Short Term Rental Tax Benefits

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Short Term Rental Tax Benefits

Chris Look
Member since 2022 · 16 posts · 7 votes

Hey everyone, we are looking for some clarification or advice on maximizing the tax benefits on a short term rental. We are in the process of purchasing our first property, just narrowing it down right now. We both have full time jobs but plan to manage it ourselves to meet the requirements for material participation for it to be a non-passive property. We would also plan to run a cost segregation study to maximize bonus depreciation in the first year. How does this work to offset both the income of the property and then our W2 income? Are there other options or tax benefits we should look at? Does it make a difference on what we are able to deduct based off of a down payment, furnishing the property, and/or any maintenance/updating to the property?

Here is an example of some numbers I have looked at. If we purchase a property for $400,000 that has a gross income the first year (4 or 5 months before year end) of $25,000, operating expenses of $10,000, mortgage and taxes of $15,000, with a W2 income of $175,000, what might that look like for taxes? Do you take all of it in year one or does/can some of it carry over to the next year if unused? How does a down payment or other costs to get it going play into all of this? I have not been able to find a good example that actually shows how to offset both the income of the property and W2 income. I plan to talk to our CPA as well but want to have a better understanding of it beforehand.


Thanks in advance for the advice!

Thanks,

Chris

1Reply
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John Carbone
Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
3y
Quote from @Chris Look:

Hey everyone, we are looking for some clarification or advice on maximizing the tax benefits on a short term rental. We are in the process of purchasing our first property, just narrowing it down right now. We both have full time jobs but plan to manage it ourselves to meet the requirements for material participation for it to be a non-passive property. We would also plan to run a cost segregation study to maximize bonus depreciation in the first year. How does this work to offset both the income of the property and then our W2 income? Are there other options or tax benefits we should look at? Does it make a difference on what we are able to deduct based off of a down payment, furnishing the property, and/or any maintenance/updating to the property?

Here is an example of some numbers I have looked at. If we purchase a property for $400,000 that has a gross income the first year (4 or 5 months before year end) of $25,000, operating expenses of $10,000, mortgage and taxes of $15,000, with a W2 income of $175,000, what might that look like for taxes? Do you take all of it in year one or does/can some of it carry over to the next year if unused? How does a down payment or other costs to get it going play into all of this? I have not been able to find a good example that actually shows how to offset both the income of the property and W2 income. I plan to talk to our CPA as well but want to have a better understanding of it beforehand.


Thanks in advance for the advice!

Thanks,

Chris

Ballpark will be about a 50-60k deduction  against your w-2 income with a cost segregation plus any furnishing/maintenance.

down payment: 0 tax benefit, it’s equity 

Furnishing - yes, need accountant for details

Maintenance - yes, need accountant for details 


Bonus depreciation is now 80 percent, and expenses are still as always 100 percent deductions. You do need a cpa though. 

keep in mind you also need to pay for the cost segregation and tax work. 

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  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    3y
    Quote from @Chris Look:

    Hey everyone, we are looking for some clarification or advice on maximizing the tax benefits on a short term rental. We are in the process of purchasing our first property, just narrowing it down right now. We both have full time jobs but plan to manage it ourselves to meet the requirements for material participation for it to be a non-passive property. We would also plan to run a cost segregation study to maximize bonus depreciation in the first year. How does this work to offset both the income of the property and then our W2 income? Are there other options or tax benefits we should look at? Does it make a difference on what we are able to deduct based off of a down payment, furnishing the property, and/or any maintenance/updating to the property?

    Here is an example of some numbers I have looked at. If we purchase a property for $400,000 that has a gross income the first year (4 or 5 months before year end) of $25,000, operating expenses of $10,000, mortgage and taxes of $15,000, with a W2 income of $175,000, what might that look like for taxes? Do you take all of it in year one or does/can some of it carry over to the next year if unused? How does a down payment or other costs to get it going play into all of this? I have not been able to find a good example that actually shows how to offset both the income of the property and W2 income. I plan to talk to our CPA as well but want to have a better understanding of it beforehand.


    Thanks in advance for the advice!

