Calling all w2 professionals! What if you could pay ZERO in tax for 2024?

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Calling all w2 professionals! What if you could pay ZERO in tax for 2024?

Account Closed
Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes

If you have ever used an AirBnB and are interested in investing in real estate, this post is for you!

For individuals navigating the demands of a w2 job and grappling with substantial tax obligations, exploring the potential of short-term rentals unveils a compelling avenue to mitigate tax burdens. A noteworthy tax loophole, particularly beneficial for those yet to attain Real Estate Professional Status, offers a strategic approach to potentially offsetting OR EVEN ELIMINATING the impact of high job-related taxes.

At its core, this tax loophole revolves around discerning between passive and non-passive activities within the realm of rentals. Those whose rental pursuits fall under the non-passive umbrella may find solace in this tax-saving provision. The federal tax code establishes stringent criteria, including guest stays limited to seven days on average and the provision of basic hotel-like services, to qualify for this advantageous tax treatment.

Understanding the mechanics of the short-term rental tax loophole is imperative. Section 469 of the federal tax code initially classified all rental properties as passive. However, an essential exception emerged in the 1990s, allowing specific rental income to be categorized as non-passive. To leverage this benefit, prospective property owners must engage in short-term rentals and provide substantial services to guests, such as daily cleaning, meal provisions, or transportation services.

Additionally, navigating a material participation test becomes crucial. This entails dedicating a significant amount of time and effort to the short-term rental business. Meeting the test criteria, which includes working over 500 hours in the business, overseeing all necessary tasks personally, or substantially participating alongside a partner, facilitates the strategic utilization of the short-term rental tax loophole. For individuals tethered to a W-2 job, this presents an opportunity to judiciously manage their tax liabilities while exploring supplemental income avenues.

If this sounds like something that fits your investing goals, please reach out. We would be more then happy to assist in answering any questions!

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
2y
Quote from @Account Closed:
Quote from @Michael Plaks:

Unfortunately this well-intentioned post has multiple incorrect statements. 

Here is an introduction to the so-called STR loophole: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...


 Hello Michael, please elaborate on what you mean by "multiple incorrect statements". I don't think its fair to say this without explaining what you think they are. Im always willing to learn and be wrong! 

I linked my own post which explains this very complicated area, and here it is again:  https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

This not about "fairness" and is not personal. This is about accuracy. Statements that need corrections in your post are:

1. You referred to the Real Estate Professional Status (REPS). While your statement was not technically incorrect, it could be misinterpreted as REPS being related to STRs. It is not. STRs do not count for REPS, and REPS does not unlock STRs. Two completely unrelated exceptions to the general rule.

2. Most importantly, providing substantial services is NOT a requirement for the STR loophole. In fact, providing substantial services changes STRs from a rental activity to a business and triggers self-employment taxes on the net profit. It's often best to avoid providing substantial services.

3. What is required is material participation, not substantial services. Your description of what is involved in meeting the material participation test is inaccurate. Refer to my linked post for details.

4. Probably the most critical piece missing is the fact that STRs can provide a tax benefit for one year only, their first year. After that, your taxes go up, not down. You will need to buy another STR to extract tax benefits for the following year.

Thank you for bringing attention to the potential tax benefits of STR investing.

3Reply
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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    2y

    Unfortunately this well-intentioned post has multiple incorrect statements. 

    Here is an introduction to the so-called STR loophole: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

    2Reply
  • John Clark
    Member since 2018 · 1k+ posts · 1k+ votes
    2y
    Quote from @Account Closed:

    If you have ever used an AirBnB and are interested in investing in real estate, this post is for you!

    For individuals navigating the demands of a w2 job and grappling with substantial tax obligations, exploring the potential of short-term rentals unveils a compelling avenue to mitigate tax burdens. A noteworthy tax loophole, particularly beneficial for those yet to attain Real Estate Professional Status, offers a strategic approach to potentially offsetting OR EVEN ELIMINATING the impact of high job-related taxes.

    At its core, this tax loophole revolves around discerning between passive and non-passive activities within the realm of rentals. Those whose rental pursuits fall under the non-passive umbrella may find solace in this tax-saving provision. The federal tax code establishes stringent criteria, including guest stays limited to seven days on average and the provision of basic hotel-like services, to qualify for this advantageous tax treatment.

    Understanding the mechanics of the short-term rental tax loophole is imperative. Section 469 of the federal tax code initially classified all rental properties as passive. However, an essential exception emerged in the 1990s, allowing specific rental income to be categorized as non-passive. To leverage this benefit, prospective property owners must engage in short-term rentals and provide substantial services to guests, such as daily cleaning, meal provisions, or transportation services.

