Will I Lose My Active Manager Status—and Tax Savings—If I Hire a Vacation Rental Manager?
One of the biggest concerns owners have when considering professional vacation rental management is what it means for their tax position. Specifically, many owners want to know: Will I lose my “active manager” or “material participant” status—and the tax advantages that come with it—if I hire a property manager?
Let’s break this down.
Why does “active” status matter?
In the U.S., short-term rental owners can unlock significant tax benefits if they qualify as a “material participant” in the operation of their rental. Most importantly, if you meet the IRS’s material participation tests, you may be able to deduct rental losses against your ordinary income—which can help offset taxes from other sources like a day job or another business.
How does the IRS define material participation?
In simple terms, the IRS looks at how much you’re personally involved in the day-to-day operations of your rental. There are a few ways to qualify, but two common tests are:
- You do most of the work yourself: You spend more than 100 hours a year working on the property, and no one else (including a manager) does more hours than you.
- You spend at least 500 hours a year working on the rental.
The goal is to show that you’re not just a passive investor but actively managing the business.
Does hiring a manager automatically disqualify you?
Not necessarily. Hiring a vacation rental manager can make it harder to meet the tests above—because now you have someone else performing meaningful work on your behalf. But it doesn’t automatically disqualify you.
Some owners choose a hybrid approach. They might hire a manager to handle certain tasks (like coordinating cleanings, routine guest messaging, or maintenance) while they still take the lead on activities like:
- Marketing the property,
- Setting pricing,
- Approving or rejecting bookings,
- Managing larger vendors,
- Overseeing renovations or upgrades,
- Personally handling higher-level guest interactions.
With this structure, you can still accumulate enough hours—and ensure you, not the manager, do the majority of the material work. However, the costs of not only bringing on a partial manager while also having to do much of the work, may not be worth it.
Take a step back: What’s your real goal?
The tax benefits tied to maintaining active participation can certainly be compelling, especially in the first year if you conduct a cost segregation study and accelerate depreciation. Many sophisticated investors use bonus depreciation to front-load their deductions—writing off a disproportionate share of losses early on.
That said, a few important thoughts (with the caveat that we are not tax professionals—always confirm with a qualified CPA):
- Tax deductions only matter if there are losses to deduct. The reality is, active status only helps if your property is losing money. But if your goal is to make more money, you may prefer stronger revenue and net income over sustaining losses just to get a deduction. The extra income in your pocket can easily outweigh the tax savings from write-offs.
- Time and returns matter. Trying to remain “active” for IRS purposes can be time-consuming. If bringing on a manager saves you dozens of hours a year and helps the property perform better, the improved cash flow and peace of mind often deliver a much better overall return—even after taxes.
- For those with front-loaded depreciation. Some more sophisticated investors do intentionally generate large paper losses in the early years by conducting a cost segregation study—this allows them to accelerate depreciation and front-load deductions. If you’ve already used bonus depreciation or accelerated write-offs, the bulk of that benefit is often realized in the first year. In later years, the ongoing tax savings from staying “active” can be relatively limited.
Pro tip: Keep good records
If you do decide to stay “active,” be diligent. Keep a log of the hours you spend: guest calls, emails, marketing, handling repairs, vendor management—it all counts. Good records can help protect you in case you ever need to prove your participation to the IRS.
The bottom line
Hiring a vacation rental manager can affect your ability to claim active participation—but it doesn’t necessarily eliminate it if you’re intentional about how you divide the work. More importantly, it’s worth asking yourself why you want to keep that status in the first place.
If your goal is long-term wealth and maximum income, you may be better served by focusing on profitability instead of deductions—especially once front-loaded tax benefits taper off.
One last note: This article isn’t tax advice—always check with a qualified CPA to get guidance tailored to your specific situation.
Written by Anish Patel, Head of Owner Relations at Vinifera Homes (anish@viniferahomes.com)
