Tax Planning For Your Rentals in 2023
In this live broadcast, CPA/attorney and author Mark Kohler delivers a comprehensive, Q&A‑style overview of tax planning strategies for various types of rental real estate. He begins by emphasizing the wealth‑building potential of rentals and promotes a follow‑up webinar. Kohler then walks through the four primary rental categories—long‑term rentals, self‑rentals (business owners renting to themselves), real‑estate syndications, and short‑term (Airbnb) rentals—detailing the tax advantages, depreciation methods, and the importance of qualifying as a Real Estate Professional (REP). He explains the 750‑hour, primary‑occupation, and material‑participation tests for REP status and how it unlocks passive loss deductions against ordinary income. The session covers practical write‑offs such as repairs versus improvements (e.g., roof replacement), cost segregation, bonus depreciation, and common deductible expenses (home office, vehicle, tools, family employment). Kohler addresses converting a primary residence to a rental, discussing basis allocation, land value, and accelerated depreciation options. He then explores exit strategies including 1031 exchanges, installment sales, charitable remainder trusts, and lease‑option deals. Additional topics include tax treatment of ADUs, renting rooms in a primary home, short‑term rental improvements, and foreign rental properties. Throughout, Kohler answers audience questions, reinforcing key rules and encouraging attendees to consult tax professionals and attend his detailed webinar.
Chapters
Welcome everyone to a live broadcast about tax savings with rental property people. Millions of Americans own real estate. You may own rental property, short term rental, long term rental, cute little meth lab, a duplex, an Airbnb, maybe your own rental in your business. All of those rental properties have different strategies that could save you thousands in taxes and help you build wealth. Tax deferred. Tax free. Oh my gosh. There's so much people over the I'm a cpa, an attorney, bestselling author and I love to talk about this topic. I am all about Main Street America and I want to be here for you today to talk about any questions you might have about real estate taxation and the best way to get the benefits of your rental property ownership in a variety of ways. Now tomorrow I'm doing a full webinar on four different ways to take advantage of rental property. That is a free webinar down below. You can click on the link and get registered. I'm going to recommend you come as a business owner, as a real estate investor. But more importantly, if you are a CPA or a tax advisor or an enrolled agent or even you want to bring your tax advisor with you, please do. Guys, I have studied back and forth upside, side downs, ways, right, left, every strategy when it comes to real estate taxation and I know I can teach even the most seasoned CPA or tax lawyer on this topic. I've got a law firm, accounting firm, a trust company and we've been doing this for 20 plus years. So with that said, let's dive into it now. The first strategy and I'm just going to hit the highlights today. I want to do some Q and A. If any of you have a quick question, please post them in the chat below. Do not click on anything about someone selling you bitcoin or some cool idea or whatever. I am not posting. They are bots. Don't respond to anybody else's post. Just pose your question, grab a pad of paper and a pen and listen up. I want to wow you all right now. Over 10,000 consultations or more in my career. I'll tell you right now. My successful wealthy clients, over 90% of my wealthy clients own rental property in their portfolio because they know it builds wealth and saves taxes. Bottom line, don't even get started on tax free cash flow. Now with that said, what is the most common type of rental real estate? It is the long term rental and I know some of you like Mark. I don't want to buy long term rentals. Some of you may already own Long term rentals. Some of you may love it, some of you may regret it. Hey, let's just talk about it. The long term rental has a lot of incredible benefits because you can use other people's money, that is the bank, put money down, get into a rental property and you can buy different types of rental property. One that may speak to you like a college rental where your kids are going to college and your kids will live in it and help manage it. You might have a rental near grandma. You might have a rental where you travel on a regular basis. It might be a duplex, a four plex, a multi unit and maybe one that you rehab down the street. And now you have some long term tenants in it. My successful wealthy clients retire predominantly on real estate income, cash flow and capital gains. Now we're going to be doing that in our retirement accounts as well. But real estate, a hard asset that hedges against inflation, it is massive. So long term rentals is a great strategy. Now what's cool about a long term rental is you're able to use depreciation and the operating costs, typically mortgage interest for that bank loan that helped you buy it, maybe HOA fees, property taxes, insurance, it typically loses money on paper. That's the funny thing. Average long term rentals lose money on paper even though they're cash flowing, growing in value. And that write off on paper that just lost money that's going to be used on your tax return. Now if you're not qualified as a real estate professional and you or your spouse can qualify, then those losses are carried forward. And that's okay because someday you're going to sell that rental or another rental property and you can dump that bucket out on a different rental property if you want. So