    Additionally, navigating a material participation test becomes crucial. This entails dedicating a significant amount of time and effort to the short-term rental business. Meeting the test criteria, which includes working over 500 hours in the business, overseeing all necessary tasks personally, or substantially participating alongside a partner, facilitates the strategic utilization of the short-term rental tax loophole. For individuals tethered to a W-2 job, this presents an opportunity to judiciously manage their tax liabilities while exploring supplemental income avenues.

    If this sounds like something that fits your investing goals, please reach out. We would be more than happy to assist in answering any questions!

    Alternative. Minimum. Tax. 
    0Reply
  • John Clark
    Member since 2018 · 1k+ posts · 1k+ votes
    2y
    Quote from @Account Closed:

    If you have ever used an AirBnB and are interested in investing in real estate, this post is for you!

    For individuals navigating the demands of a w2 job and grappling with substantial tax obligations, exploring the potential of short-term rentals unveils a compelling avenue to mitigate tax burdens. A noteworthy tax loophole, particularly beneficial for those yet to attain Real Estate Professional Status, offers a strategic approach to potentially offsetting OR EVEN ELIMINATING the impact of high job-related taxes.

    At its core, this tax loophole revolves around discerning between passive and non-passive activities within the realm of rentals. Those whose rental pursuits fall under the non-passive umbrella may find solace in this tax-saving provision. The federal tax code establishes stringent criteria, including guest stays limited to seven days on average and the provision of basic hotel-like services, to qualify for this advantageous tax treatment.

    Understanding the mechanics of the short-term rental tax loophole is imperative. Section 469 of the federal tax code initially classified all rental properties as passive. However, an essential exception emerged in the 1990s, allowing specific rental income to be categorized as non-passive. To leverage this benefit, prospective property owners must engage in short-term rentals and provide substantial services to guests, such as daily cleaning, meal provisions, or transportation services.

    Additionally, navigating a material participation test becomes crucial. This entails dedicating a significant amount of time and effort to the short-term rental business. Meeting the test criteria, which includes working over 500 hours in the business, overseeing all necessary tasks personally, or substantially participating alongside a partner, facilitates the strategic utilization of the short-term rental tax loophole. For individuals tethered to a W-2 job, this presents an opportunity to judiciously manage their tax liabilities while exploring supplemental income avenues.

    If this sounds like something that fits your investing goals, please reach out. We would be more than happy to assist in answering any questions!

    Alternative. Minimum. Tax. 
    0Reply
  • Account Closed
    OP
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @Michael Plaks:

    Unfortunately this well-intentioned post has multiple incorrect statements. 

    Here is an introduction to the so-called STR loophole: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...


     Hello Michael, please elaborate on what you mean by "multiple incorrect statements". I don't think its fair to say this without explaining what you think they are. Im always willing to learn and be wrong! 

    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    2y
    Quote from @Account Closed:
    Quote from @Michael Plaks:

    Unfortunately this well-intentioned post has multiple incorrect statements. 

    Here is an introduction to the so-called STR loophole: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...


     Hello Michael, please elaborate on what you mean by "multiple incorrect statements". I don't think its fair to say this without explaining what you think they are. Im always willing to learn and be wrong! 

    I linked my own post which explains this very complicated area, and here it is again:  https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

    This not about "fairness" and is not personal. This is about accuracy. Statements that need corrections in your post are:

    1. You referred to the Real Estate Professional Status (REPS). While your statement was not technically incorrect, it could be misinterpreted as REPS being related to STRs. It is not. STRs do not count for REPS, and REPS does not unlock STRs. Two completely unrelated exceptions to the general rule.

    2. Most importantly, providing substantial services is NOT a requirement for the STR loophole. In fact, providing substantial services changes STRs from a rental activity to a business and triggers self-employment taxes on the net profit. It's often best to avoid providing substantial services.

    3. What is required is material participation, not substantial services. Your description of what is involved in meeting the material participation test is inaccurate. Refer to my linked post for details.

    4. Probably the most critical piece missing is the fact that STRs can provide a tax benefit for one year only, their first year. After that, your taxes go up, not down. You will need to buy another STR to extract tax benefits for the following year.

    Thank you for bringing attention to the potential tax benefits of STR investing.

    3Reply
  • Nate MeekerBusiness Member
    Real Estate CPA | California · Member since 2020 · 544 posts · 251 votes
    2y

    Love this strategy, many of my tax planning clients are executing this successfully across the U.S.

    The CPA Realtor 570 Reviews
    WebsiteView Page
    0Reply
  • Account Closed
    OP
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @Michael Plaks:
    Quote from @Account Closed:
    Quote from @Michael Plaks:

    Unfortunately this well-intentioned post has multiple incorrect statements. 

