If You Want to Save on Your Short Term Rental Taxes, Watch This | The STRR Podcast #90 | Tim Hubbard

What's up, y'? All? Welcome back. We're going to talk about taxes again this week. I know it's not the most fun topic, but there's some things that you need to know. And with the recent discussion with my cpa, there may be some hidden tax benefits that you didn't know you were eligible for. So stay tuned. Let's jump in. Welcome to Short Term Rental Riches, where we'll discuss investing in real estate, but with a specific focus on short term rentals to help you build wealth faster with as little headache as possible.

Hey. Hey. Hello. Hello. Buenos dias. Bom gia. Welcome back to the Short Term Rental Riches podcast. I'm happy you guys are here. I've got a important topic again this week. It has to do with taxes. I know that's not the most exciting topic. In fact, it's maybe my least favorite topic, but it's super, super important. Why? Because what are the two biggest expenses that most Americans pay or most people in the world? That would be their housing costs, how much it costs for them to live or rent, and their taxes. So if we can eliminate as much of our taxes as possible, of course, legally, then the better off we're going to be. And there is a great webinar that my CPA recently just put on specifically for short term rentals. So I want to break that down for you. There's some things I think you might not be aware of, and if you've been listening to podcasts for a while, you know, we had an episode where I interviewed them a while back and that was fantastic, too. But this week I just want to break down some of these things in a nutshell so that you can look into them if you weren't aware of them before. And as a disclaimer, of course, I am not a tax professional, so make sure that you check with your accountant before you try to implement any of these options. First of all, what is a short term rental in the eyes of the irs? And forgive me if I'm checking my cheat sheet here, but I just want to make sure I don't mess any of this up. So, in the eyes of the irs, a short term rental is any rental that has an average stay less than seven nights. That's going to be simply the number of days rented in the year divided by the customers that booked. So that'll give you the starting point to know whether your rental should be treated or can be treated as a short term rental. So number two, let's see, I've got. I've got about five or six points that I'm going to go through here. So number two is the distinction between reporting a Schedule E which is going to be like our normal real estate rentals on our tax return, or Schedule C which is going to be more like sole proprietor ordinary income on our tax return. So the difference, because a lot of people think, you know, operating short term rentals, that it's taxed as a business, but not necessarily. In fact, most of the time it's not. As long as you are not offering hotel like services. So you're not picking people up from the airport, you're not doing daily housekeeping, you're not offering, you know, food services and things like that. So that is a big distinction that you will want to look into. If you're already offering those, well then you may be taxed differently if you were to get audited. So just keep that in mind. And what is the biggest benefit to being taxed is Schedule E versus Schedule C? Well, if you're taxed as Schedule E, it doesn't require that you pay additional self employment taxes. So you know, that could save you up to 15% on self employment tax. Check that one again. Check all of these with your CPA just to double check. But that can be a really big one right there.

A really awesome thing in the world of real estate when it comes to taxes is that if we're doing enough real estate, we become what they call a real estate professional. And that allows us to write off our losses against other or ordinary income that we didn't get from real estate. So that's a huge one, right? If you're a W2 earner or a doctor or sole proprietor, anything like that, and you have other income coming in but you have losses from your real estate. Well, if you're a real estate profess, you can use those losses to offset the income tax that you pay from your other work. So this is huge. And historically it's been pretty hard to achieve this professional real estate status.

Now one of the great things about short term rentals is that we can qualify as real estate professional a little easier than that. So I want to give you a couple of the options that my CPA mentioned in her recent webinar that might make us eligible as a real estate professional operating short term rentals and not long term rentals. So there's a couple different ways. The first way, you spend at least 500 hours a year with your short term rental. So that could be, you know, dealing with guests, dealing with housekeeping setting up your online software systems, you name it. If it has to do with your short term rental and you've acquired or you're working more than 500 hours a year and you can document it, well, then you may qualify as a real estate professional no matter if you spend more than 500 hours a year working in your other profession. And the cool thing about this is you can actually group the hours that you spent on multiple properties together. Let's say you have five short term rentals and you spend about 100 hours on each one of them. Well, cumulatively you have 500 hours. You might be eligible as a real estate professional, which means you could use some losses from your real estate income to offset your other income. This can be huge because as we know, real estate has great tax benefits if we're taking advantage of them, like bonus depreciation. That's a whole podcast on its own. I probably mentioned it in past ones, but that's a big one. That's a big one. Method 2 Second way, you might qualify as a real estate professional if you're operating short term rentals. And that's if you spend 100 hours on your short term rental. But, but this is the big one. No one else on your team and your business spends more than 100 hours on your short term rentals. So if you have a housekeeper and she's doing all the work and she spends 110 hours a year and you only spend 100, well then you wouldn't qualify by this method. But you know, that could be, that could be an option. So there's two good options that you might not have known about that may make you eligible on your taxes to file as a real estate professional. And now if you're doing lease arbitrage out there, these same rules still apply. So consider that.

