Short-term Rental Tax Loophole

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STR 01: How The Short-Term Rental Loophole Can Save You Thousands in Taxes

Investing in short-term rental properties and using the STR Loophole is one of the few tax strategies that can save you 5-6 figures in taxes without working full-time in real estate.

And because certain aspects of this strategy will phase-out over the next few years, the time to act is NOW.

Which is exactly why the guys at TheRealEstateCPA.com created this course.

After working with one-on-one with hundreds of real estate investors, they want to help as many investors as possible use the STR Loophole to reduce their tax bills.

If you want to save thousands in taxes and build your wealth faster than you ever thought possible, dont wait, enroll in this course today and take advantage of this strategy while you still can.

Predicting The Loss With A Cost Segregation Study

How much will this equate to for an average short term rental home? Youll need to do something called a cost segregation study to find out exactly.

A cost segregation study will analyze your property and assign a depreciation schedule to every component of the home. Everything from the cabinets to the roof will be evaluated and put on schedule over its assigned life span. The first 15 years of this life span can then be accelerated by your CPA into the first year of your business ownership.

But Ive seen that a good rule of thumb is that youll be able to deduct 20-30% of the purchase price of a home in the first year via accelerated depreciation.

Weve performed a cost segregation on the Palm Springs house, and it came back more aggressive than expected. With this study, we expect to deduct over 30% of the purchase price via accelerated depreciation.

Thats right if we fulfil the criteria, we should be able to deduct over $300,000 from our taxes in April. This should lead to a tax refund of over $100,000.

I spoke to my tax professional last week and confirmed that my understanding of this is correct.

I use Engineered Tax Services for my cost segregation needs. My personal contact there is Kim Lochridge.

Be Aware Of Tax Consequences When Renting Out Your Home On A Short

Today many people earn extra money by temporarily renting out their entire home through rental services such as Airbnb or VRBO. If you do this, you may have to pay federal and state income tax on your rental income. Unfortunately, the tax rules involved can be complex. But it’s up to you to understand and follow them because room and home rental services won’t do it for you.

Also Check: Selling House Capital Gain Tax

Rental Property Tax Loopholes While Selling A Rental

When you sell a rental home, there are a few inevitable tax situations that are unfavorable. However, if you take note of a few rental property tax loopholes, you can save yourself some stress and money. That said, keep reading as we go over a few common rental property tax loopholes for investors to consider while selling a rental home.

Theres More To The World

STR 01: How The Short

Short-term apartments are not just for renters in between homes or people on prolonged visits to a certain area. They are perfect for those who arent looking to put down roots too soon and settling down is not currently in the plans. For those not looking for a long-term apartment just yet, the experience of living in other areas can be life changing. If youre the type of person who goes wherever life takes them, we are here to help you find a short-term lease!

Finding a home nearby is easier than you think. Check out our Apartments Near Me page and take your pick!

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Find Comparables For Your 280a Deduction

Do your research on Google and find out how much hospitality venues charge for the type of meeting you would be hosting at your home. This will vary from area to area and require a little footwork. Its often not necessary to call more than one hotel or restaurant and get their rates for events and services you probably dont need to do a thorough comparison of several venues. When it comes to buying and selling real estate, we typically recommend pulling a number of comparables, but in this case, its a safe bet that if one hotel is charging $1,000 for a one-day conference event, most other hotels in the area are charging a similar rate. Having documentation to support you claiming this as a business deduction is critical to proving the rent was reasonable, you could print rental quotes for similar meeting locations.

Taxes When The Loophole Doesnt Apply To You

Of course, if youve got a great property to rent out all year long, its not worth limiting yourself to 14 days just to avoid paying taxesyou will still make more money in the long run by renting out your place more.

If you are renting your property beyond the 14 days, just make sure to file with Schedule E of Form 1040 to avoid paying additional self-employment tax on the income, and definitely keep track of your expenseslike from having the place cleaned, repairs, etc.to reduce the taxable income from your rental.

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Can You Deduct Expenses If Your Property Is Vacant Such As 2nd Vacation Home

The article by Anderson Advisors interpretation of the IRS rules suggests that in the wording of the legal language used by the IRS, IRC Section 280a relates to a dwelling unit. And according to the IRS, a dwelling unit includes a house, apartment, condominium, mobile home, boat, or similar property, and all structures or other property appurtenant to such dwelling unit. It does not include that portion of a unit which is used exclusively as a hotel, motel, inn, or similar establishment. It would seem from the wording of this statement that any property you own can be leveraged for the purpose of professional tax strategies, like renting your own dwelling to your businesseven if its a vacation home or vacant property.