these rental property losses will just snowball in this bucket while you're building wealth and having tax free cash flow. That's the most common real estate investment. Now the trick here is, and this is where the tip is, we're going to dive more into the webinar tomorrow. I'll have a whiteboard with me and we're going to write it all out. Is qualifying as a real estate professional because it can unlock those losses every year to use against your W2 or other income. There's a three part test. You've got to put in 750 hours doing real estate. That's about 13 hours a week. It's got to be your primary occupation. You can have a day job, but it better be part time. And you got to prove you do real estate more you don't have to be a licensed realtor or contractor, but you're at least managing your own rentals and doing rehabs and fix and flips, whatever. And then number three, you have to be materially participating. There's seven tests under that, meaning you're involved. You can't be sitting on an island somewhere and you can't, you can't be a real estate professional with time and occupation and then buy into a syndication and think that syndication loss is going to help you. It's not. That's going to, we're going to come back to that. That's number four. So number one is the long term rentals. Those losses that are going to be generated, we want to capture them, save them and use them in the future or use them now under that real estate professional classification. Now number two. Number two is the short term rental. You know what? Yeah, I'll go with number two. I think second most common. I'm going to call an audible right here because I want to go from the most common to the least common. Probably the next most common real estate investment is going to be the self rental. And what I mean by that is business owners that buy the own property they rent from. This could be farmers with the barn and the storage and the warehouses. It could be a manufacturing facility, it could be a dentist working out of their own building, an electrician out of a warehouse, a landscaper out of a metal building. Any of you that own real estate and rent from someone else, we need to own that real estate and rent from ourselves. Now the tax strategies there are incredible. This is called a Dash 4 election. The long term rental was the Dash 9. Again, we'll get into that more, more in depth tomorrow. Please click on the link and join me for this webinar on real estate taxation tomorrow. And bring your accountant with you because I have, I certify, advisors around the country enrolled agents and CPAs on over 70 different tax strategies and this is just one of them. So now back to this. Self rentals, very common. And you don't have to be a real estate professional to take all that depreciation. I can do a cost segment cost segregation analysis, load up on bonus depreciation and write it off against my business income if it qualifies as a self rental. I'll go through some of those rules again in the webinar. We'll get on the whiteboard. It's very detailed. We're going to be in that webinar for an hour. But in there we're Going to talk about common ownership and that the business is integral to the real estate and vice versa. Those are the two big rules. So if husband and wife own the business, husband, wife need to own the building and the business has to be renting from the building as its predominant tenant and vice versa. That's the self rental. Now number three, probably the next most common investment in real estate is the syndication getting more and more popular. In the good old days they were called REITs. Where Wall street would package up these REITs and invest in real estate, real estate investment trusts. And that was a way for Wall street to help common investors get into real estate and brokers make a commission. Well now we're, we're really in this alt asset world where hedge funds and syndicators and real estate investors have gone out and created their own damn fund and they're saying, hey, come join my multifamily fund or my storage unit fund or we're raising $2 million to take down a whole hotel and do a condo conversion. We're investing in tract homes, we're doing construction and spec homes or whatever. So if you find a syndicator and they're raising capital to do real estate, it's very, very common. You're generally going to get a better ROI than just going into a Wall Street Fortune 500s P500 type number. And you could see a 10 to 15% ROI on these syndications because you're just so much closer to the, to the real manager of the property. Love them. Do your homework, do your due diligence. Sometimes you have to be an accredited investor, sometimes you don't. When you invest in a syndication, the cash flow is generally going to be tax free because you're going to have this depreciation inside the syndication eating up any of the income so that the distributions are tax free. But do not think that any of those losses are going to get unlocked on your personal tax return. They're not. Because if you don't materially participate in the syndication, they go forward as a passive loss carry forward in the real estate realm. So they go into that same bucket that your long term rentals are in and that's okay, you're going to be able to dump them out someday. So for example, you could sell a syndication or, and then capture some of the losses or you could use the losses from a syndication that you carried forward to offset the gain on the sale of a long term rental. So you've got, there are lots of options there. But a syndication loss is not going to go against your day job number four type of real estate investment. And one of the newest to the to the market is the short term rental. That's