And why is this important? Because if we have losses like from depreciation and we're not a real estate professional, let's say we're paying 35, 40% income tax. Well, then we can't offset that. Let's say that we pay $100,000 a year in income tax and we have a property where we can run some bonus depreciation on or depreciation again for those that don't know, that's basically a ghost expense. It's a expense that we get to deduct against our income on our tax returns that doesn't actually cost us money. So a typical property, for example, can be depreciated over 27 and a half years. That's taking the physical property, not the land, dividing the estimated value by 27.5 years. And each year you get to deduct that off your taxable income. Now, if you're not a real estate professional, then you can't deduct that off your income. But let's say you can and that depreciation happened to be $40,000 of a loss and you are paying $100,000 in income tax, well, then you just put $40,000 back in your pocket. Right? So this can be really, really big. Something you definitely want to spend time on and not just at the end of the year. It's an all year thing. You want to make sure you're planning for this. Right? So short term rentals are actually depreciated a little differently than a traditional long term rental. They're going to be over a 39 year period. But we do have this option for bonus depreciation and that's where we can do an accelerated depreciation. I apologize if this is getting a little complicated. Hopefully for most of you it's kind of making sense. For those of you where it's still a little blurry, just know if you don't know a lot about it, you need to dig a little deeper into this and talk with your cpa. Now, of course, with our short term rentals, we have lots of expenses and lots of other things that we can deduct off our taxable income. You know, we buy furniture. That's a, that's a tax expense. We have utility costs. So all of those normal operation costs, of course we can expect those like we could with a traditional rental. And then also one other little tidbit, one little good tip in here is that, you know, if we're making income off VRBO and Airbnb, a lot of times what hits our bank account is not the actual gross amount of income that we earn. Well, we want to make sure we're recording the whole amount, the gross amount. And why? Well, it's still going to come out the same way on our, on our taxes. But when it comes to lending, well, if we, a lot of lenders will approve you for a loan based off your gross income. So we want to make sure that that's going to be as high as possible. And the last topic that comes up here for tax is something you might want to consider. This is going to be more for those of you that have vacation properties or properties where you like to actually spend time, we have to be careful how much time we spend in the property that's not related to business because the time that's not related to business, we can't deduct that. So let's say 50% of the year you live in your short term rental and the other 50% of the year you run it as a short term rental investment as a business, well then you can deduct 50% of those expenses. Now if you use it less than 14 days a year, your deductions will not be limited. So that's kind of, you know, it depends on how much time you're spending. Now if you're staying in your property for a week, for example, but you're there to fix up the property or there to put furniture in there, well then that's still business related. So that's not going to count as personal use. So these are just some, some tidbits around the tax strategies and things that we want to be considering as short term rental operators. The huge, huge, huge one is do you qualify as a real estate professional? And you might be able to deduct some of the expenses off your other income or your ordinary income. So check with your tax advisor, check with your cpa, make sure you're documenting all of your work and stuff as well too. Of course, if you get audited, you're going to have to prove a lot of these things. So do a good review and please, please don't wait till the end of the year to do your taxes. Something you should be thinking about all the time. A quarter quarterly review, strategize, it will pay off, believe me. Because think about it, just one last thing here. You know, if we have $1,000 of taxes and we have an extra expense of $400 that we forget to write off, well then we just lost $400, you know, so we want to take all these tax deductions legally, of course, but we want to use as many of them as possible. I almost forgot. If you want to watch this webinar yourself, right directly from my CPA. Well then make sure you head to our website, restmethods.com check out the recommended resources section and you can see the whole hour long webinar there and hear from the professionals themselves. So make sure to check that out. Until next time, Just have a wonderful day out there, have a great day and we'll see you back next week.