Keep in mind that the property in question must be something you own personally. If you have it under the umbrella of a business or LLC, you might want to consult with a tax professional.

How Should You Report Exempt Rental Income On The Tax Return

How The Short-Term Rental Loophole Can Save You 5-6 Figures in Taxes [FB Live Replay]

When filing your tax return, theres nothing special that you need to do simply do not report the rental revenue to the IRS. In case you get questioned, be sure to keep detailed records of your rentals. You should be able to prove that you owned the home at the time of the rental, your rates were at market rent and that you used your home for personal use during the tax year.

Recommended Reading: How To Add Sales Tax On Square

When To Use The 14

The first and probably most popular reason to use this loophole is if you live in an area convenient to a major event that draws a lot of visitors to your city.

Think: a prime location in Austin during SXSW, a midtown NYC place during the Macys Day Parade, a home in a city where the Superbowl is being held. If the demand is high and youve got a good spot, you can charge a premium and make a hefty chunk of change without paying taxes on it. This loophole is sometimes called The Masters Rule because of folks who live on the Augusta National Golf Course and rent out their homes during the 4-day Masters tournament, in some cases bringing in $25,000 of rental income in just a few days, tax free.

The rule can also be valuable if youre going on an extended trip and dont want your home sitting empty. Make some extra moo-lah to pay for your vacation, no taxes needed.

Finally, the 14-day loophole can be used as a way to dip your toes in renting your property, without dealing with the hullabaloo of taxes until you know youre ready to commit.

Know The Tax Benefits

Investing in short-term rentals can also come with some great tax benefits. Some of those tax benefits may even be better than those from investments in regular long-term rental properties.

For those in the long-term rental space, you probably already know some of the restrictions concerning the passive activity loss rules for higher-income investors. In short, if your adjusted gross income is over $150,000, then any rental losses from long-term rental properties typically can only offset income from other passive activities. When there is an excess loss, those losses are not used to offset taxes from your W-2 income. The losses are instead carried forward into future years to offset future passive income.

However, an investor who can claim real estate professional status would then be able to use the net losses from the long-term rentals to reduce taxes from W-2 and other income. For investors who work full-time, obtaining real estate professional status is often tough to achieve. One of the main hurdles is that the investor must spend more time in real estate than their job.

However, you will still need to show that you are materially participating in your short-term rentals. So what exactly does it mean to materially participate in your short-term rentals? There are seven tests, and you only need to meet one of them.

Tax benefit qualifications to know

Out of the seven possible qualifications, here are the top three that are most commonly used:

Read Also: Can I Use Bank Statements As Receipts For Taxes

Does California Recognize The Real Estate Professional Status

Unfortunately, one major area California deviates from the federal tax code is the real estate professional status . California does not recognize REPS.

Their position is clear and definitive. It is found under California Revenue and Taxation Code Section 17561:

Section 469 of the Internal Revenue Code, relating to special rules for taxpayers in real property business, shall not apply.

Section 469 is the section of the Internal Revenue Code where you can find REPS.

In addition, California also addresses this in their instructions for Form FTB 3801, Passive Activity Loss Limitations:

Beginning in 1994, and for federal purposes only, rental real estate activities of taxpayers engaged in real property business are not automatically treated as passive activities. California did not conform to this provision. For California purposes, all rental activities are passive activities. Therefore, an election under IRC section 469 is inapplicable for purposes of California personal income or franchise tax and taxpayers should group rental activities without regard to IRC section 469.

This means, if you qualify for REPS, the losses from your rental properties will be non-passive and can offset your active income at the federal level but will remain passive at the state tax level.

There is no room for interpretation here. Its clear and definitive, California simply does not conform to this part of the federal tax code.

Depreciation For Your Short Term Rental Tax Strategy

OA 03: Frequently Asked Operating Agreement Tax Questions by GPs &  LPs ...

If you get a savvy real estate CPA, theyre going to lead you through leveraging depreciation for your short term rental.

Heres what they will help guide you on:

  • Having a cost segregation study on your property
  • That cost segregation will reclassify certain components of your property from 39 year life into 5 and 15 year life. This is for tangible personal property, land improvement property, and qualified improvement property.

Heres why this is powerful:

5 and 15 year property can generally represent anywhere from 20-30% of a propertys purchase price.

Example: if you had a $1 million dollar property and did a cost segregation structure, anywhere from 20-30% could be resegregated and fully depreciated. This would give you a $250,000 deduction.

