Check my math? Deducting STR losses against high wave W2 job.
Rental Property Investor · Bay Area, CA · Member since 2021 · 7 posts · 8 votes
Check my math? Deducting STR losses against high wave W2 job.
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Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
3yThis quote below is from your link with bolded emphasis by me:
So, even if you materially participate in running your rental properties, you still can’t deduct those losses against other nonpassive income. That is, unless you meet one of the following exceptions:
- You can deduct up to $25,000 of losses from rental real estate activities (even though they’re passive) against earned income, interest, dividends, etc., if you “actively participate” in the activities (requiring less participation than “material participation”) and if your adjusted gross income doesn’t exceed specified levels.
- If you’re a qualified real estate professional, then your rental activities aren’t immediately considered passive. To be regarded as a real estate professional, you must perform a substantial amount of real estate business, defined as more than half of your time, and at least 750 hours, spent in real estate trades or businesses.
In short, in the context of real estate, the majority of your time has to be spent in real estate activities (usually full-time workers in other professions fail at this level of the test because convincing the IRS that you work two full-time jobs presents a problem) and the time spent must exceed 750 hours.
Again, a CPA can confirm this or tell you I am full of sh*t.
25 Replies
- Investor · VA AZ, SC · Member since 2017 · 173 posts · 172 votes3y
You should look to conduct a cost segregation study so that you can accelerate more of your depreciation against your income. It will allow you to deduct 100% of assets with a useful life of less than 20 years for 2022 and 80% in 2023.
- Investor · VA AZ, SC · Member since 2017 · 173 posts · 172 votes3y
- 3yMichael BaumPro MemberOlympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
Hey @Ian Tyndall, I would really reach out to a good CPA who is also an investor. They can lay it all out for you.
- Rental Property Investor · Bay Area, CA · Member since 2021 · 7 posts · 8 votes3yThanks Ian. I will most definitely purchase a cost segregation study to nail down what I can depreciate at an accelerated rate.
Quote from @Ian Tyndall:
You should look to conduct a cost segregation study so that you can accelerate more of your depreciation against your income. It will allow you to deduct 100% of assets with a useful life of less than 20 years for 2022 and 80% in 2023.
- Investor · Member since 2022 · 1k+ posts · 754 votes3y
Make sure you have yourself a STR cpa
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes3y
And plan to hold it forever, even if they outlaw STR. Otherwise all that taxes will come due in one year, not good. Plus you're guaranteed to eventually owe CA taxes even if you exchange out of California unless you hold it until you die.
If your main driver is saving money please pay the professionals. They deal with 100’s and the IRS deal with hundreds of thousands, they’ll spot a mistake at first glance. You want your guy catching it before it gets to the IRS.
- Real Estate Agent · Smoky Mountains, TN · Member since 2022 · 1k+ posts · 984 votes3y
Learnlikeacpa.com
- 3yRyan MoyerBusiness MemberProperty Manager · Orlando Kissimmee Davenport Salt Lake City, Park City · Member since 2019 · 993 posts · 1k+ votes
Quote from @Ian Tyndall:
You should look to conduct a cost segregation study so that you can accelerate more of your depreciation against your income. It will allow you to deduct 100% of assets with a useful life of less than 20 years for 2022 and 80% in 2023.
It looks like he already has a cost segregation built in to his spreadsheet, just with accelerated depreciation rather than taking full 100% bonus depreciation in year 1.
Cosmic Vacations4.9172 Reviews - 3yRyan MoyerBusiness MemberProperty Manager · Orlando Kissimmee Davenport Salt Lake City, Park City · Member since 2019 · 993 posts · 1k+ votes
Maybe I'm missing something, but in the spreadsheet how is a $114k depreciation loss each year netting $74k in saved taxes? A $114k deduction in that tax bracket would be about half that in tax savings, no?
Cosmic Vacations4.9172 Reviews - Rental Property Investor · Bay Area, CA · Member since 2021 · 7 posts · 8 votes3y
Quote from @Bill B.:
And plan to hold it forever, even if they outlaw STR. Otherwise all that taxes will come due in one year, not good. Plus you're guaranteed to eventually owe CA taxes even if you exchange out of California unless you hold it until you die.
