Short Term Rental for Tax Benefits

[Tahoe1305]

Considering purchasing my neighbors house to utilize as a STR.

Would allow us to self manage, pay our young kids to build an early (legal) Roth retirement (vs just giving them money). And allow some passive write offs even if I don’t go for bonus depreciation (which we may attempt).

Anyone in the group do something similar? Lessons learned? Things I’m not thinking of?

My goals are to decrease my W2 tax burden and pay the family money as easily as possible.

I’ve owned many long term rentals before (and still do), nothing in the short term realm to date though. Taxes and having to pay a lot of them is actually kinda new too.

 

[RickfromPA]

1st you mentioned STR. You will want to keep the average stay to 7 days or less. This will allow you to depreciate the property similar to a hotel (39yr) as compared to a house (27.5yr).

If your average stay is greater than 7 days, you need to qualify for Real Estate Professional (REP)with involves 750hrs/year of managing real estate. These hours include everything from scheduling tenants, maintenance, cutting grass, etc.

If you, or your spouse, doesn’t qualify to be considered a REP, you are limited in the deduction you can claim if your rental generates a lose. You will only be able to offset the rental income which is considered passive per the IRS.

If you are a REP, OR keep the average stay to 7 days or less, that changes the income from passive to ordinary and you are able to use the lose against W2 earnings.

Look into STR loophole for more details.

I’m a CPA and provide cost segregation services. We deal with these situations weekly. This is a high level explanation but let me know if you have more questions.

 

[Tahoe1305]

1st you mentioned STR. You will want to keep the average stay to 7 days or less. This will allow you to depreciate the property similar to a hotel (39yr) as compared to a house (27.5yr).

If your average stay is greater than 7 days, you need to qualify for Real Estate Professional (REP)with involves 750hrs/year of managing real estate. These hours include everything from scheduling tenants, maintenance, cutting grass, etc.

If you, or your spouse, doesn’t qualify to be considered a REP, you are limited in the deduction you can claim if your rental generates a lose. You will only be able to offset the rental income which is considered passive per the IRS.

If you are a REP, OR keep the average stay to 7 days or less, that changes the income from passive to ordinary and you are able to use the lose against W2 earnings.

Look into STR loophole for more details.

I’m a CPA and provide cost segregation services. We deal with these situations weekly. This is a high level explanation but let me know if you have more questions.

Thank you. Don’t plan or think we will be able to qualify for REP. So the STR route is what we are after, keeping it under 7 days shouldn’t be hard.

I plan to look for a local CPA to provide similar services. Drop me a DM, would love to chat more if you’re willing. I’m also curious what folks pay for those kind of services.

 

[Beendare]

The main danger as I see it is local Government regs.

A buddy owned 2 ST rental units in Tahoe and the local gov shut those down a couple years ago. Same for another buddy in a Socal beach town. I think both went to one month minimum rentals which changes the dynamic a lot and it slaughtered the buddy with the Tahoe rentals forcing him to sell. The Socal guy got hit- I don't know how hard- but they kept the place.

BTW, the ST rental shutdown in Tahoe hurt the local economy.

 

[Tahoe1305]

The main danger as I see it is local Government regs.

A buddy owned 2 ST rental units in Tahoe and the local gov shut those down a couple years ago. Same for another buddy in a Socal beach town. I think both went to one month minimum rentals which changes the dynamic a lot and it slaughtered the buddy with the Tahoe rentals forcing him to sell. The Socal guy got hit- I don't know how hard- but they kept the place.

BTW, the ST rental shutdown in Tahoe hurt the local economy.

Yeah risky for sure. Current spot is very loose with regs still. Worst case I’ll convert to a long term. I have a few of those already.

Just want to dip my feet in ST and being next door mitigates a bit of risk for us.

 

[HNTR918]

You or your wife need to qualify as a REP to make it worth while.
Also, you need to make sure no other person spends more time than the qualified REP. (Ex. Cleaner)

 

[colby12]

1st you mentioned STR. You will want to keep the average stay to 7 days or less. This will allow you to depreciate the property similar to a hotel (39yr) as compared to a house (27.5yr).

If your average stay is greater than 7 days, you need to qualify for Real Estate Professional (REP)with involves 750hrs/year of managing real estate. These hours include everything from scheduling tenants, maintenance, cutting grass, etc.

If you, or your spouse, doesn’t qualify to be considered a REP, you are limited in the deduction you can claim if your rental generates a lose. You will only be able to offset the rental income which is considered passive per the IRS.

If you are a REP, OR keep the average stay to 7 days or less, that changes the income from passive to ordinary and you are able to use the lose against W2 earnings.

Look into STR loophole for more details.

I’m a CPA and provide cost segregation services. We deal with these situations weekly. This is a high level explanation but let me know if you have more questions.

Can you explain these benefits in as simple dumbed down English as possible? I’ve tried to google it and still can’t get a solid grasp. I am moving out of my current house and am looking at options similar to the OP but am completely unaware of the potential tax benefits.

 

[Tahoe1305]

You or your wife need to qualify as a REP to make it worth while.
Also, you need to make sure no other person spends more time than the qualified REP. (Ex. Cleaner)

The way I understand it is for STR, REP doesn’t really matter.