This is powerful because your losses are non-passive, and that tax loss can be used to offset taxes on your W-2 income.

Also Check: How To Get My Tax Return From Last Year

Unique 2022 Tax Planning Opportunity For The Augusta Rule

Perhaps the most appealing aspect of the Augusta rule is its ability to shift income from a small business. When done correctly, you could rent your home to your small business and receive both a tax deduction at the business level and an exclusion from income at the personal level.

Heres another example of how it might work:

  • You are part owner in a small business. The business rents your vacation home for three days for the management team to use as a planning retreat. During the long weekend, management strategizes about the upcoming year. The business rents your vacation home at market rent.
  • The business can deduct the price of the rental as a legitimate business expense. Because you only rented your home for 5 days the entire tax year, you do not need to report that income on your personal income tax return.
  • You and the business should keep records that showed the business paid market rent for the rental. You can do this by getting rental quotes from similar locations. You should also keep records that the management team performed business duties while using the rental. They can keep meeting minutes or records that show what strategic decisions were made.

What Are Rental Property Tax Loopholes

Rental property tax loopholes are provisions in the tax code that allow landlords to reduce tax liability. That said, rental property tax loopholes depend on many things, such as obtaining the property, what type of investment it is, and other important factors.

Most landlords and property owners are looking to get the most from their real estate investments. Whether buying or selling real estate, investors need to know how to maximize profits and avoid unnecessary payments.

However, its crucial to accurately document income, expenses, profits, and other mandatory tax considerations when it comes to filing taxes. If you need assistance during tax time, its a wise decision to reach out to a financial advisor or tax professional.

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What Is The Most Common Test Used To Shelter Income

For the doctors in our community, most go for test number 3.

They buy a short term rental and aim to work on it more than 100 hours. Also, they ensure that they spent more hours on the property than anyone else.

So for example, if you rent a house 40 times in a year and you hired house cleaners who spent 3 hours each time cleaning your house, they will have spent 120 hours cleaning your house. You would need to ensure that you spent more than 120 hours. You should do the same with all other people you employ. Ensure that you spend more time on the property than they do.

This essentially means that you have to self-manage your short term rental that calendar year. Maybe also even do some of the cleaning yourself if the hours are close.

One strategy weve seen doctors use is to aim to rent their property about 50-60% of the time. They achieve this by setting a high nightly rate. This allows them to maintain revenue and profits while decreasing the wear and tear on their property. Their cleaners and anybody else they employ, such as handymen, also arent going to be required as much as if its occupied 100% of the time.

Materially Participate In Your Short Term Rental

Can You Use the Short-Term Rental (STR) Loophole in California?

What the heck is material participation?

Material participation for tax purposes are the rules the IRS uses to determine if you worked on your short term rental business on a regular, continuous, and substantial basis during the year.

There are seven different tests, which you can read about HERE but the ones that most accountants use are the first three and these are:

  • You participated in the activity for more than 500 hours.
  • Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didnt own any interest in the activity.
  • You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual for the year.
  • Also Check: Minimum Income To File Taxes

    What Is The Short Term Rental Tax Loophole

    The short term rental loophole has saved people thousands of dollars a year in taxes because it doesnt require you to be a real estate professional. It can be found in the tax code under Reg. Section 1.469-1T, and defines exceptions to the definition of rental activity.

    Straight from the tax code, here are the six ways in which income for a rental property to be excluded from the definition of a rental activity, and thus not automatically passive:

  • The average period of customer use for such property is seven days or less.
  • The average period of customer use for such property is 30 days or less, and significant personal services are provided by or on behalf of the owner of the property in connection with making the property available for use by customers. This could include services like a hotel would provide, such as daily cleaning or meals.
  • Extraordinary personal services are provided by or on behalf of the owner of the property in connection with making such property available for use by customers .
  • The rental of such property is treated as incidental to a non rental activity of the taxpayer.
  • The taxpayer customarily makes the property available during defined business hours for nonexclusive use by various customers.
  • The provision of the property for use in an activity conducted by a partnership, S corporation, or joint venture in which the taxpayer owns an interest is not a rental activity.
  • What Is A Short Term Rental

    A property is considered to be a short-term rental if its rented out for less than seven days at a time on average.

    These are very popular in tourist destinations.

    Plus with the advent of online platforms such as Airbnb, its never been easier for virtually anyone with a vacation/second home or rental property to use it as a short term rental.

    Also Check: Morgan Stanley Tax Documents 2021

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