    Thanks,

    Chris

    Ballpark will be about a 50-60k deduction  against your w-2 income with a cost segregation plus any furnishing/maintenance.

    down payment: 0 tax benefit, it’s equity 

    Furnishing - yes, need accountant for details

    Maintenance - yes, need accountant for details 


    Bonus depreciation is now 80 percent, and expenses are still as always 100 percent deductions. You do need a cpa though. 

    keep in mind you also need to pay for the cost segregation and tax work. 

    2Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    3y

    Hey @Chris Look, I would highly suggest that you get a good CPA to run you through all this. Get someone who knows STRs and is an investor themselves.

    0Reply
  • Leslie Anne Morris
    Real Estate Agent · Smoky Mountains, TN · Member since 2022 · 1k+ posts · 984 votes
    3y

    learnlikeacpa.com 

    1Reply
  • Matthew Powell
    Accountant · Savannah, GA · Member since 2023 · 7 posts · 1 vote
    3y

    Glad this is on your mind! 

    Cost seg for sure, then don’t overlook any local tax credits where you’re investing! 

    I always recommend donating anything you inherit with the property that you won't use in your STR instead of throwing it away. IF there is market value.

    Everyone’s tax situation is unique so make sure you do some shopping when it comes to an accountant.

    0Reply
  • John Malone
    Attorney · Boston, MA · Member since 2023 · 140 posts · 75 votes
    3y

    @Chris Look hey Chris, this post will answer for you! We've worked with dozens of STR investors in these scenarios and the tax benefits can be lucrative done correctly

    https://www.biggerpockets.com/topics/1056436

    0Reply
  • Chris Look
    OP
    Member since 2022 · 16 posts · 7 votes
    3y
    Quote from @John Carbone:
    Quote from @Chris Look:

    Hey everyone, we are looking for some clarification or advice on maximizing the tax benefits on a short term rental. We are in the process of purchasing our first property, just narrowing it down right now. We both have full time jobs but plan to manage it ourselves to meet the requirements for material participation for it to be a non-passive property. We would also plan to run a cost segregation study to maximize bonus depreciation in the first year. How does this work to offset both the income of the property and then our W2 income? Are there other options or tax benefits we should look at? Does it make a difference on what we are able to deduct based off of a down payment, furnishing the property, and/or any maintenance/updating to the property?

    Here is an example of some numbers I have looked at. If we purchase a property for $400,000 that has a gross income the first year (4 or 5 months before year end) of $25,000, operating expenses of $10,000, mortgage and taxes of $15,000, with a W2 income of $175,000, what might that look like for taxes? Do you take all of it in year one or does/can some of it carry over to the next year if unused? How does a down payment or other costs to get it going play into all of this? I have not been able to find a good example that actually shows how to offset both the income of the property and W2 income. I plan to talk to our CPA as well but want to have a better understanding of it beforehand.


    Thanks in advance for the advice!

    Thanks,

    Chris

    Ballpark will be about a 50-60k deduction  against your w-2 income with a cost segregation plus any furnishing/maintenance.

    down payment: 0 tax benefit, it’s equity 

    Furnishing - yes, need accountant for details

    Maintenance - yes, need accountant for details 


    Bonus depreciation is now 80 percent, and expenses are still as always 100 percent deductions. You do need a cpa though. 

    keep in mind you also need to pay for the cost segregation and tax work. 


     Thanks John

    0Reply
  • Chris Look
    OP
    Member since 2022 · 16 posts · 7 votes
    3y
    Quote from @John Malone:

    @Chris Look hey Chris, this post will answer for you! We've worked with dozens of STR investors in these scenarios and the tax benefits can be lucrative done correctly

    https://www.biggerpockets.com/topics/1056436


    Thanks for sharing the link, great information! How much of the cost of the property would fall under bonus depreciation? Is it a percentage of the cost of the property? Thanks

    0Reply
  • Chris Look
    OP
    Member since 2022 · 16 posts · 7 votes
    3y
    Quote from @Michael Baum:

    Hey @Chris Look, I would highly suggest that you get a good CPA to run you through all this. Get someone who knows STRs and is an investor themselves.


