All Forum Posts by: Duke Giordano

I am certainly not looking to get myself or anyone else into hot water, but looking for a conversation in relation to some of the specifics that pertain to short-term rentals. There are plenty of other people on these forms that ask tax advice in relation to this and other matters so I am not the first, and there are plenty of tax professionals on here that are willing to share information so that’s simply what I was looking for. I realize that this is not personal tax advice but simply bringing up a point that I’m sure others are considering when they’re evaluating whether to purchase a short term rental.

Hi All,
Question, I am a high income W2 employee and considering purchasing a short term rental. I do not qualify for a real estate professional status, but recently heard about the short term rental loophole where one can write off losses against their W2 income if the meet certain criteria (7 day or less avg. stay, material participation, >100 hours participation etc.). I would then perform a cost segregation study year one to use that to offset against any rental/W2 income, or possibly any renovations of the STR. My main goal is to rent out as a STR for 1 year or as little as possible to qualify for STR loophole, and then take out of service for the following time after that and use only for personal use.

A few Questions:

1. If I purchase a short term rental, with the intention of maximizing only year 1 tax benefits do I have to have the STR in service for a FULL year from when it is placed in service, or can it be less than a calendar year? For example, say if I purchase in August of a certain year do I have to have in service until the following August, or just until Jan 1? Since my intention after 1-2 years of renting would be to take out of service and use solely for personal use, so trying to figure out how long/when I would have to leave in service to get Cost Seg/losses to offset W2 income benefit?

2. During that time it is in service, if it is mostly a seasonal rental do I have to rent it out or keep in service for the whole year, or only for the rental season which is typically 3-4 months? When they consider an average seven day stay how is that exactly calculated? Does that only count stays, or for the time the STR is on service on say AirBNB or VRBO etc?

I am trying to legally figure out how I can rent it out as little as possible and use it as much as possible I'll still qualifying for that cost segregation against W2? How long would I need to keep it in service as an STR to where I don't need to pay any of that back those losses (is it just year 1)?. Can I put on Airbnb for a high price and nobody rents it? What is the way that I can best utilize my renovation timeline in respect to closing as well as my cost segregation to where I can then write off 35% of the renovation cost.

Thanks so much in advance.

Great question @Jake Wiley

I think in this current market environment it is more important now than ever (in recent time) to focus on one's education and proper due diligence in all components of the deal.  Just to reiterate that includes the sponsor, the market, and the deal, but as we all know the sponsor is by far the most important.  I think what I would say as a learning point looking back is to not be afraid to take it slow, and focus and devote time on your education when evaluating all three of these components.  It is particularly important to pay attention to the debt structure today and how it relates to exit plans for the sponsor.  In addition whether it is a fixed or floating rate that, and if floating what is the rate cap cost, and what is the sensitivity analysis for increasing interest rates.  If it is a fixed rate what is the prepayment penalty or yield maintenance, and how does this change overtime implicating exit plan down the road.  Although I'm still investing in this market, I am certainly treading lightly and more selective for which the deals I invest in.  I find very few deals that are appealing at this juncture when analyzing some of the components as outlined above.  

Hello All,

It is interesting to revisit this discussion at a very different market than where we were in a year and a half ago when this discussion started. Many of the current deals have interest rates especially taken into consideration those with cops about 5 to 6% with Rates being purchased at 3 to 4% basically indicating negative cash flow. It will be interesting to see over the next 6 to 12 months how operators navigate these waters in particular those who invest in apartments indications with this negative delta between interest rates and cap rates and how to make deals pencil out. I will be curious to see if operator switch to a fixed rate debt, shifting LTV down, or shifting asset classes altogether that might be more cash flow focused.

Curious everyone's thoughts in this current interest rate environment in relation to where cap rates are.  He will also be interesting to see the tug-of-war between the supply and demand dynamics with less housing available versus demand compared with the negative interest rate cap rate Delta as described above and which one will win out.  

@Michael Leland

Your on the right track, and thinking through things the right way. I am also in the healthcare space and have invested in close to 15 deals as a limited partner. It might be extraneous but I did set up an LLC that I invest in my limited partner deals as an additional layer of asset protection from any outside litigation. As others have noted, this is not very difficult to set up and I happen to use Wyoming LLC. In relation to the actual syndication investment as an LP, there is really no need for an LLC as most of the investments are either in their own LLC or partnership structure and your only risk is your investment in most cases. My opinion is for someone that works a day job that takes up a large amount of time real estate syndication is the more passive route although you do have to do your due diligence upfront in relation to the sponsor most importantly as well as the deal, market etc. There are websites out there that help with this process and can certainly facilitate things, but in this current market you have to be very careful as to how the underwriting is structured. Happy to help on your journey anyway I can.

For simplicity, and this is not tax advice.  It is my understanding that passive losses/depreciation from "any year" can be carried forward (On I believe form 8582) to then offset passive income whether it be capitol gains OR depreciation recapture.  Therefor, does not have to be in same year.

Brain,

As always you are a wealth of knowledge and I appreciate your reply.  That is a great point on the Yield Maintenance/prepayment penalty.  I guess I should have mentioned that ideally this not be too onerous, or to possibly negotiate that yield maintenance gets released after say three years depending on the fixed rate loan timeline (this would need to be paid for upfront).

Another key point that might allow an out clause while being able to avert yield maintenance penalty that I also forgot to mention is to be sure that the "Loan is Assumable" so that a purchaser of the property could assume the loan.  You would think in this rising interest rate environment that may make a purchase even more desirable for a potential buyer if the locked in interest rate is lower than is currently being offered.  

I really think that the current debt environment on multi-family deals really is not being talked about enough.  You are right @Brian Burke that this is the type of information that many sponsors will not offer in investment summary and often need to be asked more details about.

Thanks again

Hello All,

I am seeing more and more syndications get me nervous with the current debt terms at this juncture of the market and interest rate risk. Many value add syndications are still using bridge debt in a typical 3+1+1 structure that has been used for the last several years. Many of the caps these days are based on SOFR, and what used to be a 60k cap for 1 point is now a 600k cap for 3 points. This to me is a huge risk. Any limited partner should ask to see a sensitivity table on interest rate risk and how deals perform as rates rise. As a limited partner, I would almost prefer syndicators go to a lower LTV model in the 65% range and with fixed rate debt to de-risk a bit and I would wonder if educated passive investors would be willing to take this incremental decrease in returns to de-risk.

For those multifamily syndicators and LP passive investors in syndications whats your thoughts on the current debt market in a rising interest rate environment, and how are you underwriting deals this days to account for this risk point.  In my mind this is one of the highest risk points at this stage in many multi-family syndications.

Look forward to your perspective. Have you seen large syndicators out there now in large syndications using lower LTV, fixed rate debt? This is a time you may need to zig when others zag...

@Monty Bruckman

Hi Monty,

This is not tax advice, and I am not a tax professional.  However, what my CPA does is tracks income/losses for each state unless it exceeds a threshold amount and keeps track of that number.  Then, at the time of sale/refi of the property with a large income event then he files in those states.  Others may have different experience but that is what mine does to avoid filing multiple state returns each year for excessively small amounts of income.  This is just my experience, hope that helps.

@Andrew Freed

Andrew, thanks for your reply.  I asked CPA that same question and he said no cost difference since the rest of return the same, it's simply updating K1 information.  So cost is the same in both scenarios.  I was just not sure if any audit risk, or other tax implications that I might not be thinking of in either scenario.  Thanks for your reply.