the Airbnb short term rental scenario where the average stay is less than seven days and you're not providing substantial services, meaning you're not acting like a hotel. You only clean it at the end of the rental service. You don't provide concierge services or daily downturn or cleaning and all that kind of stuff. So you're not doing any of that. You qualify truly as a Airbnb short term rental. Well, the beauty of that is, again, you don't have to be a real estate professional to take advantage of the write offs, but you do have to materially participate. Now, if you remember, I said there's seven ways to materially participate in a long term rental. Well, with the short term rental, it's actually very easy to do. If you stay involved in that initial year, you buy an Airbnb. Rule number three of the list of seven says that if I can, if I participate at least 100 hours in all of my short term rentals, if I group them or in that one short term rental and I put in more time than anyone else, I materially participate. Now repeat that. You put in 100 hours and more than anyone else, property managers or cleaners or whatever. So if you're buying an Airbnb in the fall of the year and you put in your hundred hours and then make sure no one else put in more time than you, I can now write off all that depreciation. Well, this year it's an 80% bonus. Depreciation limitation. Crazy. So you're buying a rental for say 500 grand. The building's worth 400 grand. And I depreciate that, man. I, I might get In a cost seg scenario, I might get 300 grand in write offs. I mean, it'd be insane. So you. And it's all depends on the property and the numbers and the cost sag and all that, but it's really quite phenomenal. So you want to look at a short term rental scenario if you understand short term rentals. If you want to get involved in the short term rental market, it's very different than the long term rentals. Better chance for cash flow. But there's also volatility in the market and in tourism. There's been markets around the country that have really taken a hit with Airbnbs and other markets that are booming. With Airbnbs, you have regulatory issues. At the local level, you've got to make sure you don't get, you know, regulated out of being an Airbnb. But that's when you can fall back on midterm rental and long term rental strategies. You still have a property. Always run the numbers on a short term rental investment because if it doesn't make it on a short term perspective. Perspective, I could go mid term or long term. But from a tax perspective, I love the Airbnb strategy because again, I can have a day job as a pharmacist working 40 hours a week and still get the pass through losses without being a real estate professional. I just have to that material participation rule. Now those are the four main types of rental real estate, long term syndications, the self rental and the Airbnb. When you find and use commercial, could be in there and storage units and all that. But it's either long term, short term, or it's your own building or you're in a syndication. Those are the four big categories from a tax perspective. Now what I also want to make sure you're writing off is cell phone travel, home office, auto computers, electronics, tools and supplies at Home Depot, electronics at the Apple Store and Best Buy. You're getting your family involved in the business. You're paying your kids or your parents to help out with the real estate. If you're helping a family member anyway financially, quit paying taxes and giving them money, get them involved in the real estate. Now you're getting a tax write off for involving them in the real estate investment. That's again building wealth, tax free, cash flow tax write offs and you're leveraging your money. You're getting more real estate because you're using the bank's money when you put down that down payment. So I love this strategy. It's so, so powerful. And we got a bunch of questions coming in. So Robbie, let's go to it and let's see what we got here. I'm here for you guys.
We've got Vic asking if he just rehabbed his roof, is he able to have that as a tax write off?
If you. So we're going to assume that Vic is asking about a rental property and he put on a new roof. The question is, is it a write off? Yes. Now, how we write it off is going to be where the rub is. But the point is it's a write off. Anything you do on your rental properties, people from putting in a new water heater to redoing the roof, to putting in landscaping, a new sprinkler system. It's all a write off. But how? Now here's one of the important rules. If you're doing a repair on the roof, it's immediately deductible. If you're putting on a whole new roof, doing an improvement, then you're going to depreciate the roof. That's rule number one. Number two, I'm going to say, is Vic a real estate professional? If he goes, no, I've got a day job and this is just a little rental of mine, okay, I'm not going to be apt to try. I'm not going to be motivated to try and depreciate the hell out of that really quickly because it's just going to sit there in the carry forward bucket. But if he goes, no, no, no, I'm a real estate professional, ho ho, ho. Now I want to write off that roof with bonus depreciation and write it off as quick as possible. Maybe 80% of it this year in the first year. So If I spend 20 grand on a roof, I'm going to be writing off 16 grand of it on my tax return right now. And the other four depreciated. So. But that's again a vix, a real estate professional. But stepping back again, any improvements to your real estate in a rental scenario is a write off. Is it a repair or an improvement? And how do you qualify? That's where we're going to go on the analysis.
