A condotel is an individual hotel unit that you own outright by deed, but that a hotel management company operates as part of its guest-room inventory whenever you’re not using it. You hold full title to the physical space the way you would with a residential condo, yet the governing documents require the unit to function as a hotel room, split revenue with the operator, and limit how often you can stay there yourself. That combination, along with financing restrictions and tax rules most buyers don’t anticipate, is what separates a condotel from a standard condo or vacation home.
How Ownership Works Compared to a Regular Condo
You receive a deed at closing, so the ownership interest itself looks familiar. The difference lives in the Covenants, Conditions, and Restrictions. A condotel’s CC&Rs typically require the unit to match the hotel brand’s design and furnishing standards, which means you generally cannot redecorate, swap furniture, or make modifications without the operator’s approval. Every unit has to look and function like every other room in the building.
Most CC&Rs also mandate participation in the hotel’s rental program. You can’t leave the unit empty for the season or list it independently on a booking platform of your choice. The operator controls pricing, reservations, and the guest experience. Your personal use is capped at a set number of days per year, and many agreements impose blackout periods during peak seasons when the hotel wants maximum inventory.
Common areas and amenities are managed by an HOA or similar body, often controlled by the hotel management company rather than the unit owners. That keeps the property running like a hotel, but it also means owners have limited influence over how assessments get spent. HOA fees run meaningfully higher than at residential condos because they cover hotel-grade pools, spas, concierge staffing, and lobby upkeep. Special assessments for major repairs or renovations can arrive with little warning, and hotel-grade finishes cost more to replace than residential ones.
Some condotel agreements grant the hotel operator a right of first refusal on any resale. If that provision is recorded in the declaration, the operator can match a third-party offer and buy the unit before you sell to an outside buyer, and it stays enforceable even if the association informally says it won’t use the right.
How Income From the Rental Pool Works
Your income comes through a rental pool agreement. Participating units are pooled together, and total revenue is distributed by a formula that usually accounts for unit size or room type. Your payout doesn’t depend solely on whether your specific unit was booked on a given night; you share in the collective performance of the hotel.
The split with the management company is often stated as 50/50, but the effective split after deductions tends to be worse for the owner. Before revenue is divided, the operator takes out direct costs like booking fees, credit card processing charges, and reservation system fees. After those come off the top, what’s left gets split. An advertised 50/50 arrangement frequently translates to an effective owner share closer to 40% to 46% of gross revenue once pre-split deductions are factored in.1Hospitality Net. Often Misunderstood – Vacation Rental and Condo-Hotel Homeowner Statement Deductions
Out of your share, you still pay HOA fees, property taxes, insurance, and contributions to the maintenance reserve, regardless of how the hotel performed that month. A soft off-season generates the same fixed costs, which is why many condotel owners run cash-flow negative outside the peak months. Before buying, run projections against the hotel’s actual occupancy history rather than the developer’s pro forma.
Why You Can’t Get a Conventional Mortgage
Financing is the single biggest practical obstacle. Fannie Mae’s selling guide explicitly treats projects that operate as hotels or motels as ineligible for conventional mortgages. Any project whose legal documents require owners to participate in rental pooling, share profits with a management company, or limit the owner’s ability to occupy the unit is disqualified.2Fannie Mae. Ineligible Projects The guide also bars projects offering hotel services like daily cleaning, registration, and central key systems. Freddie Mac applies similar restrictions. Virtually every condotel trips multiple disqualifying criteria, so conforming loans are off the table.
That leaves portfolio loans from individual banks and commercial real estate loans. Expect down payments of 25% to 40%, loan terms of 15 to 20 years rather than 30, and interest rates roughly one to two percentage points above a standard primary residence loan. Lenders also look hard at the operator’s financial stability and at how many units are investor-owned versus owner-occupied, and a heavily investor-owned building (which describes most condotels) reads as higher risk.
These constraints follow the unit forward. Every future buyer faces the same financing wall, which shapes what you can expect at resale.
How the IRS Classifies the Unit
The IRS sorts a condotel into a tax category based on how much you personally use it. That classification controls which expenses you can deduct and whether you can claim a loss.
The threshold is the greater of 14 days or 10% of the days the unit is rented at fair market value.3Office of the Law Revision Counsel. 26 US Code 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc Stay below that line and the unit qualifies as rental property. Go over it and the IRS treats the unit as a personal residence that happens to produce rental income, which caps your deductions at the amount of rental income you report. You can’t create a tax loss in that scenario.4Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property Disallowed expenses carry forward, but they stay subject to the same income ceiling in future years.
For most condotel owners, whose rental pool agreements already restrict personal use to a handful of days per year, the unit naturally lands on the rental property side of the line. That’s generally the better outcome because it opens the door to deducting a net loss, subject to the passive activity rules.