As long as you materially participate I should be able to claim the deductions for a loss off W2 income, just like REPs. I think that’s the point of self managing a STR vs a Long Term. The burden for real estate professionals at 750 hrs will be tough, but because of the time but because that also has to be equal or greater than other professions.

This is a side hustle not our primary game.

 

[Jkr61]

I’ve managed multiple str’s. The constant turnover and communication with guests can be draining. Cleaning yourself gets old. Hiring a cleaner sounds good but having only one unit it’s hard to make them prioritize you so you might still end up cleaning. You will need to double check there work either way. This can get old real quick especially as it interferes with your life. I thrived on making them successful but burned out after a few years. A clean place and good communication are 2 of the most important things that make a successful str. Any other questions feel free to ask.

 

[woods89]

I’ve managed multiple str’s. The constant turnover and communication with guests can be draining. Cleaning yourself gets old. Hiring a cleaner sounds good but having only one unit it’s hard to make them prioritize you so you might still end up cleaning. You will need to double check there work either way. This can get old real quick especially as it interferes with your life. I thrived on making them successful but burned out after a few years. A clean place and good communication are 2 of the most important things that make a successful str. Any other questions feel free to ask.

I have a customer that has 3, and one July a few years back they ran 100% occupancy for the month. He told me they cleaned 47 times that month.......

Needless to say, they were a little burned out.

 

[Tahoe1305]

It’s 100yds from our main home and I have a wife who works part time and two growing kiddos. I’m retired and my second career is only a few days a week, so I have some time as well. So hoping the burden won’t be crazy.

It’s a 4/4/2 home and we will probably set a 3 night minimum at a slightly lower rate than the area. Stats are showing 60% occupancy as a decent assumption. We have a few very popular/big events close by each year that net $1k a night easily, so banking on that as well.

Another weird/neat element to it, is I want to set up a golf sim studio, a poker room, and have a spot to park another car when the hail storm comes through. That place will offer me all and not detract much from the STR part of it.

 

[mlevimadden]

I currently own 2 STRs in Denver and started 4 years ago. Happy to help with questions you have.

 

[Jkr61]

It sounds like you already have a good cleaning team! That will be a huge help. The poker/golf room can help set you apart from other comparables plus if not booked it gives you a place to hang

 

[Tahoe1305]

It sounds like you already have a good cleaning team! That will be a huge help. The poker/golf room can help set you apart from other comparables plus if not booked it gives you a place to hang

Hot tub too. Forgot to mention the dang hot tub.

 

[Tahoe1305]

I currently own 2 STRs in Denver and started 4 years ago. Happy to help with questions you have.

Thanks! I’m just south in Monument CO so curious what state benefits/considerations I may be missing.

 

[Jkr61]

Sorry I’m no help with that I just managed the units/renters.

 

[Ellsquatch]

Sounds like a great plan with the close proximity to your house. We really had a hard time with cleaners and turnover in our STR. If you can keep it occupied in your area send it! The appliances really took a beating in our place but it was not nearly as bad as LTR situation we had. Full hardwood floor refinish and re-landscape the yard from scratch.

 

[Fowl Play]

Thank you. Don’t plan or think we will be able to qualify for REP. So the STR route is what we are after, keeping it under 7 days shouldn’t be hard.

I plan to look for a local CPA to provide similar services. Drop me a DM, would love to chat more if you’re willing. I’m also curious what folks pay for those kind of services.

I have been looking at similar strategies to offset my taxes, find a local CPA that charges by the hour. Mine is $180 an hour, but I email a list of questions beforehand and ask for tax planning strategy related to them given my situation. We schedule an in person meeting for a week later, talk over the answers/strategy, she emails me a summary -- out in under an hour most times. Totally worth it for the guidance to ensure I am doing everything correctly, and how to put the strategy in place.

Your plan can totally work, but I would go over the details with a local CPA. Cost segregation study + utilization of 100% bonus depreciation can be very powerful as well.

 

[swavescatter]

I have been looking at similar strategies to offset my taxes, find a local CPA that charges by the hour. Mine is $180 an hour, but I email a list of questions beforehand and ask for tax planning strategy related to them given my situation. We schedule an in person meeting for a week later, talk over the answers/strategy, she emails me a summary -- out in under an hour most times. Totally worth it for the guidance to ensure I am doing everything correctly, and how to put the strategy in place.

Your plan can totally work, but I would go over the details with a local CPA. Cost segregation study + utilization of 100% bonus depreciation can be very powerful as well.

Next time you do that, give ChatGPT your list of questions as well and see if that $180/hr is still worth it...

 

[Tahoe1305]

I have been looking at similar strategies to offset my taxes, find a local CPA that charges by the hour. Mine is $180 an hour, but I email a list of questions beforehand and ask for tax planning strategy related to them given my situation. We schedule an in person meeting for a week later, talk over the answers/strategy, she emails me a summary -- out in under an hour most times. Totally worth it for the guidance to ensure I am doing everything correctly, and how to put the strategy in place.

Your plan can totally work, but I would go over the details with a local CPA. Cost segregation study + utilization of 100% bonus depreciation can be very powerful as well.

That’s awesome, thank you.