters
Whether using the STR loophole or REP status, material participation is not optional. You must be able to prove that one spouse:
- Logged 100+ hours and more than anyone else, or
- Met another one of the IRS’s material participation tests
You should maintain a time log or spreadsheet that details:
- Dates of service
- Type of work performed
- Hours logged
Examples of acceptable activities include:
- Messaging with guests
- Supervising cleanings or contractors
- Restocking supplies
- Managing listings and pricing
- Bookkeeping or paying property-related bills
Avoid listing activities like “thinking about the business” or attending general education — these won’t hold up in an audit.
A Real-World Example:
You and your spouse form a 50/50 LLC to operate a short-term rental.
- The STR earns $40K and produces $100K in losses due to bonus depreciation.
- Your spouse manages everything and logs 100+ hours.
- You do nothing.
- You file jointly.
Each of you receives a K-1 with a $50K loss.
Because your spouse materially participated, and you’re filing jointly, both losses are non-passive.
The full $100K can offset active income, such as W-2 wages or business profits.
This is how real tax planning changes outcomes.
Key Compliance Tips:
- Keep accurate logs of who did what.
- File jointly to take advantage of the §469(h)(5) rule.
- Make sure your LLC’s tax classification is aligned with your goals.
- Work with a tax strategist to ensure proper reporting on K-1s and your 1040.
Final Thoughts
The IRS allows you to benefit from your spouse’s hard work — but only if you meet the criteria and document it thoroughly.
At Taxfully, we’ve helped clients in these exact scenarios save tens of thousands in taxes by applying these rules correctly, optimizing their LLC structure, and reviewing their returns for missed opportunities.
If you co-own real estate and want to explore whether the STR loophole or REP status can work for you, now is the time to act.