Robbie, to follow that. If the primary residence had just a new roof put on it and then it became a rental, is it still possible to write that off?
Yes. So this is tricky. So let's say any of you have a primary and you convert it into a rental property. Well, as the accountant we have to look at your basis. What did you buy the property for? Oh, and you put on a new roof.
Great.
Oh, you put in a new fence. Oh, that's great. Oh, you redid the driveway.
Great.
So we're going to add all of that up and that's your basis. So let's say you're into your primary residence. 350 grand. Well, we might take off 20% for the land value, which would leave us with a property value of maybe 275, 260and I'm going to take the building and depreciate it. So Vic, and if we're using Vic as the example, we've got this building now that we converted from a primary to a rental. And now we have to decide again, how aggressive are we going to be on the depreciation, Are we just going to do it over 27 and a half years? Are we going to cost Sega and strip that roof out and ride it? That didn't sound great. Sounded like wizard of Oz. No, tornado came in. Vic. We're going to take that roof and put it on the books as a write off and depreciate it faster. That could work. We're going to get into cost segregation tomorrow in depth again. If you just joined us, please get over to signing up for that tax webinar tomorrow. It's free. And if you're a tax professional, a cpa, a bookkeeper, a tax attorney. Attorney, a finance advisor, and you want to learn more about real estate taxation, we're going to be into it knee deep for an hour on a whiteboard tomorrow. What do you got, Robby? Another question.
Yeah. Can it be fixed? Bought a lake house in her LLC two years ago with one partner. She did a full rehab, rented it out long term, but now it's vacant and the market is good for her to sell. What are some options for her?
Okay, so we've got this lake house gone up in value. You're not enjoying the rental experience and it's not cash flowing the way you want. Time to cash out. Love it. So, multiple options. Oh my gosh. Let's just go through a list. Number one, you could do a 1031 exchange. Very common. I know many of you are like, oh my gosh, I'm getting more crazy here. I got better ideas. But hang tight. We got to talk about the 1031. A 1031 allows. What's her first name again?
Can it be fixed?
Can it be fixed?
All right.
Sounded like it was a her. So can it be fixed? What I would tell you is if you want to sell that property and buy another property of equal or greater value or multiple properties of equal or greater value. Let's say that lake house is worth 500 grand and you want to go buy five mobile homes for 100 grand a pop and they cash flow like crazy. You can sell the lake house with no tax and go buy five properties that equal 500 grand. You're off to the races. So you can convert the real estate to another type of real estate and pay no tax. Number two, you might sell it as a note. Like sell it and carry the installment, carry the paper back. A lot of people want to hold notes. They hedge against inflation. Interest rates are high right now. So you may go out there and say, hey, I could sell this for what did we say 500 grand. So you say it for 500 grand, but that's someone coming in, getting their own loan. If you say, hey, I'll carry the paper, But I want 550, someone may say, ooh, you'll carry the paper. I don't have to go to a bank. Yeah, I'll carry the paper, but I want 50 grand down. So they give you 50 grand a note for 500. Now you're earning interest and you're only paying tax as you receive payments. It's called an installment sale. So you're spreading your tax over time. You may be getting a better sales price and you're getting a higher interest rate now that the mortgage rates are up. So you kind of play bank number three. You might do a charitable remainder trust. You donate the property to a charity that you create. You do these all the time, and then the charity sells the property. You now get all the proceeds tax free, building cash flow for you. And as it distributes cash flow, you pay tax on the cash flow that comes out. But it's based on a percentage, a determined interest rate. I don't want to say interest rate. A payout percentage based on your age and your gender. So us males are gonna die sooner, so usually the trust will pay out faster. Cause they don't think we're gonna live that long. But anyway, we do the math. This charitable trust doesn't pay any tax upon the sale of the property. And you get asset protected cash flow for life. So please get a consult with my law firm@kkoslawyers.com with Max Merritt. He's great. Max does all of our charitable trusts. And he could do a consult with you for an hour and give you the rundown on how that charitable trust might work. Finally, you might do a lease option. Get someone in there to rent it with an option to purchase it. Sometimes if you do a lease option, you can rehabilitate the rental market and you lock in a purchase price for later. That can work. Well. So anyway, got to get your partner on board. If your partner's not excited to sell, I don't know. Good luck with those partnerships anyway. Robby, next question.
David works from home, takes care of the kids. His wife has a W2 job. They plan on renting out their primary residence. Is it possible for him to achieve rep status?