If your main driver is saving money please pay the professionals. They deal with 100’s and the IRS deal with hundreds of thousands, they’ll spot a mistake at first glance. You want your guy catching it before it gets to the IRS.
Thanks for mentioning this, Bill. I did not know about owing CA taxes even if 1031'ing into another state. I will look into that.
- Rental Property Investor · Bay Area, CA · Member since 2021 · 7 posts · 8 votes3y
Quote from @Ryan Moyer:
Maybe I'm missing something, but in the spreadsheet how is a $114k depreciation loss each year netting $74k in saved taxes? A $114k deduction in that tax bracket would be about half that in tax savings, no?
Hi Ryan, thanks for looking it over. The total amount of deductions I've calculated is $186,325.71 (all of the cells in yellow). That includes the $114k in depreciation, mortgage interest, repairs, insurance, etc. I'm estimating that would save $73k in taxes.
- Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes3y
I am no CPA (and you should consult with one) but how do you plan to meet the IRS material participation rule with a $400K W2 job. I do not see how it can be done. If I am wrong, someone please enlighten me because I have been leaving a lot of film on the cutting room floor.
- Rental Property Investor · Bay Area, CA · Member since 2021 · 7 posts · 8 votes3y
Quote from @Darius Ogloza:
I am no CPA (and you should consult with one) but how do you plan to meet the IRS material participation rule with a $400K W2 job. I do not see how it can be done. If I am wrong, someone please enlighten me because I have been leaving a lot of film on the cutting room floor.
Hi Darius, there are a few ways to qualify without REPS status. I plan to manage the bookings and do cleaning in between clients, so I will meet the "substantially all" materially participation requirement. If I choose to hire a cleaning company I will need to log my hours and have the cleaning crew bill per hour so that I can prove I that I am working at least 100 hours/year *and* that my time spent is more than anyone else (so in this case, my hours must be more per year than my cleaning company).
Some more details: - Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes3y
This quote below is from your link with bolded emphasis by me:
So, even if you materially participate in running your rental properties, you still can’t deduct those losses against other nonpassive income. That is, unless you meet one of the following exceptions:
- You can deduct up to $25,000 of losses from rental real estate activities (even though they’re passive) against earned income, interest, dividends, etc., if you “actively participate” in the activities (requiring less participation than “material participation”) and if your adjusted gross income doesn’t exceed specified levels.
- If you’re a qualified real estate professional, then your rental activities aren’t immediately considered passive. To be regarded as a real estate professional, you must perform a substantial amount of real estate business, defined as more than half of your time, and at least 750 hours, spent in real estate trades or businesses.
In short, in the context of real estate, the majority of your time has to be spent in real estate activities (usually full-time workers in other professions fail at this level of the test because convincing the IRS that you work two full-time jobs presents a problem) and the time spent must exceed 750 hours.
Again, a CPA can confirm this or tell you I am full of sh*t.
- Rental Property Investor · Bay Area, CA · Member since 2021 · 7 posts · 8 votes3y
Quote from @Darius Ogloza:
This quote below is from your link with bolded emphasis by me:
So, even if you materially participate in running your rental properties, you still can’t deduct those losses against other nonpassive income. That is, unless you meet one of the following exceptions:
- You can deduct up to $25,000 of losses from rental real estate activities (even though they’re passive) against earned income, interest, dividends, etc., if you “actively participate” in the activities (requiring less participation than “material participation”) and if your adjusted gross income doesn’t exceed specified levels.
- If you’re a qualified real estate professional, then your rental activities aren’t immediately considered passive. To be regarded as a real estate professional, you must perform a substantial amount of real estate business, defined as more than half of your time, and at least 750 hours, spent in real estate trades or businesses.
In short, in the context of real estate, the majority of your time has to be spent in real estate activities (usually full-time workers in other professions fail at this level of the test because convincing the IRS that you work two full-time jobs presents a problem) and the time spent must exceed 750 hours.
Again, a CPA can confirm this or tell you I am full of sh*t.
