FUNDAMENTALS
TAXES
Tax Benefits with Short-Term Rentals
used – trade or business? If you rent a property with an average stay of 30 days or less, the IRS does not consider it rental activity; it’s a trade or business, kind of like running a hotel. In addition to the short rental period, you must also materially par- ticipate in the STR activity. Generally, this is established by spending 100 hours on your STR activities, i.e., self-managing your STR. Here is a breakdown of what is required: 1 The STR property is placed in services (you are renting or attempting to rent.) 2 The average rental period is seven days or less than 30, with substantial services provided to the guests. Substantial services are typically defined as con - cierge-type amenities. You satisfy one of the seven mate - rial participation tests under Temp. Reg. 1.469-5T. The quickest route is test three. Just spend 100 hours on your short-term rental activity and make sure it is more than anyone else, i.e., manage your properties. SHORT-TERMRENTALTAX PLAN INACTION - EXAMPLE Dr. Sadhil is a physician earn- ing $500,000 working for a medi- cal group. Dr. Sadhil and his wife
NO REPS NEEDED!
by Clint Coons, A Think Realty Resident Expert
they work full time in a non-re- al estate-related field or fail the material participation requirement is how real estate can create tax deductions for them. The solution for these investors is easier than you might think. The highway to harvesting the tax benefits from real estate runs through short-term rentals (STR). SHORT-TERMRENTALTAX ADVANTAGE Unlike long-term rental activ- ity, which is passive, STR activity is defined as a trade or business activity. STR is considered a trade or business if the average customer use of the property is for seven days or fewer—or 30 days or fewer if the owner (or someone on the owner’s behalf) provides significant personal services. Did you notice the phrase
any investors struggle with cap- italizing on the tax benefits of
M
owning real estate. Yes, you can write off your expenses and depreciation against your real estate income, but the real target for many is reducing their non-passive income with real estate losses (passive). For example, a physician earning $500,000 a year listens to a podcast on the benefits of cost segregation, i.e., accelerat- ed depreciation, coupled with 100 percent bonus depreciation through 2022 to create tax shelters out of his four rental properties. After speak- ing to his CPA, the physician learns the depreciation deductions he heard about are only available to offset his non-passive income if he is a real estate professional. The physician does not qualify—or does he? The dilemma for those investors who cannot meet real estate pro- fessional status (“REPS”) because
28 | think realty magazine :: december 2021
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