Short Term Rental - W2 employees/high earners

[Jeremy Horton]

I had a thought recently regarding selling my LTRs. One of the big benefits to real estate investing is the tax deductions, primarily depreciation. I think there's a lot of us that have to pass these deductions on whether that's because you have a W2, you're a "high earner" or not a REP for whatever other reason. 

Recent insurance increases here on the Gulf coast and lack of appreciation compared to the average, combined with not being able to take depreciation really makes RE not that good of a deal (in this area, in my opinion). You either leave a good bit of cash in the deal to get cashflow then have a low ROE. Or minimize your cash in the deal resulting in zero cashflow (or losses). The strategy here is basically quick flips, wholesaling, or entirely using OPM to finance deals (creative financing, syndicating etc). Those latter strategies that "work" are very time consuming and essentially businesses in and of themselves. Can you do this with a W2 - maybe so by outsourcing most of the work. Does it make sense to do when you're getting taxed 35-37% - likely not. 

Now long term capital gains on the other hand is 15-20%. So I'm saving 15% at the minimumby investing in the market - with minimal time, no cold calling, DIYs, driving to projects and managing contractors etc. So the stock market (in my opinion) makes more sense for high earners/non REPs.

Now if you still want to invest in RE as a high earner/non REP - where would it make sense? STRs. How? Material participate, spend 100 hours via your log book, and possibly do a cost segregation study. In addition you can consolidate multiple properties into 1 - I personally like this idea - one roof, one HVAC system etc. 

I'm not sure why it took this long to figure - I would assume I needed a little time to build and then roll the equity from the LTRs over to the STR (1031 exchange). I need to see if there is a sort of passive RE fund to invest money into that would allow you more time to identify a new property. The equity I have now should be enough to be a nice downpayment on a cabin in Tennessee - the cashflow should be fine with 50% or so down, and I'd save tens of thousands in taxes by being allowed to deduct from my W2.

I need to find a good tax strategist & new CPA at this point. And a great realtor in the Gatlinburg/Pigeon Forge/Sevierville Tennessee area. Anything you all see that I'm missing? Is there anything that you would do differently/better? 

[Aaron Zimmerman]

I think there's a lot here in this post. 

1. When markets shift and cash flow dries up or isn't as good as the past, you're wondering what your options are and I like that you're willing to pivot strategies.

2. You mentioned doing a 1031 exchange into an STR. This is possible but I did want to highlight you may not get as much in tax benefits as you think.

Let's say you're deferring out $500k of gain and the new STR is $1M. Your new basis will be $500k ($1M - $500k). From there, you'll have to split out between building and land. So now let's saying building is 80% ($400k) and land is 20% ($100k). If you met the STR loophole requirements and did a cost seg accelerating losses and got $100k of bonus depreciation, your loss would be adjusted by this amount, which is still a lot but may be less than what you're thinking.

3. there's a lot of great CPAs on here. I'd recommend reaching out to a few and seeing who you connect well with and deciding from there. With tax season approaching, you'll want to do get on it sooner than later