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Building long-term financial stability goes beyond the walls of your dental practice. Real estate, particularly vacation rentals, has become an appealing way to create additional income streams while maintaining a primary focus on patient care.
Short-term rentals can offer attractive returns, but they also bring added layers of tax complexity, operational responsibility, and risk.
A thoughtful review of both the upside and the tradeoffs can help determine whether this type of investment fits your broader financial goals.
Vacation rentals stand out from traditional long-term rentals because of their income potential and flexibility. In desirable locations, short-term stays may generate higher nightly rates and stronger cash flow, especially during peak travel seasons. Owners also retain the option of personal use, which can be appealing for those who want both an investment and a getaway.
For dental professionals with higher earnings from their practice, vacation rentals may also play a role in tax planning. Depending on how the activity is structured and how involved the owner is, rental income and losses can be treated in different ways for tax purposes. This is where opportunity and complexity begin to intersect.
From a tax perspective, not every vacation rental is treated the same. While most people naturally think of these properties as rentals, the IRS applies specific rules to determine whether an activity is considered a rental or something closer to an operating business.
One major factor is the average length of guest stays. Properties with very short average stays, often seven days or fewer, may fall outside the standard rental category. Another factor is the level of services provided to guests. Offering services that go beyond basic utilities and maintenance, such as frequent cleaning during stays or concierge-style assistance, can change how the activity is classified.
Why does this matter? Because the classification sets the stage for how income and losses are reported and whether losses may be used to offset other types of income.
Once the activity is evaluated, the next question is how involved the owner truly is. This is where material participation comes into play. The IRS uses a series of tests to measure whether an owner is actively involved in the operation of the property or functioning more like a passive investor.
These tests often revolve around time spent on the activity. Managing bookings, communicating with guests, handling repairs, supervising cleaners or contractors, and overseeing marketing efforts can all count toward participation. Hours spent by a spouse may also be included, which can make a meaningful difference for married owners who share responsibilities.
On the other hand, not all time is counted. Travel time to and from the property, education performed solely as an investor, or activities that appear inflated simply to meet hour thresholds may be excluded. The distinction between qualifying and non-qualifying time can have a direct impact on tax outcomes.
For those aiming to demonstrate a high level of involvement, recordkeeping is more than a formality. Contemporaneous documentation like calendars, time logs, emails, or written summaries helps support the position taken on a tax return. Recreating records after the fact or providing vague estimates can weaken that position if questions arise later.
With many mobile apps now available to track time and activities, maintaining detailed records has become more manageable. Consistency and clarity in documentation can go a long way toward reducing uncertainty.
Not every vacation rental will meet the tests needed for active treatment. When an owner’s involvement does not rise to that level, the property is generally treated as a passive rental activity. Income from the property is still taxable, and losses may be limited in how they can be used.
Passive losses typically offset only other passive income. If losses exceed passive income in a given year, they are carried forward until future passive income is available or until the property is sold. While this may not align with short-term tax reduction goals, it can still be part of a longer-term planning approach, depending on future income events.
There is also a unique provision often referred to as the “Augusta Rule,” which can be relevant for dental professionals who own a personal residence or vacation home. Under this rule, a property rented for 14 days or fewer per year may generate rental income that is excluded from taxable income, provided certain conditions are met.
This is commonly used when a practice rents an owner’s property for legitimate business meetings. The practice may deduct the rent expense, while the owner does not report the rental income personally. Fair market pricing, a valid business purpose, and clear documentation are key factors in making this work properly.
Vacation rentals can be a powerful tool for diversifying income, but they are not a one-size-fits-all solution. Market conditions, time availability, appetite for management responsibilities, and tax objectives all influence whether this strategy makes sense.
For dental professionals considering this path, the most effective approach is one that weighs both rewards and risks. Understanding how the activity is classified, how involvement is measured, and how income and losses flow through a tax return allows for more confident, informed decisions.
With thoughtful planning and the right guidance, vacation rentals can complement your long-term financial picture.
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