building more vacation cabins as a tax shelter?

Question

Let's say someone had gotten a chunk of money, this year, and wanted to invest it to avoid as much tax as possible. Here's my idea, maybe someone can tell me if or why it is flawed... yep, I'm a newbie. I'll admit that!

I've had a vacation cabin rental in Alaska for almost 10 years. I am thinking that if I used the money to build 3 or 4 more cabins, I could deduct that money as a business expense against this year's income. It's a great market in our little town, and I am confident I could fill the cabins all summer. Can I deduct, say, $60k, from a business income of say, $9000? And show that loss against my other "real job" income" for the year? Or would I have to just deduct a part of it for depreciation? If so, how much, and can I take all of my depreciation up front somehow?

Thanks for the advice on this, or any other strategies for sheltering this money while creating a good investment!

Thanks!

Eric P. · Answer

Great question! The internet is a great place to start for tax advice but when you get serious I'd highly recommend you not only consult a CPA, but one who specifically specializes in REI such as @Daniel Hyman

Ken Latchers · Answer

The best way is to grow your income reliably, not focus on how to tax shelter. You want shelters, open 401k...you can put up to 25% of biz profits in. Max your HSA. IRAs. Etc.

Connor Dunham · Answer

@Debbie Berg Hey Newbie! Welcome. You can deduct losses from real estate against your ordinary income if you are below certain income thresholds, however it can be difficult to do that and often has to be planned for (making excess tax deferred contributions from your wages). This is a good article I found on Carry Back and Carry Forward losses https://loopholelewy.com/looph... And the tax structures required for each. Generally, you are limited to $3,000 per year unless you have the right entity structure. Even then, it would only apply to the business income. Your best bet for counting the income against your wages is to use the 25,000 landlord exemption https://loopholelewy.com/looph.... Full disclosure, I'm not a CPA, just a tax optimizer.

Debbie Berg · Answer

Thanks for the recommendation. Yep, I now realize this is definitely a CPA question! I will go that route. THanks!Deb

Debbie Berg · Answer

Thanks everyone for your replies! I will definitely do some more checking. Seems a lot more complex than I thought and I have a lot to learn. But great advice!

Jon Crosby · Answer

@Debbie Berg I'm not a CPA and as mentioned you should ask a CPA these questions to be sure of what's possible. In general, however, you cannot deduct passive activity losses against your normal (ordinary) income (W2) unless you qualify as a professional real estate investor. This would require you putting in most of your day (enough so that you could not possibly have a full-time job, thus activating a probable audit) to qualify for. You will have to figure out if your cabin business model falls under Schedule C/E filing and then you have to figure out if you are Active/Passive investor. From there I believe you and your CPA could figure out what if/any you can depreciate against your normal income, which will likely not be much. If you wanted to use the money as a direct deduction against your normal income, you would likely want to start an S-Corp of some kind which will provide you the pass-thru tax benefits against your normal income. But...you will need to start a business for that (LLC, Inc.), filing with the appropriate states, counties, create ByLaws, Operating Statements, etc. so it's not a small feat either. Congrats on coming into some money this year and if you are passionate about what you put your money in, don't let the tax tail wag the investment dog as they always say. ;)Best of luck to you !

Michael Baum · Answer

I second what @Julie McCoy says. She is genius. :)I do know you will have to depreciate the cabins on a 27.5 year schedule so I don't think you can just deduct the entire cost of construction.You can deduct the cost of setup, like linens etc (Appliances are depreciated on a schedule as well so not those).All of this is just what I have experience with our place. You need to get a CPA and get all your ducks in a row before deducting everything.Also, you MUST do depreciation starting your first year of rental income above a certain level. Penalties ensue...Again, get a CPA. Ignore everything else.

Julie McCoy · Answer

@Debbie Berg You need a CPA to answer these questions. Nothing you see on this site should be construed as tax advice. The answer to your question is going to have a lot to do with how the money was obtained, and other particulars of your personal situation. As for the cabins themselves, do some serious research on regulations in the area (both building and short-term rental), their cost, time to complete, holding costs, realistic projected income, etc. Do you already own the land they would be built on? If so, how is the land zoned? Etc. etc. etc. Even if you get the answers you're hoping for, what you're proposing is a complex endeavor that should be carefully thought through before you begin.