Hi, I am new to STR market, and I plan to get into this business after learning all the benefits it comes with.
We all know how STR (for 7 days or less lease) can be great for depreciation tax deduction, as it counts as an active income/loss, while the property value is appreciated.
From my understanding, the IRS states if a business is running at a loss for 3 years in the last 5 tax years, then it will be classified as a hobby, and I assume with that a huge tax bill will be on the way.
My question is, if people are using LLC to run STR at a loss for depreciation deduction for 3/5 and more tax years, wouldn't IRS just consider it as a hobby? Since with the depreciation of the property, the STR is unlikely to have net income and it would always be losing money on paper.
I plan to getting into the STR market once the mortgage rate gets a bit better, I wish to learn as much as I can while waiting for it. Any info would be appreciated, thanks!
Businesses are reported on Schedule C (or in an entity structure) and are classified as Non Passive, Ordinary Income. This is where the hobby loss rules come into play.
Rentals are reported on Schedule E (or in an entity structure) and are classified as Passive Income. No hobby loss rules apply.
I also suggest speaking with a CPA. My big tax savings with my STRs have come from doing a Cost Segregation study. I suggest looking into that. It gives you 80% bonus depreciation this year and beyond.
I also suggest speaking with a CPA. My big tax savings with my STRs have come from doing a Cost Segregation study. I suggest looking into that. It gives you 80% bonus depreciation this year and beyond.
Isn’t it 80 percent this year, then going 60,40,20,0 each subsequent year later?
A friend of mine took up “professional motorcycling” for 3 years including all the deductions for his truck, trailer, motorcycle and travel. After 3 years he had won 12 trophy’s for top 3 finishes. And zero money. It then became a hobby.
At the time he was able to use H&R Block and pay less than a $100 for audit protection where they promised to pay any extra taxes due. That was 20 years ago. Either the IRS accepted it, or H&R Block paid without even contacting him.
I’m just saying… Having the correct professional on your side it worth a lot. And some extra insurance don’t hurt either. :-)
Businesses are reported on Schedule C (or in an entity structure) and are classified as Non Passive, Ordinary Income. This is where the hobby loss rules come into play.
Rentals are reported on Schedule E (or in an entity structure) and are classified as Passive Income. No hobby loss rules apply.