Hi Darius, I'm sorry...I Google'd that link and it looked to be focused on materially participation. However that link is for real estate "rentals" which is not relevant to my purchase of a short term rental. The IRS actually does not consider a STR a "rental" -- it is a 'trade or business'. Therefore you won't need to qualify for REPS status.
https://www.therealestatecpa.c...
Here's the section which is most relevant to STRs of 7days or less (or 30 days or less with substantial services):
"If you rent a property to customers with an average stay of 7 days or less, on average, this is a short-term rental. If that's true, you don't have a "rental" activity under Section 469. This means you don't have to qualify as a real estate professional to recategorize that activity from passive to active. You do still have to materially participate."
While you still have to materially participate, you don't have the additional hurdle of needing to spend more than 1/2 of your total working time within the business (like with REPS).
______
My CPA did confirm over the phone that my general understanding is correct but I will be taking the advice and talking with a tax attorney and running the numbers in detail.
Small world, I see you're in Marin! I'm looking at homes in the coastal zone of Sonoma county. But because of high prices and high rates most of the properties seem to be breakeven (at best), so this may be something to look into once rates decrease.
- Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes3y@Gian Jr, III: Learn the term "Tax Court" because that's what you are heading towards. The IRS specifically is looking for people misusing that rule since it's such "easy pickings" for them.
Quote from @Darius Ogloza:
@Gian Jr, III:
This quote below is from your link with bolded emphasis by me:So, even if you materially participate in running your rental properties, you still can’t deduct those losses against other nonpassive income. That is, unless you meet one of the following exceptions:
- You can deduct up to $25,000 of losses from rental real estate activities (even though they’re passive) against earned income, interest, dividends, etc., if you “actively participate” in the activities (requiring less participation than “material participation”) and if your adjusted gross income doesn’t exceed specified levels.
- If you’re a qualified real estate professional, then your rental activities aren’t immediately considered passive. To be regarded as a real estate professional, you must perform a substantial amount of real estate business, defined as more than half of your time, and at least 750 hours, spent in real estate trades or businesses.
In short, in the context of real estate, the majority of your time has to be spent in real estate activities (usually full-time workers in other professions fail at this level of the test because convincing the IRS that you work two full-time jobs presents a problem) and the time spent must exceed 750 hours.
Again, a CPA can confirm this or tell you I am full of sh*t.
- Rental Property Investor · Bay Area, CA · Member since 2021 · 7 posts · 8 votes3y
Quote from @Account Closed:
@Gian Jr, III: Learn the term "Tax Court" because that's what you are heading towards. The IRS specifically is looking for people misusing that rule since it's such "easy pickings" for them.Quote from @Darius Ogloza:
@Gian Jr, III:
This quote below is from your link with bolded emphasis by me:So, even if you materially participate in running your rental properties, you still can’t deduct those losses against other nonpassive income. That is, unless you meet one of the following exceptions:
- You can deduct up to $25,000 of losses from rental real estate activities (even though they’re passive) against earned income, interest, dividends, etc., if you “actively participate” in the activities (requiring less participation than “material participation”) and if your adjusted gross income doesn’t exceed specified levels.
- If you’re a qualified real estate professional, then your rental activities aren’t immediately considered passive. To be regarded as a real estate professional, you must perform a substantial amount of real estate business, defined as more than half of your time, and at least 750 hours, spent in real estate trades or businesses.
In short, in the context of real estate, the majority of your time has to be spent in real estate activities (usually full-time workers in other professions fail at this level of the test because convincing the IRS that you work two full-time jobs presents a problem) and the time spent must exceed 750 hours.
Again, a CPA can confirm this or tell you I am full of sh*t.
Hi Mike, thanks for your reply. Could you help me better understand what part looks problematic and could end up in court? I am here to learn.
From the tax code that I am reading it looks pretty clear that rental/"business" income from rentals under 7 days are considered active income (and do not require REPS because it is not considered a rental). By documenting with a detailed logbook and performing all of the labor myself (e.g.: handling bookings, cleanings between clients) I can show that I have passed one of the required material participation tests ('Activity that constituted all participation substantially').