Passive Losses and the $25,000 Allowance
Rental income from a condotel is passive income, and any losses are passive losses. Under the passive activity rules, you can only use passive losses to offset passive income. If the condotel is your only passive activity and it loses money, you can’t apply that loss against wages, business profits, or investment income. The unused loss carries forward until you have passive income to absorb it or you sell the unit.5Internal Revenue Service. Instructions for Form 8582 – Passive Activity Loss Limitations
There’s an important exception. If you actively participate in the rental activity, you can deduct up to $25,000 of passive rental losses against non-passive income. The allowance phases out once adjusted gross income passes $100,000 and disappears entirely at $150,000.6Office of the Law Revision Counsel. 26 US Code 469 – Passive Activity Losses and Credits Limited Active participation is a lower bar than material participation. It means you’re meaningfully involved in decisions like approving tenants or setting rental terms. Whether an owner whose unit sits in a professionally managed hotel rental pool can claim active participation is debatable. If the management company handles everything and you have no real decision-making role, the IRS may say you don’t actively participate. Confirm with a tax advisor before counting on the deduction.
A separate exception exists for a Real Estate Professional. That requires more than 750 hours a year in real property trades or businesses in which you materially participate, and those hours have to exceed half of your total personal services for the year.6Office of the Law Revision Counsel. 26 US Code 469 – Passive Activity Losses and Credits Limited Meeting the standard reclassifies rental losses as non-passive, deductible against any income. For someone whose day job isn’t real estate, this designation is extremely difficult to achieve with a single condotel unit.
Depreciation, Capital Gains, and 1031 Exchanges
If the unit is classified as rental property, you can depreciate the building’s value (not the land) over 27.5 years on a straight-line basis.7Internal Revenue Service. IRS Form 4562 – Depreciation and Amortization Furniture and appliances inside the unit run on shorter schedules. Depreciation is a non-cash deduction that reduces taxable rental income, but every dollar you deduct gets recaptured when you sell.
When you sell at a profit, the gain is a capital gain. The portion tied to depreciation you previously took is taxed at a maximum rate of 25% under the unrecaptured Section 1250 rules, regardless of your ordinary bracket. Any remaining gain is taxed at the long-term capital gains rate if you held the unit more than a year.
A Section 1031 like-kind exchange lets you defer the capital gains tax by swapping the condotel for another investment property.8Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips The unit has to have been held for investment or business use, not primarily for personal enjoyment. Revenue Procedure 2008-16 provides a safe harbor for dwelling units:
- You own the unit for at least 24 months before the exchange (for the relinquished property) or after it (for the replacement property).
- In each of the two 12-month periods inside that window, the unit is rented at fair market value for at least 14 days.
- In each of those 12-month periods, personal use does not exceed the greater of 14 days or 10% of the days rented at fair value.
Most condotel owners whose units stay in a year-round rental pool meet these conditions without trouble, because the pool generates plenty of rental days and the management agreement already restricts personal use.9Internal Revenue Service. Revenue Procedure 2008-16 The risk shows up if you pull the unit out of the pool for extended personal use in the two years before selling. That can disqualify the exchange and leave you owing the full capital gains tax plus depreciation recapture.
When a Condotel Purchase Is Legally a Security
A condotel purchase may legally constitute a securities transaction, something most buyers never think about. Under the Supreme Court’s decision in SEC v. W.J. Howey Co. (1946), an investment is a security when it involves putting money into a common enterprise with the expectation of profits generated primarily by someone else’s efforts. Buying a unit, placing it into a managed rental pool, and relying on the operator’s marketing to produce your return checks all three boxes.
The SEC addressed this directly in a 1973 release on condominium offerings. Where real estate is sold with a rental arrangement and the buyer expects profits from the developer’s or operator’s management rather than from the real estate itself, federal securities laws apply. The offering should be registered with the SEC or qualify for an exemption, and buyers should receive the disclosures required for a securities offering.
Enforcement has been uneven. Some developers register or structure for an exemption; others ignore the issue. For a buyer, the practical point is this: if an offering was required to be registered but wasn’t, you may have rescission rights, meaning the ability to unwind the purchase and recover your money. If the developer did register, you should have received a prospectus or offering memorandum with financial projections and risk disclosures. Not receiving one is worth investigating before closing.
Why Resale Is Difficult
Condotels are harder to sell than almost any other type of real estate. The financing wall that complicated your purchase applies to every future buyer. Without access to conventional mortgages, the buyer pool shrinks to cash purchasers and the smaller number of borrowers who can secure commercial financing with large down payments. That alone depresses resale values compared with similar residential condos.
The management agreement adds another layer. Buyers aren’t just evaluating the unit; they’re evaluating the operator, the brand’s standing in the market, the pool’s historical performance, and the terms of the management contract. A weak operator or a brand that has lost appeal makes the unit a harder sell regardless of physical condition. If the operator exits or goes bankrupt, remaining owners face a hard transition: the units lose the reservation system and marketing that fed the rental income, and without a replacement operator that income can disappear.
Go in with realistic expectations about the exit. These are illiquid assets with a thin resale market, and the leverage to shape the deal, particularly on the management agreement, the revenue split calculation, and any right of first refusal, exists before you sign.