Montana's short-term rental market has grown significantly in recent years. Properties in Big Sky, Whitefish, Glacier National Park gateway communities, and Flathead Lake generate strong rental income, but they also create complex tax situations that require specialized planning.
Mark Simonsen, CPA, Managing Partner of the Northwest Region at AE Tax Advisors, works with Montana STR owners to build tax strategies that maximize deductions and minimize liability.
The 7-Day Rule and Material Participation
Under IRC Section 469, rental activities are generally treated as passive, meaning losses can only offset passive income. However, properties with an average rental period of 7 days or less are not treated as rental activities for passive loss purposes. This is known as the 7-day rule.
When the 7-day rule applies, the STR owner can qualify for non-passive treatment by meeting one of the material participation tests. The most common tests include:
- 750-hour test: The taxpayer participates in the activity for more than 750 hours during the tax year
- Majority test: The taxpayer's participation exceeds that of any other individual
- 100-hour test: The taxpayer participates for at least 100 hours and no other individual participates more
Meeting material participation allows STR losses to offset W-2 wages, business income, and other active income sources, making it one of the most powerful tax planning tools available to short-term rental owners.
Bonus Depreciation and Cost Segregation for STRs
When combined with a cost segregation study, the material participation strategy becomes even more powerful. A cost segregation study reclassifies STR building components into accelerated depreciation categories. With 100% bonus depreciation, reclassified components can be fully deducted in year one.
For a Montana STR property purchased for $800,000, a cost segregation study might reclassify $240,000 to $320,000 into short-life categories. If the owner meets material participation, that entire deduction can offset active income, potentially saving $80,000 to $120,000 in federal taxes in a single year.
Montana-Specific STR Considerations
Montana STR owners face additional considerations that affect their tax position:
- Lodging facility use tax: Montana imposes a 4% lodging tax on accommodations, which must be collected and remitted
- Resort area expenses: Properties in Big Sky and Whitefish often have higher operating costs, HOA fees, and maintenance expenses that are deductible against rental income
- Seasonal occupancy: Montana's ski season and summer tourism create distinct high and low seasons that affect income projections and expense timing
- Personal use limitations: Days of personal use can affect the property's tax classification and deduction eligibility
Own a short-term rental in Montana? Make sure your tax strategy matches your investment strategy.
Contact Mark Simonsen, CPA or visit AE Tax Advisors to schedule a consultation.