STRs as a married couple, tax strategy

[Eric Sato]

Hi! My wife and I are hoping to close on a SFH soon with the intent on doing an STR! I have a tax question / real estate professional question.

I myself have a W2 job and my wife is a stay-at-home mom (no income). My thought was that it would be best if she does the primary STR work and log her hours and ensure that she spends more time on the STR than I do (at least officially logged hours... since I will most likely always be thinking about the STR... haha).

I am trying to find the most relevant information for our strategy to ensure we get the best joint tax deduction options against MY W2 income.

Is the following strategy correct?

- I maintain my W2 income job

- My wife does the primary amount of work on the STR and logs 150+ hours in a calendar year (I see 100 hours listed in some sites, and 150 in others...)

- We file our taxes as joint / married

- Her tax deduction benefits from qualifying as a real estate professional from the STR can offset my W2 income.

- She can use REPSTRACKER for this

I then of course have a plethora of other questions in terms of book keeping (tracking all purchases etc...) but I will save those for another time unless someone has the best offline resources I can start to learn from? 

Cheers!

[Sean Graham]

Quote from @Eric Sato:

Hi! My wife and I are hoping to close on a SFH soon with the intent on doing an STR! I have a tax question / real estate professional question.

I myself have a W2 job and my wife is a stay-at-home mom (no income). My thought was that it would be best if she does the primary STR work and log her hours and ensure that she spends more time on the STR than I do (at least officially logged hours... since I will most likely always be thinking about the STR... haha).

I am trying to find the most relevant information for our strategy to ensure we get the best joint tax deduction options against MY W2 income.

Is the following strategy correct?

- I maintain my W2 income job

- My wife does the primary amount of work on the STR and logs 150+ hours in a calendar year (I see 100 hours listed in some sites, and 150 in others...)

- We file our taxes as joint / married

- Her tax deduction benefits from qualifying as a real estate professional from the STR can offset my W2 income.

- She can use REPSTRACKER for this

I then of course have a plethora of other questions in terms of book keeping (tracking all purchases etc...) but I will save those for another time unless someone has the best offline resources I can start to learn from? 

Cheers!

Hey @Eric Sato you're on the right track. 

STR loophole is different than qualifying for REPS. You and your wife can combine hours for STR loophole, whereas you cannot combine hours for REPS. You can use the STR loophole without qualifying for REPS.

Also, your wife simply would need to "materially participate". Here are the ways you can qualify for material participation per IRS publication 925: https://www.irs.gov/publications/p925#en_US_2023_publink1000...

Material participation tests.

You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests.

1. 1. You participated in the activity for more than 500 hours.
2. 2. 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.
3. 3. 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.
4. 4. The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities under Recharacterization of Passive Income, later.
5. 5. You materially participated in the activity (other than by meeting this fifth test) for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
6. 6. The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
7. 7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.