Is it possible to use the STR loophole to offset w-2 income if managing out of state?

Question

Hi!

I am an optometrist and am finishing up building a new build STR out of state. I will have a cleaning team do the day-to-day turnovers and will be using Guesty to assist in helping manage the property myself. I have a partner in the deal as well.

Is it possible to use the STR tax loophole to offset my w-2 income. I know that if i am working, I will not be able to qualify as a RE professional. Hoping to save some $$ on my tax bill in 2023.

Nancy Bachety · Answer

Yes, it’s possible. You are self managing. You are managing Guesty and your cleaners. You are communicating and spending time doing this. It is essential that you track your time, the actual time of day, number of hours including quarter and half hours. If your partner is also doing this (and partner isn’t your spouse), you must be sure you personally are doing/tracking work, at least 100 hours to be materially participating. And yes, it needs to be actual and real. It does not need to be a contemporaneous log but obviously it’s likely to be more accurate, and acceptable, by the IRS.
I sent my log to the IRS in August. They told me they received it and it’s still pending.

Greg O'Brien · Answer

@Mitchell Maginnis as others have said, there are lots of threads on this. Search for “Clearing Up Confusion on Short Term Rentals”. We did a thread clearing up the FAQs this summer as many CPAs/Tax pros were not treating them correctly and everyone has the same questions.

In short, yes its possible. We’ve been specializing in STRs for a few years and have seen multiple clients succeed when there is a plan in place and they navigate IRC 469 properly.

Sara Levy-Lambert · Answer

It is possible to use the short-term rental tax loophole to offset your W-2 income, but it depends on a number of factors, including your level of involvement in the rental property, your rental income, and your expenses. In general, to qualify as a real estate professional, you must meet certain criteria, including spending at least 750 hours per year on real estate activities and earning more than 50% of your income from real estate. It's important to consult with a tax professional to determine how the short-term rental tax laws apply to your specific situation

Ryan Moyer · Answer

As I understand it, it is going to be difficult for you to prove material participation when you have a W-2 job whether you're in state or not.

Isn't one of the requirements of material participation that you can't spend more time on something else?  IE you have to spend more time on the rental than your W-2 job, which seems unlikely.

Most people use material participation when they have a non-working spouse.  Then the spouse can be the one that materially participates in the STR, but the depreciation can be used against the working spouse's W2.

Not a CPA, so I could have that all wrong.

Andrew Simms · Answer

We are out of state (but only 2.5 hours from our STR) and do this. That said, I make sure we do enough work each year on the property to show material participation. There's always plenty to be fixed.

Leslie Anne Morris · Answer

learnlikeacpa.com

Jeff Copeland · Answer

Like others have already stated, finding the right CPA is key.

My gut says it would be very difficult to claim the material participation and hours needed (and have them hold up in an audit or tax court) when you are both out of state and a full-time working professional.

However...If you are married filing jointly, perhaps your spouse could. They key is having enough hours in direct material participation in the operation of the rental activity. Difficult to do from out of state, but it might even be worth spending some time where the property is located to meet the requirement (if the tax savings are significant enough).

There's a Facebook group called Tax Smart Real Estate Investors (no affiliation) you might want to check out where the nuts and bolts of the STR loophole and REPS are discussed on an almost daily basis.

Michael Baum · Answer

Hey @Mitchell Maginnis, there have been some topics posted recently as tax season is upon us as @John Underwood said. :)

Like @Brooklyn McCarty said, get a good CPA. Not just any CPA but someone who is familiar with real estate and is an investor. I would say that a STR investor would be best, but not necessary.

Our CPA has about 30 doors himself but no STRs. He has been excellent for us.

John Underwood · Answer

You might want to search for this topic on here. It seems to have been discussed a few times not too long ago.

Is it possible to use the STR loophole to offset w-2 income if managing out of state?

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