What is the best way to pay yourself as a STR investor.

Question

Say you have a profit of $30K a year and you have invested into your home as much as you would like to, for now. So you don't want to just put the money back into the house.

What is the best way to pay yourself that 30K? Is there a way to put it into an IRA tax free to save it for retirement? I anticipate having this happen in the next year and I want to be prepared for it. I want to take the income with the least amount of tax implications.

Thank you so much in advance for your responses!

Nathan Gesner · Answer

Instead of dumping it back into the same house, use it to build your savings faster and invest in the next.

I put every dime I earn right into the next investment to accelerate growth.

As for taxes? All my properties legally operate at a loss so the tax man never comes knocking!

Leslie Anne Morris · Answer

This is a great problem to have! Save it up, buy another one - then cost seg the new one to hopefully offset during that tax year.

Michael Baum · Answer

Exactly. You have made the profit, now you pays yer taxes. You can offset some of that profit by contributing to an IRA (not a ROTH) but I would consult a CPA.

Last year we had a quite a bit of profit as well so I dumped 8k into an IRA which lowered our tax burden.

Kristine Eickman · Answer

Oh no, I have no intention of "hiding" profits. More just wondering where do I put it until I have enough to buy a new one. Do I take a draw and put it into an IRA...that kind of stuff. It is something I have never really had to deal with before so not sure how to move to the next rental while minimizing taxes.

Luke Carl · Answer

I’m sorry the question doesn’t make a ton of sense. The taxes are what the taxes are you can’t hide money in some account somewhere and not pay taxes on it.

Read a book called Profit First it’ll explain.

Basit Siddiqi · Answer

Have a conversation with your accountant to see what your profit will be.it is the end of April so you likely have 4 months of activity thus far.You can estimate the remaining 8 months based on the first 4 months.What many people get confused in thinking is that their cash-flow is their taxable income without factoring in depreciation.if you are talking about rental income, rental income is not considered earned income, and therefore not eligible for IRA contributions.You may be eligible for IRA contributions if you have other forms of earned income.Best of luck to you!

Carlos Ptriawan · Answer

Either put into a non-penalty CD or put into Accredited-Investor Public Interval Fund or Debt Fund that has short term liquidity capability to withdraw.

Ricky A. · Answer

@Kristine Eickman

Short Answer:  I suggest engaging a CPA/tax planner and/or a financial advisor.  What's best in your particular case likely involves a dozen nuances of your own personal situation that simply cannot be adequately considered by respondents to an online post.

Great thing is that you're ahead of the curve since you need this for the next tax year.  Engaging a CPA or tax planner in the near term will allow you to make moves this year that wouldn't be possible if you wait until after year end, and these professionals will be a lot more available after May 1.

Longer Answers:

- As has been stated before, simply moving your profits into another type of account will not (necessarily) change the (inherit) taxes due.  The best way to lower taxes is to have legitimate offsetting expenses.

- How are you holding title to the property?  When you say "What is the best way to pay yourself?"  I assume the property is held in a separate entity.  However, if it is held in your name or if it's in a disregarded entity (e.g., a single-member LLC), then the profits are already being "paid" to you and are simply a part of your own tax bill (regardless of if it's flowing into a property-specific bank account).

- Is the 30K true taxable profit, or is it actually cash flow?  Perhaps your 30K cash "profit" is already going to be offset from a tax perspective by depreciation.  If not, could/should you accelerate your deprecation?  For example, a cost segregation (alone) may be enough to to shelter the 30K profit.  Or perhaps doing a cost seg plus using bonus depreciation could shelter it.  In either case, there is a cost to doing a cost seg that may or may not be justified by the tax savings (which are really deferrals).

- The ability to lower taxes by investing in an traditional IRA will depend on other income factors.  Perhaps you already make too much to be able deduct investments into a traditional IRA.  Perhaps you don't philosophically want to in invest into a pre-tax IRA.

All in all, I think a good CPA or tax strategist will help you maximize your profit.

Mohammed Rahman · Answer

Hey @Kristine Eickman - that's a nice chunk of change profit :)

Guessing all of your profits have been recorded and transacted on a STR online platform like Airbnb or VRBO. You can't hide your profits, and shouldn't - but you should work with a CPA to figure out the best ways to minimize your taxes.

Maybe spend some of it on a business expense that you can have this year vs. putting it off to next year.

Michael Baum · Answer

Hey @Kristine Eickman, a very good problem to have!

Like @Leslie Anne Morris and @Nathan Gesner said, use it to buy the next one, but only after you have a nice reserve setup for your current rentals.

What is the best way to pay yourself as a STR investor.

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