Hey, trying to get my head around the new REI tax laws and I've got a bunch of questions. I've looked into hiring a firm to help but they are thousands and thousands and I don't even know what I need until I get some questions answered. Looking for bonus deprecation, cost seg, Airbnb business (I have a unit) answers etc. Anyone have someone they love who's super smart, creative (in a legal way!), and just super up-to-date on tax stuff that I could ask questions of? I know that this will cost $, not worried about that, thanks!!!!! PM me if preferred too.
@Adam Sankowski New tax laws affect real estate investors differently, depending on the nature and extent of their real estate ventures. You are correct that the tax treatment of Airbnb business (emphasis on "business") is distinct from other forms of real estate investment - and that you should get clarity about that to incorporate into tax planning and investment ROI analysis. Regarding cost seg, would be very helpful to reach out to @Yonah Weiss - you'll get great education at no cost (don't quote me on that - but he's usually glad to share his expertise).
Thanks for the shout out @Bernard Reisz (I'll send you the bill 😊)
@Adam Sankowski feel free to reach out any time, I'll be happy help if I can. If you have specific questions, you can post them here to benefit the forum. That will give you the opportunity to hear from some other tax experts as well.
@Adam Sankowski if you have any questions about cost seg or bonus depreciation I'd be happy to share my insights and answer any questions.
What are you curious about specifically? It can seem a bit complicated at first, but once you have experts working for you they take care of all the complex parts.
Bonus depreciation had some great changes, namely the increase to 100% and that used property now qualifies! When looking at real estate all assets classified as 15 year land improvements and 5 or 7 year personal property qualify for 100% bonus depreciation, meaning you can deduct their entire cost in year 1 instead of spreading that deduction out over 5, 7 or 15 years. The real property (structural components) doesn't qualify for bonus depreciation and would still have the 27.5 year for rental and 39 year for commercial property depreciation schedules. To get the maximum benefit from bonus depreciation you need a forensic detailed engineered cost segregation study to find all the 5, 7 and 15 year assets.
Cost seg hasn't really changed with the new tax law other than that the benefits are supercharged due to bonus depreciation. There's still a spectrum of quality and accuracy in cost seg ranging from highly accurate forensic detailed approaches to less accurate statistical sampling and computer modeling. What to pick comes down to your individual situation.
Hey @Yonah Weiss and @Paul Caputo thanks so much for jumping on here. This is great info! If you look up bonus deprecation online most of what you find says that it can't be for used property so I'm so glad that I posted this up. I'll give you a bunch of my situation and see what you have to say and also feel free to PM me or I'm happy to help others with this thread as well.
So this pas year I went on a bit of a buying spree, liquidated some other assets and bought three single family homes in the 50-80K price range. Two of them are actually in Indianapolis Paul so your back yard. In the past I know that this has only worked for commercial properties so I don't know if its even worth doing this for these three houses. Total purchase price of all three together is about 200k.
I want to take as much of a write off this year as my wife and I have a fair amount of W-2 income and I'd love to somehow drop keep that below the 24% bracket instead of the 32% one (I think that's the number) that we are current in. I also don't know if you can even use real estate loses to deduct from W-2 income?
Does cost seg'ing these single families even make sense? Thanks for any info!
ps. I'd also still love to hear from anyone in the Boston/ Cambridge/ Somerville area that I could sit down with in person as well?
Airbnb rentals are considered business and not "rentals" for IRS purposes. There are a few good things that apply in your case.
- Bonus depreciation: It does apply to used property in 2018.
- Cost Seg: Might or might not be a good fit due to cost of properties. I'll let @Yonah Weiss handle that. A residential cost seg might be a good option to explore.
- If you have a loss which you might at least on paper, you can deduct all looses against your W2 income without limits.
- Structure: Form LLC, if you have looses don't treat it as an s-corp yet, since it is an added unnecessary cost at the moment but do form it.
- Have kids: Hire them, they pay no tax up to 12K each and you get to deduct 12K. As little as 7 years old has been approved by IRS. Get creative, there is a lot they can do. You can now deduct they clothing, toys, etc because they have money. It's a win-win
- Home office: Get reimbursed for actual expenses incurred in home office under an accountable plan.
- Section 105 plan: Make yours and your family health expenses 100% deductible.
- Augusta Loophole: An S corporation owner can rent his or her entire home to the S corporation for up to 14 days per year and get big tax deductions. The S corporation deducts the full amount of the rent, and the owner realizes the income completely free of income tax.
- Retirement accounts: Implement one if you can and want.
Hope that helped :)
@Hector Bilbao thanks for the info! Follow up question. So we are renovating the third floor of our house to turn it into an Airbnb. Probably gonna be like 120-150k in renovation costs (totally worth it to get a legal airbnb happening in Boston). Do I write those costs off as depreciation or as part of a business expense?
