I am hearing STR doesn't count toward REPS status.

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I am hearing STR doesn't count toward REPS status.

Joel Oh
Member since 2023 · 188 posts · 111 votes

Hello guys! I have a good W2 income as well as STR income.

2023 is the first year I thought I could qualify for RE status as I am working as the property manager, handyman... (750+ hours) man I worked hard!

Just finding out that with a full time W2, it is nearly impossible to qualify the RE status especially with short term rentals. Hence, they are looking at STR as business income rather than passive income. What a bummer!

However, I am seeing posts here that many people utilize their short-term rentals for RE status by using Schedule E.

Can you really qualify as a REPS with a full time W2 income?

Also,

I am involved in rehab and management, so I am claiming my STR income under the Schedule C.

Why aren't you guys claiming it under Schedule C and getting the deduction?

What is the real benefit of claiming your short-term rental income in Schedule E? Is it just for the RE status?


Thank you in advance!

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Michael BaumPro Member
Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
2y

@Karen Chow, it isn't a loophole. It is just the law.

5Reply
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  • Ian Tyndall
    Investor · VA AZ, SC · Member since 2017 · 172 posts · 172 votes
    2y

    I don't know your sources of information but they are generally mot accurate. There are conditions to qualify for the STR REPs status that are unique to the STR business.

    Some conditions that you have to document and be able to prove:

    1. You must spend at least 100 hours managing guests and more time than anyone else in the calendar year

    2. Average length of stay must be less than 7 days

    4Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    2y
    Quote from @Joel Oh:

    Hello guys! I have a good W2 income as well as STR income.

    2023 is the first year I thought I could qualify for RE status as I am working as the property manager, handyman... (750+ hours) man I worked hard!

    Just finding out that with a full time W2, it is nearly impossible to qualify the RE status especially with short term rentals. Hence, they are looking at STR as business income rather than passive income. What a bummer!

    However, I am seeing posts here that many people utilize their short-term rentals for RE status by using Schedule E.

    Can you really qualify as a REPS with a full time W2 income?

    Also,

    I am involved in rehab and management, so I am claiming my STR income under the Schedule C.

    Why aren't you guys claiming it under Schedule C and getting the deduction?

    What is the real benefit of claiming your short-term rental income in Schedule E? Is it just for the RE status?


    Thank you in advance!

    Are you doing a turn down service at night, providing meals etc? If not then you should be on schedule E.

    Pretty much  impossible to be a RE professional if you have W2 income.
    2Reply
  • Zachary Cain Humphrey
    Investor · KY · Member since 2022 · 204 posts · 77 votes
    2y

    Robuilt has some youtube videos where he covers these tax considerations. I highly recommend them. 

    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y

    @Joel Oh

    Your cpa is probably saying this based on your first sentence

    I have good w2 income. It’s my understanding it’s very hard to meet reps status working a w2

    Also I believe once you get above $150k basically you lose any benefits of reps status

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  • Joel Oh
    OP
    Member since 2023 · 188 posts · 111 votes
    2y
    Quote from @John Underwood:
    Quote from @Joel Oh:

    Hello guys! I have a good W2 income as well as STR income.

    2023 is the first year I thought I could qualify for RE status as I am working as the property manager, handyman... (750+ hours) man I worked hard!

    Just finding out that with a full time W2, it is nearly impossible to qualify the RE status especially with short term rentals. Hence, they are looking at STR as business income rather than passive income. What a bummer!

    However, I am seeing posts here that many people utilize their short-term rentals for RE status by using Schedule E.

    Can you really qualify as a REPS with a full time W2 income?

    Also,

    I am involved in rehab and management, so I am claiming my STR income under the Schedule C.

    Why aren't you guys claiming it under Schedule C and getting the deduction?

    What is the real benefit of claiming your short-term rental income in Schedule E? Is it just for the RE status?


    Thank you in advance!

    Are you doing a turn down service at night, providing meals etc? If not then you should be on schedule E.

    Pretty much  impossible to be a RE professional if you have W2 income.
    I heard the average nightly stays must be more than 7 days to qualify for Schedule E. 
    Pretty confusing area!!

    Yeah.. I am so disappointed that I can’t have RE status. 

    0Reply
  • Joel Oh
    OP
    Member since 2023 · 188 posts · 111 votes
    2y
    Quote from @Ian Tyndall:

    I don't know your sources of information but they are generally mot accurate. There are conditions to qualify for the STR REPs status that are unique to the STR business.

