All Forum Posts by: Stephen Nelson

Honesty think if all you're looking for is a data entry service, you should just have your bookkeepers copy and paste the data.

You could even just try this yourself?

To echo what others have said, with the shortages in the tax accounting world, the smart firms have focused on doing the highest value work and bumping their prices. (Supply and Demand in action...)

@William C. that's pretty much the way it works. But it's tricky.

The two main things to focus on? Average rental interval of 7 days or less... and you and your wife materially participating (by the way, not actively participating that's something different).

If you get a cost segregation study done, as a guess you can maybe deduct 20% of the purchase price for 2024 tax return. You will also probably be able to deduct nearly 100% of the furniture by applying the Section 263 de minimis safe harbor.

But you need to be careful of some mistakes that blow up the strategy even if you get the above stuff right. For example, you do need to not get entangled in the Section 183 (aka "hobby loss") rules. And you need to not get limited by the Section 280A mixed use dwelling rules.

Tip: If you're doing the STR truly, truly, honestly, honestly to build wealth and earn a return on your investment? You don't need to worry about Section 183. And as long as you have zero personal use, don't discount the rent to people, don't rent to family members, you don't need to worry about Section 280A.

You need to make sure you're following the Section 280A rules if you converted a personal residence to a rental. I.e., you're not using the "regular" Section 469 accounting rules. You're using a different, more restricted set of rules that probably limit your deductions to your income because you have a "mixed use dwelling."

@Scarlett G. Banks Just to be technical, what really happens with a motel or hotel, or some other real-estate-y business where there is significant personal services, is it's not considered a rental activity. And that means the only thing that matters in terms of passive vs. nonpassive is whether you or you and your spouse materially participate.

The regs say this about what significant personal services are:

(iv) Significant personal services—(A) In general. For purposes of paragraph (e)(3)(ii)(B) of this section, personal services include only services performed by individuals, and do not include excluded services (within the meaning of paragraph (e)(3)(iv)(B) of this section). In determining whether personal services provided in connection with making property available for use by customers are significant, all of the relevant facts and circumstances shall be taken into account. Relevant facts and circumstances include the frequency with which such services are provided, the type and amount of labor required to perform such services, and the value of such services relative to the amount charged for the use of the property.

But frankly? This doesn't really seem like a real estate investment. You're running some other trade or business.

BTW the other thing I'll mention is, I don't think the Section 469(c)(7) rule (aka "real estate professional") is being phased out. That's in the statute. Congress can change the law. But I don't think there's any serious move to do that.

A couple of comments to add to those from @Ryan Coon.

1. A single member LLC by default gets treated as a disregarded entity for tax purposes. In that case, your LLC looks like an unincorporated sole proprietorship to your consulting clients or customers. That's good and keeps things simple and DIY-y. However, you can make an S election for the LLC. But it'll be tough to get the numbers to work well for a mid-year election. BTW for context, my CPA firm provides services to hundreds of S corporations. (We're located in Redmond obviously.) So me suggesting an S corporation is premature is something you may want to take slightly more seriously than you might at first guess.

2. Putting real estate into an LLC is fine. Putting real estate into an S corporation or an LLC taxed as an S corporation is a terrible mistake. You do not want to do that. You get no tax benefits. You do however set yourself up for possibly catastrophic tax situations down the road if you're successful as a real estate investor.

Me too. Washington state and King County used to be mildly pro-business, allowed space for entrepreneurs and small businesses, and relatively light on taxes. No longer.

Just to add a handful of comments to those already shared.

1. Terrible shortages of tax accountants exist right now. Especially good ones. So, it's not a certainty you can even find someone worth paying. (Just to be clear, you probably can find someone who says they can do your return... someone who will charge you a seemingly reasonably price... but it'll be hard to find someone good.)

2. Most people should just use TurboTax or TaxCut and accept that, sure, they'd get better results from using a skilled accountant... but not enough to justify the cost. You do not want to pay $1,000 in tax prep fees to save $1,000. You want to spend invest $1,000 to save $5,000... or $5,000 to save $50,000.

BTW here's an example connected to your situation where a good tax accountant might have helped you optimize. So you're now renting your former principal residence. That means you're intentionally or unintentionally giving up or risking the Section 121 exclusion which would allow you to avoid tax on up to $500,000 of gain on the sale of that property. If you knew about this and considered the pros and cons of keeping the house as a rental? You're probably doing great with DIY. If you didn't know this and have missed out on saving tens of thousands of dollars of taxes? A good tax accountant would have really paid for their fees many times over.

The Washington state 7% capital gains tax doesn't apply to real estate. (It also doesn't apply to a bunch of stuff as well.)

Don't get me wrong. The capital gains tax is a stupid idea. But it targets the wealthy tech employees at Microsoft, Amazon, Meta, Google, etc.

Just because several people above in thread mentioned TN doesn't tax income?

Neither does Washington state.

There are way lower bars than 500 hours to achieve material participation. (The full list appears at Reg. Sect. 1.469-5T(a).)

Also if an investor hires a property manager? They lose their own property management hours. Just saying...