If I can write it all of as a business expense that would be amazing? Maybe since the IRS considers Airbnb income to be a business not REI income. The renovation will probably finish in December? I don't think that I'll have any income from Airbnb in 2018 and yet all of the expenses will occur in 2018. Can you write off that much if you have no/ little income to show for it?
Also I don't think I can do an LLC because of the due on sale clause (all of my investments are leveraged- 30 year residential)? Is there a work around for that? Thanks!
A few questions for you:
Are the Airbnb properties available or will be available for rent before Dec 31st of this year? If so, yes, you can deduct a lot of expenses, but they have to be advertised and available by then on Airbnb.
You cannot "deduct" renovation cost, you can depreciate them. Some of the renovations might qualify for bonus depreciation thus increasing your losses.
You can have a main LLC who manages the properties to take advantage of the strategies but you might not need to do that this year since you are having losses anyways, something to consider for January 2019 and you want to consult with an attorney for the legal aspect of it. In other words, everything is possible without affecting the due on sale clause.
Something else to add here, I'm going overboard but since you might be having a lot of looses you want to make your return audit-proof:
- You must materially participate to deduct any tax losses from your airbnb activity.
- Use of a management firm makes material participation less likely.
- Use of a management firm increases the possibility that you will not be involved in day-to-day activities, and that lack of involvement will cost you any claim of investor time for material participation purposes.
- The IRS questions whether drive time counts for material participation purposes, and the court in Toups denied drive time as material participation time. In its audit guidelines, the IRS instructs its agents and auditors to check with the chief counsel’s office for guidance. Consider meeting the material participation tests without drive and travel time.
IRS Audit Tactics
- The IRS uses the initial interview to secure a statement from you as to hours worked and activities performed on your airbnb. This means the initial interview is perhaps your most important interview in this audit.
- You need to get your proof of material participation time in good order and technically correct before your first audit interview.
- You should have a record of the time you spent on this activity.
- Your record of time spent should be made on a timely basis (kept at least weekly).
- As you do for the mileage record on your vehicle, you can keep a test record for three months in a row if that record reflects the average time spent during the year.
- In the initial interview, the IRS is going to scrutinize your travel time to ensure that the primary purpose of your travel is business. Make sure that your travel records are in good shape.
- You will make a major mistake if you wait until after the initial interview to learn the rules.
- The hours you spend as an investor reading reports and otherwise monitoring operations does not count for material participation purposes UNLESS you are directly involved in day-to-day management or operations.
- The IRS has learned that taxpayers seldom study the rules until after the initial interview, meaning that poorly informed taxpayers admit much in the first interview and then pathetically try to change their stories after they learn the rules (this is usually too little, too late).
Goal here is to educate you, not overwhelm you. Just make sure you keep adequate records, and take advantage of the deductions this year. It's going to put more money in your pocket.
@Adam Sankowski The change in bonus depreciation applies to asset acquisition with contract signed on 9/28/2017 or later. So if you got the property before then the old rules still apply.
"This only works on big commercial properties" is a big misconception about cost seg. Any commercial or rental property of any size must be depreciated using MACRS. It's just a bit cost prohibitive on smaller properties, and the IRS doesn't mind if you just do it the easy way (the incorrect way) and use straight-line depreciation since that results in overpaying taxes.
For your situation with 3 small rentals totaling about $200k the cost of a study probably wouldn't make sense. If you had 10-20 small rentals it would probably work.
As far as using real estate losses against W-2 that's generally no. If your active income is less than $100k you can deduct up to $25k in passive losses, which phases out at 2:1 up to $150k when it's not allowed. If you're a real estate professional for tax purposes that doesn't apply.
Hey Paul, you might be confusing rental income with hotel-like activity such as Airbnb rentals. If the period of average rental is seven days or less, you have a vacation hotel business and again not a rental.
Cost Seg: Residential Cost seg is only $399, in his case might or might not work but worth checking into.
You are correct on rental losses, they cannot be deducted against w2 income, but again, this is not rental and instead of a business for IRS purposes.
A $399 "Residential Cost Seg" is not an actual cost segregation. It's filling out a form online and having a computer program spit out numbers based on statistics, not the facts and circumstances of the property. A "residential cost seg" such as this would not hold up to IRS scrutiny. A true cost segregation study requires a qualified construction engineer or architect to perform a site survey, deconstruct the property on paper and reclassify every asset (there are hundreds often thousands of individual assets in a building, even a small rental) which would take 30-40 hours on a small rental and a few hundred hours on most multifamily or commercial properties.
Chances are you likely wouldn't have a problem or get audited using a "residential cost seg" until the IRS decides to crack down on these providers, but it wouldn't be fun to be the unlucky one who gets to be their example.
@Hector Bilbao "Hey Paul, you might be confusing rental income with hotel-like activity such as Airbnb rentals. If the period of average rental is seven days or less, you have a vacation hotel business and again not a rental."
If you're implying all AirBNB rentals with average occupancy of 7 days or less belong on Schedule C and are subject to SE taxes, this isn't correct.