    Here is an introduction to the so-called STR loophole: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...


     Hello Michael, please elaborate on what you mean by "multiple incorrect statements". I don't think its fair to say this without explaining what you think they are. Im always willing to learn and be wrong! 

    I linked my own post which explains this very complicated area, and here it is again:  https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

    This not about "fairness" and is not personal. This is about accuracy. Statements that need corrections in your post are:

    1. You referred to the Real Estate Professional Status (REPS). While your statement was not technically incorrect, it could be misinterpreted as REPS being related to STRs. It is not. STRs do not count for REPS, and REPS does not unlock STRs. Two completely unrelated exceptions to the general rule.

    2. Most importantly, providing substantial services is NOT a requirement for the STR loophole. In fact, providing substantial services changes STRs from a rental activity to a business and triggers self-employment taxes on the net profit. It's often best to avoid providing substantial services.

    3. What is required is material participation, not substantial services. Your description of what is involved in meeting the material participation test is inaccurate. Refer to my linked post for details.

    4. Probably the most critical piece missing is the fact that STRs can provide a tax benefit for one year only, their first year. After that, your taxes go up, not down. You will need to buy another STR to extract tax benefits for the following year.

    Thank you for bringing attention to the potential tax benefits of STR investing.


    Michael, if you were to read my post you would see :
    1. I never compare REPS to STRs
    2. While you can debate this substantial services stuff, its in the end subjective, and nuance is needed here for a specific client situation, this is no fault of the article.
    3. I didn't explicitly list all 7 ways to meet material participation, that makes the article "wrong" to you?
    4. STR only provides tax benefits for one year being left out does not make the article wrong. We do this all the time and this seems obvious to us, and this always comes up during a client call.

    We ALWAYS turn over every stone with a client to make sure the strategy we are employing is a proper fit to them.

    Again, not a good look coming to my post to just call me wrong and then link your own article. 
    0Reply
  • Account Closed
    OP
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @Nate Meeker:

    Love this strategy, many of my tax planning clients are executing this successfully across the U.S.


     Love to see it, Nathan! Lots of great savings to be had using this strategy for 2024! Happy new year 

    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    2y
    Quote from @Account Closed:

    Again, not a good look coming to my post to just call me wrong and then link your own article. 

    Based on your self-description  

    I assumed you were an investor, and I corrected the information you posted. I had no idea you were a fellow tax professional, not from your description and not from the content of your post.

    0Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    2y
    Quote from @Account Closed:

    To leverage this benefit, prospective property owners must engage in short-term rentals and provide substantial services to guests, such as daily cleaning, meal provisions, or transportation services.


     I think there is some incorrect information regarding substantial services.

    [email protected]917-280-8544
    Basit Siddiqi CPA4.979 Reviews
    View Page
    0Reply
  • Account Closed
    OP
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @Basit Siddiqi:
    Quote from @Account Closed:

    To leverage this benefit, prospective property owners must engage in short-term rentals and provide substantial services to guests, such as daily cleaning, meal provisions, or transportation services.


     I think there is some incorrect information regarding substantial services.

    Please let me know what you think I got wrong! Im happy to update it or clarify. 
    0Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    2y

    @Account Closed

    If you don't mind me giving me my 2 cents...  I think I wouldn't take it...  Paying zero tax is inefficient in it of itself--- unless it was for the rest of my life or something...

    Making use of the lower/lowest tax brackets and the standard deduction (being so massive nowadays) is a huge tax break in it of itself.

    As mentioned, you only drive one's taxes higher (and/or higher tax brackets) in future years, especially with using up the depreciation faster.  Granted, that matters depending on the investor's strategy and goals.

    Meanwhile, all this does is increase the work for the supporting professionals with more filings, paperwork, the potentially the 1031's, all for some tax savings in this year.  For this layman (i'll let you professionals figure out what is being sold here in this post), I don't see how your services benefits a long term investor like myself, or are really in my best interests.

    0Reply
  • Account Closed
    OP
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @David M.:

    @Account Closed

    If you don't mind me giving me my 2 cents...  I think I wouldn't take it...  Paying zero tax is inefficient in it of itself--- unless it was for the rest of my life or something...

    Making use of the lower/lowest tax brackets and the standard deduction (being so massive nowadays) is a huge tax break in it of itself.

    As mentioned, you only drive one's taxes higher (and/or higher tax brackets) in future years, especially with using up the depreciation faster.  Granted, that matters depending on the investor's strategy and goals.

    Meanwhile, all this does is increase the work for the supporting professionals with more filings, paperwork, the potentially the 1031's, all for some tax savings in this year.  For this layman (i'll let you professionals figure out what is being sold here in this post), I don't see how your services benefits a long term investor like myself, or are really in my best interests.