     Thanks! Any recommendation on a CPA that covers Nebraska, South Dakota, or Missouri? 

    1Reply
  • Chris Look
    OP
    Member since 2022 · 16 posts · 7 votes
    3y
    Quote from @Leslie Anne Morris:

    learnlikeacpa.com 


     Thanks Leslie! I just listened to a podcast where they mentioned this link. I will take a look at the site.

    0Reply
  • Chris Look
    OP
    Member since 2022 · 16 posts · 7 votes
    3y
    Quote from @Matthew Powell:

    Glad this is on your mind! 

    Cost seg for sure, then don’t overlook any local tax credits where you’re investing! 

    I always recommend donating anything you inherit with the property that you won't use in your STR instead of throwing it away. IF there is market value.

    Everyone’s tax situation is unique so make sure you do some shopping when it comes to an accountant.


     Thanks for the info!

    1Reply
  • John Malone
    Attorney · Boston, MA · Member since 2023 · 140 posts · 75 votes
    3y

    @Chris Look rough calc we usually see is 25-35% building basis (less land) is eligible. For 23% the law is 80% vs 100% in 22.

    0Reply
  • Chris Look
    OP
    Member since 2022 · 16 posts · 7 votes
    3y
    Quote from @John Malone:

    @Chris Look rough calc we usually see is 25-35% building basis (less land) is eligible. For 23% the law is 80% vs 100% in 22.

    Thanks for this info. That will help me put some numbers together. 

    0Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    3y
    Quote from @Chris Look:
    Quote from @Michael Baum:

    Hey @Chris Look, I would highly suggest that you get a good CPA to run you through all this. Get someone who knows STRs and is an investor themselves.


     Thanks! Any recommendation on a CPA that covers Nebraska, South Dakota, or Missouri? 

    So you can use a CPA that isn't in your area at all. Ours is across the state from us.
    1Reply
  • John Malone
    Attorney · Boston, MA · Member since 2023 · 140 posts · 75 votes
    3y

    @Chris Look of course happy to help!

    0Reply
  • Michael PorchePro Member
    Rental Property Investor · Boise, ID · Member since 2017 · 220 posts · 101 votes
    3y
    Quote from @Chris Look:

    Hey everyone, we are looking for some clarification or advice on maximizing the tax benefits on a short term rental. We are in the process of purchasing our first property, just narrowing it down right now. We both have full time jobs but plan to manage it ourselves to meet the requirements for material participation for it to be a non-passive property. We would also plan to run a cost segregation study to maximize bonus depreciation in the first year. How does this work to offset both the income of the property and then our W2 income? Are there other options or tax benefits we should look at? Does it make a difference on what we are able to deduct based off of a down payment, furnishing the property, and/or any maintenance/updating to the property?

    Here is an example of some numbers I have looked at. If we purchase a property for $400,000 that has a gross income the first year (4 or 5 months before year end) of $25,000, operating expenses of $10,000, mortgage and taxes of $15,000, with a W2 income of $175,000, what might that look like for taxes? Do you take all of it in year one or does/can some of it carry over to the next year if unused? How does a down payment or other costs to get it going play into all of this? I have not been able to find a good example that actually shows how to offset both the income of the property and W2 income. I plan to talk to our CPA as well but want to have a better understanding of it beforehand.


    Thanks in advance for the advice!

    Thanks,

    Chris

    @Chris Look This is definitely a question you want to get on the phone with a few different people in that world to get the best perspective. Here is a video that might help clear up some questions:
    https://www.youtube.com/watch?v=NEpBed2-9HA

    0Reply
  • Chris Look
    OP
    Member since 2022 · 16 posts · 7 votes
    3y
    Quote from @Michael Porche:
    Quote from @Chris Look:

    Hey everyone, we are looking for some clarification or advice on maximizing the tax benefits on a short term rental. We are in the process of purchasing our first property, just narrowing it down right now. We both have full time jobs but plan to manage it ourselves to meet the requirements for material participation for it to be a non-passive property. We would also plan to run a cost segregation study to maximize bonus depreciation in the first year. How does this work to offset both the income of the property and then our W2 income? Are there other options or tax benefits we should look at? Does it make a difference on what we are able to deduct based off of a down payment, furnishing the property, and/or any maintenance/updating to the property?