    Some conditions that you have to document and be able to prove:

    1. You must spend at least 100 hours managing guests and more time than anyone else in the calendar year

    2. Average length of stay must be less than 7 days

     Amazing! Thank you so much!

    I was confused by that there are a different RE status for STR.

    I think even regular CPAs are not fully aware of this!!

    You guys always rock!


    0Reply
  • Joel Oh
    OP
    Member since 2023 · 188 posts · 111 votes
    2y
    Quote from @Chris Seveney:

    @Joel Oh

    Your cpa is probably saying this based on your first sentence

    I have good w2 income. It’s my understanding it’s very hard to meet reps status working a w2

    Also I believe once you get above $150k basically you lose any benefits of reps status


    I think I will be able to qualify for the STR re status if I run the cost segregation when I purchase the house.

    I think that is what other comments are referring to. 

    Otherwise, it is pretty hard to claim the loss as STRs are generally very profitable. I see why people are saying it is difficult. 

    Thanks for your comment!

    0Reply
  • Joel Oh
    OP
    Member since 2023 · 188 posts · 111 votes
    2y
    Quote from @Zachary Cain Humphrey:

    Robuilt has some youtube videos where he covers these tax considerations. I highly recommend them. 


     I will watch it! Youtube taught me a lot too 😂 thank you for your recommendation!

    1Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    2y

    In general, when you are self-employed (not a w2 enployee) and actively work in your business, you report the income and deduct allowed expenses on Schedule C. You can think of it as income that you have to do something to earn. Income reported on Schedule C is subject to self-employment tax.

    2Reply
  • Karen Chow
    West Linn, OR · Member since 2023 · 35 posts · 23 votes
    2y

    For the STR tax loophole don't you only need 100 hours? Amanda Han wrote a book about this.

    0Reply
  • Kelly O'Keefe
    Accountant · NC · Member since 2023 · 123 posts · 163 votes
    2y

    Hi @Joel Oh

    To be considered a Real Estate Professional you need to meet the threshold of 750 hours annually AND more than half your time. Therefore if you are contributing 40 hours a week at your W2 job you would need to be able to substantiate 41 hours a week in real estate. This is why it is so hard for W2 earners to claim. 

    You can qualify for material participation for short term and long term properties. Here are the requirements:

    • You participated in the activity for more than 500 hours. OR
    • Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity. OR
    • You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.

    For longterm rental the maximum loss you can take is capped at 25k a year, and this amount begins to be phased our between 100k in W2 income and caps at 150k in income. If you are a Real Estate Professional this cap does not apply and hence why it is such a powerful status for tax planning.

    As @John Underwood said, Schedule C income categorized by "substantial services" such as turn down services, meals prepared, or special activities provided. If it is a turn key property managed by a property manager or you have limited interaction with your guests it would most likely be considered passive income and filed on a Schedule E

    4Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    2y

    @Karen Chow, it isn't a loophole. It is just the law.

    5Reply
  • Joel Oh
    OP
    Member since 2023 · 188 posts · 111 votes
    2y
    Quote from @Karen Chow:

    For the STR tax loophole don't you only need 100 hours? Amanda Han wrote a book about this.


    Yes, but STR rarely loses money, unlike long-term rentals. That is why most people combine depreciation practice to offset the first-year income. This only works for the first year of purchase and if the owner plans to hold the unit for 10+ years.

    We all joined STR because of the cash flow, so why would anyone choose STR over LTR if it doesn't flow. Kinda make sense why their requirement is significantly lower than the regular REPS requirement.

    1Reply
  • Joel Oh
    OP
    Member since 2023 · 188 posts · 111 votes
    2y
    Quote from @John Underwood:

    In general, when you are self-employed (not a w2 enployee) and actively work in your business, you report the income and deduct allowed expenses on Schedule C. You can think of it as income that you have to do something to earn. Income reported on Schedule C is subject to self-employment tax.


    That is what I understood about Schedule C. I have multiple STRs so I have a lot of deductions (Insurance, utilities, repair, rent for arbitrage...) I preferred using Schedule C because of it but I understand why some people prefer using Schedule E from you guys' explanation.

    Self-employment tax is nothing compared to the deduction I can get for my case haha. 

    1Reply
  • Joel Oh
    OP
    Member since 2023 · 188 posts · 111 votes
    2y
    Quote from @Michael Baum:

    @Karen Chow, it isn't a loophole. It is just the law.