    Hey David! I really appreciate you giving your opinion here. There are a few beliefs here I would like to invite you to challenge, in the very least it's a good thought exercise. 

    To respond to your response "Paying zero tax is inefficient in it of itself--- unless it was for the rest of my life or something..." That is indeed the goal! or get as close as we can as possible. Note that every year we would need to be buying property to maintain these benefits, as they only work in the year they are used. Unfortunately, there is no silver bullet. 

    You are right that it increases the need for supporting professionals like us, but taking the long term outlook, I would say that a tax professional / accountant focused on the assets you are investing is imperative for success. As they say here on BP, you need to "build your team" and accountants are an important member of your team. If your accountant is not knowledgable in the area you invest in, you could be missing out on 10s of thousands of dollars of tax savings per year. 

    How do services like this benefit you? 

    The simple answer is it allows you to compound your money faster. Let's say we meet for 1-3 hours per year, and you pay for math's sake 2k out of a household income of 200k. out of that 200k house hold income you are paying (for examples sake) 50K in taxes (tho it is likely much more for most people). If we can save you 30k on your taxes via implementing these strategies, that is a 15x return on your 2k cost, since you are now not paying that to the government. Taxes are everyone's biggest expense of their lives, and if we can change people's situations by finding ways to get them savings, it can truly change lives. 
    0Reply
  • Sean O'KeefePro Member
    CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 871 votes
    2y

    @Zachary Jensen Hmm no, I don't but thanks for the offer.

    [email protected]628-241-0888
    1Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    2y

    @Account Closed

    Thanks.

    Different goals / perspectives...  If I was paying $1mil (or perhaps more realistic $250k) in tax a year, I would/could be ridiculously happy!  From your repeated comments, it doesn't sound like you understand that.  Just to save on taxes out of spite doesn't follow the 'its what you keep vs. what you make' (however that goes)

    Sure, "building a team" is important (there always good ways and bad ways to do it...).  But, you need a good team.

    I don't do short term rentals, so perhaps my understanding is a bit off:  I thought the majority of the deductions are the setup costs and noncash depreciation from cost seg.  Well, the setup costs were never lost deductions, and doing cost seg doesn't really "save" me any taxes.  It DEFERS this (incidnetly, I don't work with accountants who don't understand this openly).   Hmm... then this goes into another rabbit hole of handling this "lemonade out of lemons" which can also end poorly.  You still may not save me anything, if anything it could be worse.

    Maybe because you are going after short term rentals, but short term "savings" are not for me.  Honestly, I think we'd get a significant, but few, less questions on the board and I'd spend less time helping investors figure out what to do in the long run.

    Good luck.

    1Reply
  • Account Closed
    OP
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @David M.:

    @Account Closed

    Thanks.

    Different goals / perspectives...  If I was paying $1mil (or perhaps more realistic $250k) in tax a year, I would/could be ridiculously happy!  From your repeated comments, it doesn't sound like you understand that.  Just to save on taxes out of spite doesn't follow the 'its what you keep vs. what you make' (however that goes)

    Sure, "building a team" is important (there always good ways and bad ways to do it...).  But, you need a good team.

    I don't do short term rentals, so perhaps my understanding is a bit off:  I thought the majority of the deductions are the setup costs and noncash depreciation from cost seg.  Well, the setup costs were never lost deductions, and doing cost seg doesn't really "save" me any taxes.  It DEFERS this (incidnetly, I don't work with accountants who don't understand this openly).   Hmm... then this goes into another rabbit hole of handling this "lemonade out of lemons" which can also end poorly.  You still may not save me anything, if anything it could be worse.

    Maybe because you are going after short term rentals, but short term "savings" are not for me.  Honestly, I think we'd get a significant, but few, less questions on the board and I'd spend less time helping investors figure out what to do in the long run.

    Good luck.


     100% its not for everyone! It depends on a variety of factors like tax brackets, what you actually want to invest for the long term in, stuff like this. At the end of the day, you need to ask your accountant if that is a good plan for your specific situation! 

    0Reply
  • Account Closed
    OP
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @Sean O'Keefe:

    @Zachary Jensen Hmm no, I don't but thanks for the offer.


     Ha not for everyone! Have a great day 

    0Reply
  • Nick Szwed
    Member since 2021 · 2 posts · 1 vote
    2y

    Hey Zach definitely interested in this!

    0Reply
  • Account Closed
    OP
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @Nick Szwed:

    Hey Zach definitely interested in this!

     Hey Nick! Feel free to DM me with any questions you may have 

    0Reply
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