§ 1.469-1T
(ii) Exceptions. For purposes of this paragraph (e)(3), an activity involving the use of tangible property is not a rental activity for a taxable year if for such taxable year -
(A) The average period of customer use for such property is seven days or less;
- Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes3y
This definition is new to me (I am focused on LTR). Good to know this exists.
I wonder if the IRS has issued any guidance on the 7 day rule excepting STR's from the definition of "rental activity" or on how "material participation" is going to be interpreted in this context? I suspect they are going to approach logs with some degree of skepticism, especially when you are working 2,000 hours W2. Also, persuading professional cleaners to log time may pose an issue. The incentive is going to be to lean toward enlarging rather than diminishing their hours.
- Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes3yI'm not a tax attorney or CPA. But, I had a tax attorney mention to a group I am in, that you may win your case eventually, but the IRS flags anyone who claims to be a full time investor that also has a W2.
Quote from @Gian Jr, III:
Quote from @Account Closed:
@Gian Jr, III: Learn the term "Tax Court" because that's what you are heading towards. The IRS specifically is looking for people misusing that rule since it's such "easy pickings" for them.Quote from @Darius Ogloza:
@Gian Jr, III:
This quote below is from your link with bolded emphasis by me:So, even if you materially participate in running your rental properties, you still can’t deduct those losses against other nonpassive income. That is, unless you meet one of the following exceptions:
- You can deduct up to $25,000 of losses from rental real estate activities (even though they’re passive) against earned income, interest, dividends, etc., if you “actively participate” in the activities (requiring less participation than “material participation”) and if your adjusted gross income doesn’t exceed specified levels.
- If you’re a qualified real estate professional, then your rental activities aren’t immediately considered passive. To be regarded as a real estate professional, you must perform a substantial amount of real estate business, defined as more than half of your time, and at least 750 hours, spent in real estate trades or businesses.
In short, in the context of real estate, the majority of your time has to be spent in real estate activities (usually full-time workers in other professions fail at this level of the test because convincing the IRS that you work two full-time jobs presents a problem) and the time spent must exceed 750 hours.
Again, a CPA can confirm this or tell you I am full of sh*t.
Hi Mike, thanks for your reply. Could you help me better understand what part looks problematic and could end up in court? I am here to learn.
From the tax code that I am reading it looks pretty clear that rental/"business" income from rentals under 7 days are considered active income (and do not require REPS because it is not considered a rental). By documenting with a detailed logbook and performing all of the labor myself (e.g.: handling bookings, cleanings between clients) I can show that I have passed one of the required material participation tests ('Activity that constituted all participation substantially').
§ 1.469-1T
(ii) Exceptions. For purposes of this paragraph (e)(3), an activity involving the use of tangible property is not a rental activity for a taxable year if for such taxable year -
(A) The average period of customer use for such property is seven days or less;
I don't have W2 income so I didn't pay too much attention to the details. What caught my ear was audits and W2.
So, my approach would be to have a back up if your CPA/Enrolled Agent or Attorney says it's okay to do as you've laid out. Do exactly as the advisor advises, ask who would represent you in an audit and set aside some money for their services. That doesn't mean your advisor is wrong. It's just that the IRS is hiring 87,000 new employees and they are loooking for things to do. And being W2 means you will have to prove your case. - Rental Property Investor · North Fork, NY · Member since 2016 · 1k+ posts · 631 votes3y
You are absolutely correct. You won’t end up in tax court but if you do, you would win based on everything you cited about material participation as long as you have a time and activity log that shows your tasks and provide a guest list that shows the number of nights your guests stay (easily found on the various platforms).
Stay the course. Even if you have a cpa who isn’t well-versed, she’d be enlightened once she reads the irs tax regulations cited above.
Good luck. You’re doing the right thing, trust but verify. - Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes3y
Quote from @Nancy Bachety:
You are absolutely correct. You won’t end up in tax court but if you do, you would win based on everything you cited about material participation as long as you have a time and activity log that shows your tasks and provide a guest list that shows the number of nights your guests stay (easily found on the various platforms).
Stay the course. Even if you have a cpa who isn’t well-versed, she’d be enlightened once she reads the irs tax regulations cited above.