    Here is an example of some numbers I have looked at. If we purchase a property for $400,000 that has a gross income the first year (4 or 5 months before year end) of $25,000, operating expenses of $10,000, mortgage and taxes of $15,000, with a W2 income of $175,000, what might that look like for taxes? Do you take all of it in year one or does/can some of it carry over to the next year if unused? How does a down payment or other costs to get it going play into all of this? I have not been able to find a good example that actually shows how to offset both the income of the property and W2 income. I plan to talk to our CPA as well but want to have a better understanding of it beforehand.


    Thanks in advance for the advice!

    Thanks,

    Chris

    @Chris Look This is definitely a question you want to get on the phone with a few different people in that world to get the best perspective. Here is a video that might help clear up some questions:
    https://www.youtube.com/watch?v=NEpBed2-9HA


     Thanks for sending the link, it helped clear some of my questions up!

    1Reply
  • January Johnson
    Real Estate Agent · Emerald Coast, FL · Member since 2016 · 820 posts · 487 votes
    3y
    Quote from @Leslie Anne Morris:

    learnlikeacpa.com 

    I have seen you give this recommendation many times.  What, specifically, are you recommending?  The home page advertises a podcast.  I'm interested to learn how the site/services might be helpful to me or my clients.  Thanks!

    0Reply
  • Leslie Anne Morris
    Real Estate Agent · Smoky Mountains, TN · Member since 2022 · 1k+ posts · 984 votes
    3y
    Quote from @January Johnson:
    Quote from @Leslie Anne Morris:

    learnlikeacpa.com 

    I have seen you give this recommendation many times.  What, specifically, are you recommending?  The home page advertises a podcast.  I'm interested to learn how the site/services might be helpful to me or my clients.  Thanks!


     It's Ryan Bakke, my accountant.  He overalled my entire tax situation from day one.  He does consultations, but I believe they are paid.  I share the link because he has a ton of free resources and knows his stuff.

    0Reply
  • January Johnson
    Real Estate Agent · Emerald Coast, FL · Member since 2016 · 820 posts · 487 votes
    3y

    Thank you!  I wondered if there was a specific location on his site I should be looking at.  I'll dig deeper!

    0Reply
  • Michael PorchePro Member
    Rental Property Investor · Boise, ID · Member since 2017 · 220 posts · 101 votes
    3y
    Quote from @Chris Look:
    Quote from @Michael Porche:
    Quote from @Chris Look:

    Hey everyone, we are looking for some clarification or advice on maximizing the tax benefits on a short term rental. We are in the process of purchasing our first property, just narrowing it down right now. We both have full time jobs but plan to manage it ourselves to meet the requirements for material participation for it to be a non-passive property. We would also plan to run a cost segregation study to maximize bonus depreciation in the first year. How does this work to offset both the income of the property and then our W2 income? Are there other options or tax benefits we should look at? Does it make a difference on what we are able to deduct based off of a down payment, furnishing the property, and/or any maintenance/updating to the property?

    Here is an example of some numbers I have looked at. If we purchase a property for $400,000 that has a gross income the first year (4 or 5 months before year end) of $25,000, operating expenses of $10,000, mortgage and taxes of $15,000, with a W2 income of $175,000, what might that look like for taxes? Do you take all of it in year one or does/can some of it carry over to the next year if unused? How does a down payment or other costs to get it going play into all of this? I have not been able to find a good example that actually shows how to offset both the income of the property and W2 income. I plan to talk to our CPA as well but want to have a better understanding of it beforehand.


    Thanks in advance for the advice!

    Thanks,

    Chris

    @Chris Look This is definitely a question you want to get on the phone with a few different people in that world to get the best perspective. Here is a video that might help clear up some questions:
    https://www.youtube.com/watch?v=NEpBed2-9HA


     Thanks for sending the link, it helped clear some of my questions up!


     Glad it helped! 

    0Reply
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