Mark Kohler explains how short-term rental losses can offset W-2 income if you materially participate, and walks through IRS at-risk rules that determine what counts toward your deductible loss: upgrades, mortgage principal, down payment, and closing costs.
I recently consulted. Consulted with a CPA for tax prep and was talking about losses in my short term rental put into service in 2022. Last year the CPA brought to my attention that the losses I could use, I could use the losses to offset my W2 assuming I qualify under the material participation. That's a. That's a pretty cutting edge CPA right there. We are teaching short term rental strategies and they're very unique. There's a loophole in that. Yeah. So I want to commend you that you're. You're onto something with the accountant. Then the accountant says, but you are capped by the money you've put into the rental, which is he described as the at risk rule and said the figure, the cap is the total cost of upgrades and renovations. Principal paid on mortgage prior to being put into service. Since it was my primary residence in 2018-22. Down payment and closing costs. I hate to say this too, but the at risk rule includes recourse debt, which is really interesting that the accountant didn't refer to that. So if I buy a rental property and put down 20 grand and get a mortgage for 80 grand and buy a property for 100 grand, my at risk is 100 grand I'm on for the mortgage of 80 and I put down 20. So now I get to peel out the cost of land and depreciate the rest with cost seg or whatever. Same thing applies if you have a primary residence and you contribute to this project. So I just would take a little. Just as an aside, Leonard, make sure it is true. You've got all of us. We can't write off more than we're at risk. Can I tell a quick story? Be okay.
You're already going long on this question.
Oh no, I am. You're. You're feeling that. I'm sorry.
I'm enjoying it. Okay.
You're okay. Okay. I'm just going to say every. Any of you hear of the Savings alone crisis.
The snl.
SNL Crisis. Yeah. It was Saturday Night Live. No, no.
And L. Yeah.
Yes. Savings and loan. Yeah. Crisis. Now that was back in the 80s, kind of a big deal. 80s had it. 70s, 80s, 90s. It was kind of going through that whole period. Here's what happened. Investors were going out and putting money down on big buildings. And savings and loans were funding the acquisitions of these buildings. This was when savings and loans were a big deal and investors loved it because they could put down 100 grand on a million dollar building. And under the IRS rules back then they could write off the whole million minus the land. But they were able to write off these huge investments. They didn't even care if the building made money. What happened? The buildings didn't make money. What happened to the loans? They went into default. What happened to savings and loans? They're kind of like the dodo bird. They're gone. They don't exist anymore. They went under and the government had to come bail them out. And it was a big disaster. Well, it wasn't really the savings alone that were making the problem. It was the tax code. The tax code was letting investors write off more than they were at risk. They didn't care if they lost 100 grand because they got a write off for 2, 3, 400 grand or more. So the IRS and the Congress changed the law and said blah blah, blah blah blah. You can take loss write offs on these short term rentals and these sorts of things but you in any sort of rental, but you have to be at risk to be able to take that write off. And that includes the recourse debt. If you're on for the debt personally, you get to add that to your at risk. So anybody out there, you're like, well I got a non recourse loan. Well that means you're at risk is only what you put into it, plus repairs and maintenance. Well I shouldn't say repairs and maintenance, but improvements and things like this. So Leonard and everybody out there, kind of a digression but I think, I think that was a very important story to share. Did you appreciate that?
Yeah. Way back to the SNL crisis.
Okay. Yeah, I don't know, I'm just gonna say Leonard, I think you're on track. The short term rental strategy is excellent. You've got to materially participate. Matt and I have held a couple podcasts on the short term rental strategy. They're in our history. Please get back and listen to those in full. In the last six months I think we've done a couple and I would really recommend you go listen to those. But that's where I would go, Leonard, is listen to our podcast on the short term rental strategy. You' back. I'm liking what you're doing, but the at risk is in the comment here. Maybe not what you expected me to comment on, but that's the concern.
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