STR Tax Loophole in a partner LLC
Most Popular Reply
Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votesThere is a lot to unpack here.
First, it is worth noting that with a W2 job you may or you may not be able to reduce your W2 taxes with bonus depreciation. Talk with your CPA.
If a property is owned in a LLC, how profits and losses (including depreciation) are split will depend on your operating agreement. The online legal companies may or may not have set it up correctly. I'd read yours carefully and if there are any questions, talk with an attorney.
Finally, since you mentioned you had one person buy the property, you should check with your attorney about how you are holding title vs the mortgage. Theoretically, having the LLC own the property and one of its members be responsible for the note is co-mingling of interests so could impact the integrity of the LLC in a lawsuit. I'd be sure to carry excellent insurance.
19 Replies
- 3yGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
There is a lot to unpack here.
First, it is worth noting that with a W2 job you may or you may not be able to reduce your W2 taxes with bonus depreciation. Talk with your CPA.
If a property is owned in a LLC, how profits and losses (including depreciation) are split will depend on your operating agreement. The online legal companies may or may not have set it up correctly. I'd read yours carefully and if there are any questions, talk with an attorney.
Finally, since you mentioned you had one person buy the property, you should check with your attorney about how you are holding title vs the mortgage. Theoretically, having the LLC own the property and one of its members be responsible for the note is co-mingling of interests so could impact the integrity of the LLC in a lawsuit. I'd be sure to carry excellent insurance.
- Lender · New York, NY · Member since 2022 · 1k+ posts · 1k+ votes3y
Talk with your CPA. If you don't have one, there are some out that actually specialize in STR tax advantages.
- 3yJoseph PalmieroBusiness MemberCPA · PA · Member since 2023 · 151 posts · 115 votes
Here are a few more points to consider.
In order to offset your W-2 you must first meet the definition of a short term rental which is having an average guest stay of 7 days or less. Then you must meet one of the material participation tests. The most common one is performing 100 hours in the activity and more hour than anyone else. The more than anyone else requirement will eliminate one of you from being able to offset their W-2. The way around this is if you both dedicate 500 hours or more to the activity. This can be tough to do unless you have multiple STRs.
- 3yMichael BaumPro MemberOlympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
Hey @John Park, I echo what others have said. Go get a CPA if you don't have one. One that is an investor in real estate would be preferable.
Also, it isn't a loophole. It is just the IRS's rules.
- Investor · Honolulu, HI · Member since 2021 · 17 posts · 6 votes3y
Quote from @Michael Baum:
Hey @John Park, I echo what others have said. Go get a CPA if you don't have one. One that is an investor in real estate would be preferable.
Also, it isn't a loophole. It is just the IRS's rules.
Hey @Michael Baum
Thanks for the input.
- Investor · Honolulu, HI · Member since 2021 · 17 posts · 6 votes3y
Quote from @Joseph Palmiero:
Here are a few more points to consider.
In order to offset your W-2 you must first meet the definition of a short term rental which is having an average guest stay of 7 days or less. Then you must meet one of the material participation tests. The most common one is performing 100 hours in the activity and more hour than anyone else. The more than anyone else requirement will eliminate one of you from being able to offset their W-2. The way around this is if you both dedicate 500 hours or more to the activity. This can be tough to do unless you have multiple STRs.
Thanks for the input. fully aware of the requirements and will make sure those are met in order to take advantage of owning a short term rental.
- Investor · Honolulu, HI · Member since 2021 · 17 posts · 6 votes3y
Quote from @Zach Edelman:
Talk with your CPA. If you don't have one, there are some out that actually specialize in STR tax advantages.
Will do! We do have a CPA and he did help us set up the LLC.
- Investor · Honolulu, HI · Member since 2021 · 17 posts · 6 votes3y
Quote from @Greg Scott:
There is a lot to unpack here.
First, it is worth noting that with a W2 job you may or you may not be able to reduce your W2 taxes with bonus depreciation. Talk with your CPA.
If a property is owned in a LLC, how profits and losses (including depreciation) are split will depend on your operating agreement. The online legal companies may or may not have set it up correctly. I'd read yours carefully and if there are any questions, talk with an attorney.
Finally, since you mentioned you had one person buy the property, you should check with your attorney about how you are holding title vs the mortgage. Theoretically, having the LLC own the property and one of its members be responsible for the note is co-mingling of interests so could impact the integrity of the LLC in a lawsuit. I'd be sure to carry excellent insurance.
@Greg Scott Thanks for the input. We will make sure we meet the requirements necessary in order to be able to write off the bonus depreciation.
I'll make sure to consult with the CPA before transferring the deed to make sure everything is good to go. Thank you!
- Investor · Member since 2022 · 1k+ posts · 754 votes3y
Great question for your cpa
- Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes3y
Quote from @John Park:
Hi. My brother and I are 50/50 business partners in our real estate journey. We are closing on a couple properties that we tend to use for short term rentals in order to take advantage of the str tax loophole to offset our W2 income tax.
My main question is if we start transferring the deed over to our LLC in which we are 50/50 partners, how does it work when it comes time to deduct the bonus depreciation against our W2? Do we each get 50% of the write off or does the entire write off go to the one that originally bought the property in their own name? Thank you and appreciate any advice possible.
I love my brothers, but I would never have them as a partner in an LLC. I would have each of us have our own LLC and do a Joint Venture Agreement with 51/49 ownership and 50/50 profit. It makes Thanksgiving dinners happier events. ;-)
The obvious questions are why and why. If you are both in the same LLC you are subject to greater liability from each other's mistakes and each other's family's mistakes. (Law suits in particular) and if you share ownership 50/50 and one person beats the other person at a golf game and gets upset, or some other crazy event which causes a break down in communication, someone has to be able to make decisions for the benefit of the property. It provides greater flexibility.
