Published by AE Tax Advisors Team • 2026-05-01

STR in Vacation Market Creates $180,000 Paper Loss Against W-2 Income

The Client

Ryan and Julia Sanderson, both attorneys in Atlanta, Georgia, earned a combined W-2 income of $480,000. They purchased a $920,000 mountain cabin in Blue Ridge, Georgia, as a short-term rental investment, spending $55,000 on high-end furnishings, a hot tub, and game room amenities.

The Problem

At $480,000 in combined income, the Sandersons were in the 35% federal bracket and paying approximately $118,000 per year in federal taxes. They had no significant deductions beyond mortgage interest on their primary residence. Their financial advisor suggested real estate but had no specific STR tax strategy.

Our Strategy

We performed a cost segregation study reclassifying $330,000 into accelerated categories. With bonus depreciation on the reclassified components and Section 179 on the $55,000 in furnishings, Year 1 depreciation exceeded $385,000. Julia documented material participation by managing all guest operations. Total deductible losses -- depreciation, mortgage interest, property taxes, operating expenses -- minus rental revenue of $82,000 produced a net paper loss of $180,000.

The Results

The $180,000 paper loss reduced the Sandersons' taxable income from $480,000 to $300,000, saving approximately $63,000 in federal taxes. The cabin was cash-flow positive at $82,000 in revenue against $52,000 in actual cash expenses (the paper loss was driven by non-cash depreciation). They plan to acquire a second STR to offset the remaining taxable income.

Key Takeaway

Vacation-market STRs in destinations like Blue Ridge, Smoky Mountains, and lake regions generate strong rental revenue while simultaneously creating paper losses through depreciation -- producing both cash flow and tax savings simultaneously.