Why Investors Are Buying Short-Term Rentals (STR) in the Bay Area — and Why Local Rules Decide If It Works
By EJ Pulpan, REALTOR® — Pulpan Brothers Group, Christie's International Real Estate Sereno, Los Gatos, CA
Short-term rental investing is having a moment again, and the reason isn't soaring nightly rates, it's actually the tax code. Recent federal changes restored 100% bonus depreciation for many qualifying investment properties, and when that's paired with a cost segregation study, an STR purchase can generate significant paper losses in year one. For investors who meet the IRS's material participation requirements, those losses can offset ordinary income, not just passive rental income. This is a benefit that long-term rentals typically can't offer non real estate professionals and in some circumstances can lead to hundreds of thousands of dollars in tax savings.
That's the pitch, and it's a real one. It's also only half the picture. In the Bay Area, whether an STR actually works has less to do with the tax benefit and everything to do with whether the city the property sits in allows short-term rentals at all, or on what terms.
The Tax Case for STRs
Short-term rentals get favorable tax treatment because the IRS generally treats them differently from long-term residential rentals, provided the average guest stay is seven days or fewer (or 30 days or fewer with substantial owner services). That classification opens the door to a few strategies:
- Bonus depreciation on the property and its components, restored to 100% for qualifying assets under recent federal tax law.
- Cost segregation studies, which break a property into components with shorter depreciation schedules, accelerating deductions instead of spreading them over 27.5 years.
- Material participation, which for investors who meet the IRS's specific time and involvement thresholds, can allow STR losses to offset active income, not just passive income. This is the mechanism most real estate investments don't offer, and it's the reason STRs get so much attention from investors in high tax brackets.
None of this is a do-it-yourself calculation. Material participation has specific, strictly enforced tests, and getting it wrong doesn't just cost you the deduction, it can trigger an audit. Every investor considering an STR for tax purposes should talk to a CPA who has specifically worked with STR material participation rules before writing an offer, not after.
One more point worth stating plainly, the tax benefit should make a good investment better. It shouldn't be the reason to buy a mediocre one. A property that only works because of the depreciation schedule is a much riskier bet than one that would perform well as an STR, a long-term rental, or a resale.
Why Local Regulation Is the Real Filter
California has no statewide short-term rental law. Every city and in unincorporated areas, every county writes its own rules, and there's no consistent logic across the region. Some cities regulate through hard permit caps. Some limit unhosted nights per year. Some require the owner to live there most of the year. Some have banned STRs outright. And a surprising number have no STR ordinance at all. Which usually doesn't mean STRs are legal, it means they're prohibited by default under zoning codes that never listed short-term lodging as an allowed residential use.
A few examples make the range clear:
Fully closed markets. Los Altos bans short-term rentals citywide outright. There's no hosted exemption, no permitting pathway, and advertising an illegal STR is itself a code violation. On the coast, Carmel-by-the-Sea prohibits STRs in every residential zone. The only legal path is a commercially zoned property operating more like a small inn than a typical rental.
Restricted but open. Cupertino allows STRs only at a host's primary residence, requires the host to be on-site, and caps unhosted stays at 60 nights a year. This is one of the tighter unhosted limits in the South Bay. Down the coast, Half Moon Bay requires the owner to live at the property at least half the year and caps unhosted nights at 60 per year as well, though STRs in its downtown commercial zones are exempt from that residency requirement entirely.
More permissive, for now. Campbell has no dedicated STR ordinance, and active listings continue to operate with limited clear enforcement. A genuine gray area rather than an approved framework. On the coast, Pacifica requires a permit and an annual fee but, as of its 2025 ordinance, doesn't impose a night cap on rentals. This a comparatively open framework, though a citywide permit cap is still being finalized.
The pattern that matters for a buyer: the same property, a few miles apart, can be a strong STR investment or a complete non-starter purely based on which city line it falls on.
What to Verify Before Writing an Offer
Before any STR purchase, confirm directly with the city (not just the listing agent or a general web search):
- Is a permit required, and is the cap currently open or full?
- Is there a primary residency requirement, and if so, how many days/year?
- Is there an annual night cap on unhosted rentals?
- Are permits transferable to a new owner, or do they expire at sale?
- Does an HOA independently restrict or ban STRs, separate from city rules?
- Is the property in a Coastal Zone, which can add California Coastal Commission review on top of city rules?
These rules also move fast. Several Bay Area cities have adopted or significantly changed their STR ordinances within the past two years, and a few reversed long-standing bans. What's accurate today can be outdated within a single ownership cycle. Which is exactly why this needs to be confirmed at the time of purchase, not assumed from an old blog post or a neighbor's setup.
The Bottom Line
The tax code is genuinely more favorable to short-term rentals than it's been in years, and that's a legitimate reason investors are paying attention again. However, in the Bay Area, the local ordinance is the first thing to underwrite, before appreciation potential, before projected nightly rate, before the depreciation schedule. Get the regulatory picture wrong and none of the rest of the math matters.
At Pulpan Brothers Group, we help investors evaluate STR opportunities against both sides of this equation. The tax and cash flow upside, and the regulatory reality on the ground in each city. If you're considering a short-term rental purchase in the Bay Area, we can walk you through what's actually allowed where you're looking before you make an offer.
This article is for general informational purposes and isn't tax or legal advice. STR regulations vary by city and change frequently, always confirm current rules directly with the relevant planning department, and consult a qualified CPA regarding material participation and depreciation strategy before purchasing.
