Rental purchase 4 airbnb. Do I form my LLC before repairs 4 taxes

8 Replies

Hi everyone. My name is Jonathan I'm looking for some guidance and direction. I've purchased my first rental property in a mountain resort adjacent in the San Bernardino Mountains of Southern California. It is a small 1080 sq. ft. 3BR/1BA with detached garage proximate to local ski resorts. My goal is to make it a short term rental on Airbnb. I want to form an LLC entity to protect my other assets but also to manage the investment as a business. The property requires numerous upgrades and repairs. For tax/accounting purposes, is it necessary to form the entity before hiring contractors or making purchases for projects that can be DIY? With current and new tax laws I want to do my best to leverage the tax code and avoid more first-time investor mistakes. In addition, for those that have experience in airbnb properties with some success, could you share/impart some wisdom as to how you address accounting, tax planning, and entity formation. Thank you. I really look forward to any help as I am combing through other member questions and blog articles.

@Brian Adzadi What a great article.  I have such a great amount to learn and to discuss as I pursue hiring a tax advisor and CPA.  I've basically been doing clean-up on the property for now.  All the things that don't cause me to pay someone else for the very reasons that this article addresses.  Thank you for sharing the article, because now I have so many questions to ask when I meet with the experts.  

Originally posted by @Brian Adzadi :

@Jonathan Duarte

I am not a tax expert but I am going to surmise from a blog (Click this link here: that @Brandon Hall Hall Hall  Hall posted, you are better off setting up an LLC before you lift a hammer.

Once you set up an LLC, start advertising the unit then start doing rehab work, it will all become ordinary and necessary expense write off on your taxes.

It's not necessarily true that everything becomes ordinary and necessary expenses to write off. There are still things that require capitalization. 

I don't want to misguide though so maybe brandon could chime in since it's his article. 

@Natalie Kolodij

 That would be really cool if @Brandon Hall could add a little.  I'll used this reply as an opportunity to expand on the scope of the project.  The house exterior is in fair to good condition.  Its curb appeal lacks something to desire.  As such its my desire to replace the siding  and paint as well as create usable spaces with ext. landscape.  On the inside, upgrades will be floors, doors, walls, paint, kitchen & bath remodel.  The improvements will vary but I'm going for more of a really elegant updated modern cabin with good amenities. Fully furnishing will be in addition to structural and interior/exterior upgrades.  Hopefully this paints the scope of the projects.  

@Jonathan Duarte there are two requirements the IRS imposes in order for a property to be in service: ready and available.

Once in service, the property is operational and expenses can potentially be deducted as operating expenses assuming they meet certain criteria.

“Ready” for rent generally means that a certificate of occupancy can successfully be issued for your property per your locality’s rules. This means that your major components have been repaired, the structure is in good shape, and the property is habitable.

“Available” means that the property has been advertised for rent. It does not mean that someone has moved in, just advertised.

Most investors wait until the end of the rehab to advertise (make their property available) which all but guarantees that no repair cost will be written off because the property was not placed in service until the advertisement date, which occurred at the end. 

Our method is to have our clients advertise at the beginning, or in the middle, of the rehab. This does not place the property into service (since you still have to meet the “ready”) criteria, but it does provide us with flexibility to square off against the IRS on treatment of costs.

Setting up an LLC will not affect the places in service date and is a completely separate conversation. If you are going to set up an LLC, I would recommend doing it before you purchase property at all. This will help you avoid problems such as Due on Sale clauses and transfer taxes.

Thank you @Brandon Hall .  I'm just going to keep doing the minor work until I meet with a CPA and tax advisor so I can create a plan that will maximize the benefits.  This has definitely been informative of what to avoid for now.  

For AirBnB-type rental structure, I would recommend having a very specific short term rental agreement (what landlords typically use for vacation rentals).  A good real estate attorney should be able to draft one that protects you specifically for short term tenants - ask them for a custom template with blank spaces for the tenant names, dates, etc so you can consistently reuse that form with all your tenants.  Message me if you have any questions about this.

The other thing is that, for proper legal protection, if you form an LLC to hold rental properties, you want to disconnect yourself as much as possible to give the appearance that this is a company by itself and not just you buying properties and transferring it into the LLC's name. Keep all rental income/expenses in a separate bank in the name of the LLC. The LLC should be doing everything - disconnect any personal connection with you and your LLC.

This is not advice, just information.

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