If your only rental property is your primary residence? You're not going to make the cut as a real estate professional. But here's the other thing too. It may not matter. Who cares if you're a real estate professional right now, let's rent the home, get good cash flow. You can write off up to $25,000 in losses a year if your AGI is under 150 grand. So if your wife's day job is paying less than 150,000 a year on a W2, you're going to get those write offs and you don't even need to be a real estate professional. But if you only have one rental, use this as a stepping stone to, to get more rentals. I've often said here in my books you can get them on Amazon. Right here in my financial freedom book and in the Tax Legal playbook, I talk about buying that rental property every year by one rental a year. So this year you're converting your primary to a rental. Create some cash flow and get at it. Start building wealth with that real estate. You'll get a write off. Don't worry about real estate professional right now with one rental. Next question.
Robbie Nicole wants to know if she built an ADU on her primary residence, can she write this off, the cost of the building?
Damn straight. Damn straight. I want you writing off that adu. For some of you that don't know what that is, that's an accessible, sorry, accessory dwelling unit. So it's, it's a new, it's kind of like putting a tiny home on your lot of your house. In some of the more urban developed areas, local municipalities have allowed people to put these little tiny homes on their primary residence property. So you get to write that off. It's 100%. I want to say it's 100% write off. I mean it's a write off. Now we got to again look at depreciation and your status and are we going to write it off all in one shot? How big was it? The land is never going to be a write off because you just put it on your home lot where your primary residence is. So those ADUs are great cash flow. And in fact, I'll tell you right now, it's not. Can you write it off? You have to because when you go to sell your home, you're going to have to recapture depreciation whether you took it or not. So. And you can 1031 exchange an ADU. There's so many options there. Love the ADU. It's a great write off. Use it. Next, Robbie.
Priestess Lucy. When renting out rooms out of your primary residence, is depreciation still mandatory?
When you're renting out rooms in your own house, there's Kind of the tipping point. On one hand you might just do it under the table. You're renting out a room here or there, one occasion, a little forest gump action and you're just renting and it's no big deal, you know. And if you don't claim the income and you don't take the depreciation, there's no recapture, it's just there. But for some of you that turn that into a long term plan. You almost graduate to a bed and breakfast where you're renting out rooms constantly. A third of the house, a half of the house is a rental. You're going to be required to take depreciation and under audit. You be in big trouble if you didn't claim the income and do the depreciation. Meet with your tax advisor and find out if you're really tipping over the top of having to be reporting that. It depends really on is it de minimis, small or substantial and material. Those are terms that we're going to use in the accounting world to determine what to do. So I'd say it's a gray area. Next, Robbie.
Sergeant Sam. He wants to build out the backyard in his primary to prep it to be his next str. How can he do this and can he write it off?
Well, when you're prepping land for a short, you say str. Short term rental.
Yes.
Okay. With a short term rental, when you convert to the short term rental, any improvements to the property that are attachments, like let's say a sprinkler system, a fence, lighting, that's going to be a write off when you convert to STR for sure. Keep track of all those expenses. But just grading the land, land is not a write off. You can't depreciate it. So I would want to have a list from you of what improvements you're doing and just be smart with your money. At this point I may want to say to everybody, don't chase write offs. Do what you have to. Get this damn thing on the market and making money. If there's a write off involved, great. First make good economic decisions. Then we'll worry about the tax write off. So we don't want to let the tax tail wag the dog. Let's be smart first. So if you're doing improvements to your place to get it to the short term rental status, great. Be efficient, be economical and keep a good list. And we're going to write off what we can. Robby, Next
we've got Laid X. She wants to know how to set up a write off for a property that's outside of the United States.
Oh, okay. So if any of you are buying rental property out of the United States, let's say you got a place down in Cabo or Costa Rica. That's wonderful. You are taxed on your worldwide income as an American citizen. You also get the write offs of your business expenses worldwide as an American taxpayer. So if I'm going down to Costa Rica to do a rental property, then I get to depreciate that building. I get to claim, I have to claim all the rental income and I'm just going to treat it as if it's in New Jersey or Costa Rica, no difference. One major variable is you are doing business in a foreign country. So you, depending on the country you're in, you're going to need to file a tax return there. You may pay taxes in that foreign country which gives you a foreign tax credit in the U.S. and if you have losses there, those losses can be a write off against your income in the United States. Yeah, I got it
here.
Talking.
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