The one with 51% ownership can move things forward if things go south.
However, if both are in the same LLC, and both need to agree on any issue, but one is missing on a sight seeing trip to the Mariana Islands or some such thing, it creates decison making problems.
With each having his own LLC, if one wants, or needs, to sell his part of the ownership, he can sell his share under his LLC and the new owner of that share doesn't become a direct, (sometimes unwanted ) liability within a single LLC , with the other owner. With separate LLCs, each can also do other Joint Ventures with other investors separately.
Keep in mind that you should have an Operating Agreement if you have an LLC and should maintain it properly. If you both are in the same LLC and the OA isn't maintained properly, it puts you both at risk. If you each have an LLC with it's own OA, you shield each other better.
Here are some further thoughts on LLCsHere's a post I did on LLCs that may help
DO You Need An LLC - It Gives Me Protection, Right? My Attorney / CPA Says That. . .
All my REIs are in an LLC! Why am I being personally sued?
I suggest one of the LLCs is the one used to open a bank account and run all related income & expenses through it to avoid the accusation of commingling funds, to be able to write checks and to send and receive wire transfers. The IRS will appreciate it when they audit you.
- 3yMichael BaumPro MemberOlympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
Well said @Account Closed
- Attorney · Boston, MA · Member since 2023 · 139 posts · 75 votes3y
@Sothea K. Its unlikely. We works with tons of STR partnerships. Generally we'd recommend you flip flop properties for material participation.
The only way for 2 partners to both material participate would be 500+ hours EACH, which is unlikely/the IRS frankly won’t believe you!
- Investor · Honolulu, HI · Member since 2021 · 17 posts · 6 votes3y
Quote from @Account Closed:
Quote from @John Park:
Hi. My brother and I are 50/50 business partners in our real estate journey. We are closing on a couple properties that we tend to use for short term rentals in order to take advantage of the str tax loophole to offset our W2 income tax.
My main question is if we start transferring the deed over to our LLC in which we are 50/50 partners, how does it work when it comes time to deduct the bonus depreciation against our W2? Do we each get 50% of the write off or does the entire write off go to the one that originally bought the property in their own name? Thank you and appreciate any advice possible.
I love my brothers, but I would never have them as a partner in an LLC. I would have each of us have our own LLC and do a Joint Venture Agreement with 51/49 ownership and 50/50 profit. It makes Thanksgiving dinners happier events. ;-)
The obvious questions are why and why. If you are both in the same LLC you are subject to greater liability from each other's mistakes and each other's family's mistakes. (Law suits in particular) and if you share ownership 50/50 and one person beats the other person at a golf game and gets upset, or some other crazy event which causes a break down in communication, someone has to be able to make decisions for the benefit of the property. It provides greater flexibility.
The one with 51% ownership can move things forward if things go south.
However, if both are in the same LLC, and both need to agree on any issue, but one is missing on a sight seeing trip to the Mariana Islands or some such thing, it creates decison making problems.
With each having his own LLC, if one wants, or needs, to sell his part of the ownership, he can sell his share under his LLC and the new owner of that share doesn't become a direct, (sometimes unwanted ) liability within a single LLC , with the other owner. With separate LLCs, each can also do other Joint Ventures with other investors separately.
Keep in mind that you should have an Operating Agreement if you have an LLC and should maintain it properly. If you both are in the same LLC and the OA isn't maintained properly, it puts you both at risk. If you each have an LLC with it's own OA, you shield each other better.
Here are some further thoughts on LLCsHere's a post I did on LLCs that may help
DO You Need An LLC - It Gives Me Protection, Right? My Attorney / CPA Says That. . .
All my REIs are in an LLC! Why am I being personally sued?
I suggest one of the LLCs is the one used to open a bank account and run all related income & expenses through it to avoid the accusation of commingling funds, to be able to write checks and to send and receive wire transfers. The IRS will appreciate it when they audit you.
Thanks for the input on this!
- Investor · Honolulu, HI · Member since 2021 · 17 posts · 6 votes3y
Quote from @John Malone:
@Sothea K. Its unlikely. We works with tons of STR partnerships. Generally we'd recommend you flip flop properties for material participation.
The only way for 2 partners to both material participate would be 500+ hours EACH, which is unlikely/the IRS frankly won’t believe you!
So as long as I meet the requirements and I take all the bonus depreciation associated with the property that I bought under my name we should be good to go? Thanks in advance!
- Attorney · Boston, MA · Member since 2023 · 139 posts · 75 votes3y
@John Park depends on the operating agreement and special allocations. You certainly need to speak with a pro on this one
- Investor · Honolulu, HI · Member since 2021 · 17 posts · 6 votes3yWill do! We’ve reached out to our CPA and waiting for answers now
Quote from @John Malone:
@John Park depends on the operating agreement and special allocations. You certainly need to speak with a pro on this one
- Member since 2023 · 2 posts · 0 votes2y
Thanks for the help! We are pulling out with Vacasa, and planning to self manage. Do you have any suggestions on management software for STR, and smart pricing? I'm planning on putting the property on multiple listing platforms, so am searching for the best software to manage pricing and calendars.
- Member since 2022 · 1k+ posts · 1k+ votes2yI honestly don't think it is necessary to use software unless you have at least 3-4 properties. Focus on having a good cleaner and good service first. You can sync calendars between the platforms to avoid double bookings.
Quote from @David Street:
Thanks for the help! We are pulling out with Vacasa, and planning to self manage. Do you have any suggestions on management software for STR, and smart pricing? I'm planning on putting the property on multiple listing platforms, so am searching for the best software to manage pricing and calendars.
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