Second home/Vacation Home as Short Term Rental- tax write off?

[Catherine Javier]

Good day everyone. Newbie here and asking for some light.

My spouse and I are travel nurses from FL. We are almost finished rehabbing a LTR we closed last March 2022 and are planning our next purchase.

We are thinking on buying a vacation home in WA (where we currently work as travel nurses).  We will stay here for for  2 weeks during our assignments and will rent this out as Short Term Rental. 

One of our purposes is tax deduction as we are both W2’s. We know that 1 of the requirements for becoming a Real Estate Professional is material participation. We are thinking my spouse can manage it (of course I will be helping out 🙂)

Questions is:

1. We can purchase a second/ vacation home with 10% downpayment, is that right?

2. If we do this and make it as a short term rental, can things be written off such as Interest Rate, Points, Repair and replacement of appliances in the property, fixtures, furniture, utility bills, HOA, (coffee etc for guests?)

3. Can We purchase this under our names, and just make an llc for the activity/rental perse so we can open a set up a business credit card/bank accounts? 

4. If we have a LTR in FL and hopefully an STR in WA, can we claim both losses in our W2's (providing 1 of us passed the requirements of material participation)

Thank you so much for all your information!

Anything is appreciated, we are still unclear about this strategy and your expert opinions are greatly appreciated!

[Marshall Leipprandt]

@Catherine Javier Hey Catherine, I have some experience with this as an Airbnb owner with W2 income. I'll try to answer some of your questions below but several of these would best be answered by a Real Estate friendly CPA if you don't already have one. I used one this year for the first time and it was a game changer.

1. We can purchase a second/ vacation home with 10% downpayment, is that right? In most cases, I believe yes. They may ask whether it will truly be a second home or if it is being purchased as an investment property. If you plan to set up an LLC, then you might defeat the option of calling it a second home and it could become obvious it is actually an investment property. Rates/points may be higher for the 10% down option, but I would start reaching out to some lenders to confirm this is still an option with your personal situation.

2. If we do this and make it as a short term rental, can things be written off such as Interest Rate, Points, Repair and replacement of appliances in the property, fixtures, furniture, utility bills, HOA, (coffee etc for guests?) This is where my answer will differ from your situation. I bought my Airbnbs with the intention of them being run exclusively as businesses. Short answer is that for a business, all legitimate business expenses can be deducted.

3. Can We purchase this under our names, and just make an llc for the activity/rental perse so we can open a set up a business credit card/bank accounts? You can, but that wouldn't make sense in my opinion. The home will be in your name anyway, so trying to hide the bank accounts behind an LLC veil would be unnecessary unless you absolutely wanted to. An LLC is a pass-through entity anyways, so the tax situation would be the same as if you and your spouse ran it as a sole proprietorship. With an LLC also comes the reporting requirements, fees, etc. Again, up to you, but it would seem discombobulated to have the house in your name but then the bank account / credit card in an LLC. If you want a stronger answer, call up a CPA and get their insight.

4. If we have a LTR in FL and hopefully an STR in WA, can we claim both losses in our W2's (providing 1 of us passed the requirements of material participation) Recently had this discussion with my CPA and there are very specific criteria that must be met in order to be considered real estate professionals. Although not impossible per se, it could be difficult to prove material participation based on the amount of hours your W2 require from you. They'll look at the LTR which typically doesn't require a lot of time and the STR which requires more, but maybe not enough to satisfy the hour requirement. Again, ask a Real Estate friendly CPA for specifics.

One thing to consider that you didn't mention is the property's depreciation and the fact that it will decrease your taxable income just like the other business deductions. 

I live in SoCal and manage two Airbnbs in Florida, so if you have any other questions, I would be happy to discuss. Good luck with everything!