Good luck. You’re doing the right thing, trust but verify.You assume too much. (said kindly) ;-)
No professional I know, will simply read a regulation, law, ordinance etc without looking for case law to give guidance. It isn't simply a matter of being
"enlightened once she reads the irs tax regulations cited above."But, no worries, since you state "You are absolutely correct" you must have done the research and read the supporting case law and been in tax court to know what they do and don't do. I defer to your brilliance and experience. Will you be doing seminars?
- Rental Property Investor · North Fork, NY · Member since 2016 · 1k+ posts · 631 votes3y
@Account Closed That’s funny because the opposite is true: I assume nothing.
My tax professional read the IRS regulations and examined case law. He also assumes nothing. While it’s becoming more common to audit tax filers on this particular aspect of the tax code it is still not too common or understood by even the seasoned IRS auditors, let alone the new 89,000 employees.“But, no worries, since you state "You are absolutely correct" you must have done the research and read the supporting case law and been in tax court to know what they do and don't do. I defer to your brilliance and experience. Will you be doing seminars?”
Yes I did.
Yes I did.
Called out on it by IRS and NY State Dept of Taxation, provided my documentation and cited the code to both entities, which resulted in avoiding tax court and a reversal of tax liabilities. In fact, one auditor even told me he was unfamiliar with it until he read my references.My husband thinks I am both brilliant and experienced.
No.
Said gently:)
- Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes3yWell done, and humorous. ;-)
Quote from @Nancy Bachety:
@Account Closed That’s funny because the opposite is true: I assume nothing.
My tax professional read the IRS regulations and examined case law. He also assumes nothing. While it’s becoming more common to audit tax filers on this particular aspect of the tax code it is still not too common or understood by even the seasoned IRS auditors, let alone the new 89,000 employees.“But, no worries, since you state "You are absolutely correct" you must have done the research and read the supporting case law and been in tax court to know what they do and don't do. I defer to your brilliance and experience. Will you be doing seminars?”
Yes I did.
Yes I did.
Called out on it by IRS and NY State Dept of Taxation, provided my documentation and cited the code to both entities, which resulted in avoiding tax court and a reversal of tax liabilities. In fact, one auditor even told me he was unfamiliar with it until he read my references.My husband thinks I am both brilliant and experienced.
No.
Said gently:)
But, may I point out that you state you DID get audited. You followed your advisors advice and it turned out well. Congratulations!
And what I suggested to the original poster was:
"What caught my ear was audits and W2.
So, my approach would be to have a back up if your CPA/Enrolled Agent or Attorney says it's okay to do as you've laid out. Do exactly as the advisor advises, ask who would represent you in an audit and set aside some money for their services. That doesn't mean your advisor is wrong. It's just that the IRS is hiring 87,000 new employees and they are loooking for things to do. And being W2 means you will have to prove your case." - Rental Property Investor · NY · Member since 2024 · 1 post · 0 votes2y
Quote from @Nancy Bachety:
@Account Closed That’s funny because the opposite is true: I assume nothing.
My tax professional read the IRS regulations and examined case law. He also assumes nothing. While it’s becoming more common to audit tax filers on this particular aspect of the tax code it is still not too common or understood by even the seasoned IRS auditors, let alone the new 89,000 employees.“But, no worries, since you state "You are absolutely correct" you must have done the research and read the supporting case law and been in tax court to know what they do and don't do. I defer to your brilliance and experience. Will you be doing seminars?”
Yes I did.
Yes I did.
Called out on it by IRS and NY State Dept of Taxation, provided my documentation and cited the code to both entities, which resulted in avoiding tax court and a reversal of tax liabilities. In fact, one auditor even told me he was unfamiliar with it until he read my references.My husband thinks I am both brilliant and experienced.
No.
Said gently:)
Thank you for this info! I know that it’s been a year since you posted but I just got audited by NY State and am hoping to provide them documentation successfully to reverse the tax liability that they are finding. I think that I have my ducks in a row but would you be so kind as to share what you had provided? Also, did you file non-passive losses against your W-2 earnings (above $150k like this example) in your Schedule E? Thank you so much in advance!
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