How to pay $0 in taxes on a STR generating over $120K in revenue

[Taylor Jones]

Here’s how that works:

Depreciation is the act of slowly deducting the initial expense of an asset against your taxable income. Generally this is over a 27.5 (residential) or 39 (commercial) year time frame. So each year you can write off 2-3.6% of the purchase price against your income.

That's an awesome opportunity. We bought a cabin for $640k. With a building basis of $560k, that's a $20k a year write off against $50k in cashflow on a $640k deal.

It makes 40% of our cashflow tax free. Very powerful but there is much more to it.

Different parts of the asset can be depreciated on different schedules. We had a cost segregation study done to split up the depreciable lifespan of different parts of the house. The raw land can't be depreciated so that has to be given a value. But other items can be depreciated on a quicker timeline. The roof, driveway, fence, walls, doors, flooring, air conditioners, landscaping, etc.

The IRS has a depreciation schedule for each type. Some parts are 5 yrs, others are 15 yrs. So you can depreciate a portion of the asset costs faster. Once you get the study done, you'll get dollar amounts assigned to different parts & different schedules to front-load depreciation.

Bonus Depreciation allows you to deduct a certain % of costs in the 1st year an asset is in service. So now 25%+ of your asset cost can be DEPRECIATED IN THE FIRST YEAR!

Side note: Raw land can't be depreciated, so a value needs to be assigned to it.

So back to the $640k cabin we bought.

The cost segregation study came back & 35.9% of the asset cost can be depreciated on a 15 yr or faster timeframe.

This is 100% deductible the FIRST YEAR...
35.9% of $640k is $230k.

A $230k tax deduction in year 1.

This cabin will produce about $50k in free cash flow. So while $50k goes into the bank account, the tax "LOSS" is $230k.

This is how real estate owners, investors, operators, and developers make millions a year and pay $0 in taxes.

[Collin Hays]

You've got your math way, way wrong.  Yes, you can deduct $20,000 a year in depreciation.  But that's not a tax credit. It's a tax deduction.  

So let's say you are in the 30% income tax bracket.  Your cabin nets, after all expenses, $100,000 per year.  If you depreciate $20,000 per year on the property, your tax savings is $6000 per year, not $20,000. (30 percent of $20,000)

And as John said, depreciation is tax deferral, not a tax write off.  Big difference.  Every dollar you depreciate lowers your basis.  When you sell, the IRS will recapture that amount.

And even assuming for a moment that you indeed had a "tax loss" of $230,000 - on this property or any other - the maximum annual loss you can claim per the IRS is $25,000, and that would be an income deduction, not a tax credit.  Once your AGI reaches $100,000, that stars phasing out rather quickly.  

And you can't "bonus depreciate" a percentage of your full purchase price of $640K.   There's a very limited list of things you can bonus depreciate.   Certainly not the dwelling and the land.

My friend, you need a new accountant.