     I agree!!! People make it sound very scammy by using the wrong lingo. It isn't that easy to pull it out just like any other tax code! We already get enough bad reps from all these stupid media and politicians who never made hard-working money in their lives. Gotta start from our end!

    2Reply
  • Joel Oh
    OP
    Member since 2023 · 188 posts · 111 votes
    2y
    Quote from @Kelly O'Keefe:

    Hi @Joel Oh

    To be considered a Real Estate Professional you need to meet the threshold of 750 hours annually AND more than half your time. Therefore if you are contributing 40 hours a week at your W2 job you would need to be able to substantiate 41 hours a week in real estate. This is why it is so hard for W2 earners to claim. 

    You can qualify for material participation for short term and long term properties. Here are the requirements:

    • You participated in the activity for more than 500 hours. OR
    • Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity. OR
    • You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.

    For longterm rental the maximum loss you can take is capped at 25k a year, and this amount begins to be phased our between 100k in W2 income and caps at 150k in income. If you are a Real Estate Professional this cap does not apply and hence why it is such a powerful status for tax planning.

    As @John Underwood said, Schedule C income categorized by "substantial services" such as turn down services, meals prepared, or special activities provided. If it is a turn key property managed by a property manager or you have limited interaction with your guests it would most likely be considered passive income and filed on a Schedule E


     Yes! One day I will be able to quit my W2 job and get the RE status! That is the goal!!

    2Reply
  • Sean O'KeefePro Member
    CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 870 votes
    2y

    Good answer from @Kelly O'Keefe

    Short answer: the time you spend on a rental that meets IRS requirements to be considered and STR doesn't count toward REPS.

    However, the tax benefits of an STR are still accessible without REPS provided you meet the material participation requirements.

    .

    .

    .

    *This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

    [email protected]628-241-0888
    0Reply
  • Account Closed
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y

    Short answer: 
    STR and REPS are TWO DIFFERENT tests, unrelated to one another.

    1Reply
  • Nate MeekerBusiness Member
    Real Estate CPA | California · Member since 2020 · 543 posts · 251 votes
    2y

    @Joel Oh @Karen Chow - To make things even more confusing, there is a way to group certain activities so you don't have to technically materially participate in every rental. 

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    0Reply
  • John Malone
    Attorney · Boston, MA · Member since 2023 · 139 posts · 75 votes
    2y

    @Ian Tyndall there is no such thing as "STR REPS Status" to be clear.

    https://www.biggerpockets.com/forums/530/topics/1056436-clearing-up-confusion-on-tax-treatment-of-short-term-rentals

    0Reply
  • John Malone
    Attorney · Boston, MA · Member since 2023 · 139 posts · 75 votes
    2y

    @Joel Oh IRC 469 and 1402 are not "tied at the hip". IRS CCA pretty much came out in 21 and confirmed Sch C is incorrect for MOST STR owners unless you provide substantial services.

    0Reply
  • Ian Tyndall
    Investor · VA AZ, SC · Member since 2017 · 172 posts · 172 votes
    2y
    Quote from @John Malone:

    @Ian Tyndall there is no such thing as "STR REPS Status" to be clear.

    https://www.biggerpockets.com/forums/530/topics/1056436-clearing-up-confusion-on-tax-treatment-of-short-term-rentals


    True. Material participation for STR test is what I was getting at

    0Reply
  • Joel Oh
    OP
    Member since 2023 · 188 posts · 111 votes
    2y
    Quote from @John Malone:

    @Joel Oh IRC 469 and 1402 are not "tied at the hip". IRS CCA pretty much came out in 21 and confirmed Sch C is incorrect for MOST STR owners unless you provide substantial services.


     Hi John! Thanks for the explanation! This helps a lot. How about arbitrage? Can it qualify as Schedule E anyway? 

    0Reply
  • John Malone
    Attorney · Boston, MA · Member since 2023 · 139 posts · 75 votes
    2y

    @Joel Oh likely yes. Most of our arbitrage clients are Sch E

    0Reply
  • Joel Oh
    OP
    Member since 2023 · 188 posts · 111 votes
    2y
    Quote from @John Malone:

    @Joel Oh likely yes. Most of our arbitrage clients are Sch E


     That is so interesting!! Do they own a percentage of the property? Don’t you need to own a certain percentage of the property to claim it under Schedule E? I kind of see how it can still be a passive income without owning the asset. Always learn new things! 

    0Reply
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