Nothing in the material participation tests turns on holding title. Treas. Reg. §1.469-5T asks how many hours you personally worked in the activity and how that compares with everyone else, and an operator who leases a property and sublets it nightly answers those questions the same way an owner does. What changes in an arbitrage arrangement is almost everything around the hours — the deductions the hours are being used to unlock, and in some cases whether the activity is a rental activity at all.
What arbitrage is, for tax purposes
The arrangement usually looks like this: you sign a long lease on a unit, the landlord consents to subletting, you furnish it, and you rent it to guests for a few nights at a time. Economically you are running a lodging operation on a leasehold rather than on a building you own.
For tax purposes the useful observation is that you still hold an interest in tangible property — a leasehold — and you are still collecting payments from customers for the use of that property. The passive activity rules in IRC §469 do not have a separate chapter for operators without title. They sort activities by what the activity is and by how much the taxpayer does, and both questions have answers here.
The rental definition does not require ownership
Treas. Reg. §1.469-1T(e)(3) describes a rental activity as one where gross income represents amounts paid principally for the use of tangible property. The text speaks of property "used by customers" and of the taxpayer's activity, not of a deed. A sublessor collecting nightly rates is generally collecting amounts paid for the use of tangible property.
That matters because the same regulation carries the exceptions short-term operators care about, including the one where the average period of customer use is seven days or less. An activity that falls into an exception is not a rental activity for §469 purposes, which is why it is not automatically passive, and which is why the hours in Treas. Reg. §1.469-5T decide the question instead. The short-term rental loophole guide walks through that sequence in full. The average period of customer use is computed from the bookings themselves, so the figure comes from the platform's booking data rather than from an hours log.
Why the loss question usually looks different
Here is the part most arbitrage articles skip. The reason owners pursue the seven-day exception is usually depreciation: a building, often with a cost segregation study behind it, produces a large non-cash deduction that creates a loss, and a non-passive loss can be used more broadly. An operator who does not own the building has no building to depreciate.
What an arbitrage operator deducts instead is mostly cash out the door — rent paid to the landlord, cleaning, supplies, utilities, platform fees, insurance — plus the furniture and equipment they bought, and any improvements they made to leased space, each under its own recovery rules. Those are real deductions, but they sit against real receipts, so the arithmetic that produces a large paper loss in an owner's return is often simply absent.
The practical consequence is that the question an arbitrage operator is answering with their hours is frequently not "can I use a big loss against other income" but something plainer: whether a modest operating loss is currently deductible, and whether net income is subject to self-employment tax. Both still depend on how the activity is characterized, and the second one has nothing to do with §469 at all.
Substantial services and the schedule question
Running a sublet operation often means a higher level of guest-facing service than a typical owner provides, and that pushes on a separate line: whether the activity is reported as a rental of real estate or as a service business. We covered the framework in Schedule C or Schedule E, and the short version is that customary landlord services point one way and services provided principally for the guest's convenience point another.
Arbitrage facts vary enormously — a single furnished sublet with self check-in and a twelve-unit operation with staff are not the same animal — and this is not a question a general article can answer for a particular arrangement. It belongs with a CPA or EA who can see the lease, the service level and the structure.
The hours you would log either way
Whichever way the characterization lands, the hours record does the same work, because every one of the tests in Treas. Reg. §1.469-5T and the significant participation rules behind it is counted in hours of personal work. The categories are familiar:
- Guest communication, inquiries, booking decisions and problem calls
- Turnover work you do yourself, and coordination of cleaners who do it
- Maintenance, repairs and vendor supervision within the unit
- Supplies, restocking and furnishing replacement
- Pricing, calendar and listing management
- Dealings with the landlord, the building and local compliance
- Bookkeeping for the operation
The one test that gets more interesting with a lease is the 100-hour test, which compares your hours against the participation of every other individual. In an arbitrage setup there are frequently more other people involved — a cleaning service, a co-host, sometimes building staff doing work the landlord pays for — and the comparison only works if you have recorded what they did too. The what counts as participation guide covers which tasks are countable before you start measuring them against anyone.
Lease terms, consent and the record
Two documents belong in the same folder as the hours log.
The first is the lease, with whatever written consent to sublet you obtained. That is not a tax document, but it is the document that establishes you had the right to operate at all, and a file where the hours and the authority to earn them sit together reads considerably better than one where they do not.
The second is whatever shows the unit was held out for short stays through the year — listing history, booking records, nightly rates. Where the seven-day average matters, it is computed from those bookings.
If you operate several units under separate leases, keep the hours separated by unit from the first entry. STR Tracker tags every entry to a property and lets you set a default so nothing lands unassigned, which is what makes a per-unit total possible later; combining a dozen units into one number after the fact is not a reconstruction anyone enjoys. Whether those units can be treated as one activity is a grouping question with its own rules, and it is much easier to combine clean per-unit records than to split a merged one.
What to write down
- Date, unit, minutes and what you actually did, entered when it happened rather than at year end
- Who else worked on the unit, and roughly how long, including anyone the landlord sends
- Lease, sublet consent and any amendments, filed alongside the log
- Booking records showing stay lengths, since the average period of customer use comes from them
- A note of your service level — self check-in versus daily service — because that fact drives the reporting question above
Questions to take to your CPA
A general article can lay out the framework; it cannot tell you how your arrangement is characterized. Reasonable preparers reach different conclusions on arbitrage facts, and the authority here is thinner than it is for owner-operators. Worth asking directly: whether the operation is a rental activity or a trade or business, which schedule it belongs on and whether net income is earnings from self-employment, how the furniture and any leasehold improvements are recovered, and whether multiple leased units can be grouped. IRS Publication 925 and Treas. Reg. §1.469-5T are the places those conversations start, and our page for CPAs explains what we hand a preparer. The hours record is useful under every one of those answers, which is a good reason to keep it while the characterization is still being worked out.