All Forum Posts by: Daniel Murphy

I am a fee only financial planner & fiduciary.  100% independent.  I'd be happy to talk more if you're interested.  Check out www.greatergoodfinancial.com for an idea of how I work.  

I'm in the process of transitioning my niche towards real estate investors as I recently bought my first short term rental property. I've been digging into the tax code behind real estate & have found my happy place :) 

IRS pub 425 says, "Passive activities include trade or business activities in which you don't materially participate. You materially participate in an activity if you're involved in the operation of the activity on a regular, continuous, and substantial basis. In general, rental activities, including rental real estate activities, are also passive activities even if you do materially participate. However, rental real estate activities in which you materially participate aren't passive activities if you qualify as a real estate professional. Additionally, there's a limited exception for rental real estate activities in which you actively participate. The rules for active participation are different from those for material participation. You can find guidelines for determining material participation, the rules for determining who's a real estate professional and what's active participation, and the special rules that apply to the income and losses from a passive activity held through a publicly traded partnership (PTP) in Publication 925,"

Basically, rental is generally passive unless you are a real estate professional, HOWEVER, refer to pub 925 for special rules.  

Pub 925 says,  "Rental Activities

A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. See under Activities That Aren’t Passive Activities, later. An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. It doesn’t matter whether the use is under a lease, a service contract, or some other arrangement.

Exceptions.

Your activity isn’t a rental activity if any of the following apply.

1. The average period of customer use of the property is 7 days or less.
   
   

In my brain, the IRS says that rental is generally a passive activity. Unless, you are a real estate professional, or average rental of 7 days or less.  

I've actually been digging into this a ton recently.  I'm a financial planner by profession so I want to fully understand the process.  
I've found that most CPA's have different understandings of the rules. The STR Loophole (materially participate & less than 7 day rental) vs. providing substantial services.
I ended up spending HOURS building a tax estimate spreadsheet. Most of the tax schedules follow pretty easy to follow math, (IE- multiply line 7 by 50% & enter on 1040 line 11).  

However, when you get to forms 8582 (passive activity loss limitations) and form 4562 (depreciation & amortization), it's less math & more theory.  IE- it requires interpretation and I could see how a CPA's interpretation could differ from one to the other. 

Here's my understanding.  Materially participate & rent for less than 7 days, you should be able to write it off against active income.  The 14 days or less than 10% of rented days refers to the exclusion ratio.  IE- if you stay more than 14 days or 10% of rented days, you won't be able to 100% deduct the loss, only partially.  BUT, you can keep track of this also.  I've stayed at my property a total of probably 20 or so days this year so far, but will probably only log 3-4 personal days because I was doing more than 4 hours of work on the property most of the days. 

I don't think your mortgage factors in at all.  Tax forms don't ask about your mortgage & how much you put down. They only ask for interest paid etc. 

You may need to shop for a CPA who understands the rule the way you & Brandon Hall do. 

 Oh, one other tip(s) we have.  Introduce yourself to ALL of your neighbors. Bring them a gift basket from your home town/state. Leave them a letter with your personal phone number. Friend them on Social Media. Have a neighborhood bbq or invite them over for beers.  Hire them whenever possible.  
It makes a WORLD of difference to know your neighbors have your back.  A bad neighbor can report to you to the city & cause all kinds of issues with your rental. You'd much rather they call & deal with you... 

I've met all of my neighbors. We had one set of bad guests, cops were called.  I mailed out a letter to each of my neighbors apologizing.  Still... if something goes wrong, I can call at least 4 different people who will probably try to help me.  

Hello, 

I'd love to hear your best practices or tips you've learned with Pricelabs.  Open ended question, respond with anything... 

We live in MN and our property is in FL.  

We have Eufy security camera's (no subscription but DEFINITELY add on the solar chargers)

Schlage encode wireless door lock.  

Ownerrez to coordinate between airbnb & vrbo. It also sends out our rental agreements & archives our communications as well as notes on guests. 

Pricelabs to integrate prices (super important in my opinion)

By in large, our cleaning team is the #1 most important part though.  We signed up for some local facebook groups prior to buying.  (cape coral FL FB groups).  Kept a list of people who posted or advertised for cleaning of rentals.  Then met them all while we were on site.  Once we found them, we pour into them to make sure that WE are just as important to them.  
Since signing on with us, we've gotten our cleaning team signed up with probably 7-10 other rentals which means more money for them.  We gave them a bonus when we were down last.  We share their postings in any groups we can to encourage their business to grow.  

Oh, and a few wifi light switches so our outside lights come on automatically plus we can control lights when we're not home. 

And wifi thermostat.  

95% of problems from out of state are no problem to handle.  

 Thanks Ryan, that's my understanding also & how my calculations are figured.  Just looking for someone to peek over my spreadsheet to see if I'm missing something and/or if my calculations are correct.  

Hey everyone, 
I'm a financial planner by profession & I really dislike "sales pitches."  All of the sales pitches I've seen for Cost Seg studies show the tax benefit at "37% tax rate" which doesn't apply to most investors. Also, the benefit is not as simple as taking your marginal tax rate x bonus depreciation.  

I've built out a pretty extensive spreadsheet so investors can more accurately estimate their own real world tax benefit of a cost seg study.  

BUT, I'm a bit lost when calculating deprecation recapture & long term capital gains tax when selling a property.  Is anyone willing to hop on a video call with me for 10-15 min sometime to review my calculations? 

We use Ownerrez as an API integration. 

I'm only familiar with building a wix website but the ownerrez has widgets that easily import.  The reviews, calendar, pricing etc. all import very easily with the widgets.  

However, I built the web page for the listing because I wanted it to look like the Airbnb page to keep things consistent.  

We're taking a slightly different approach & building a "local area guide" with a direct booking page attached.  The long term goal is to get the local area guide to rank in google which will help bring more views to our direct listing.  

www.capecoralforfamilies.com 

www.capecoralforfamilies.com/s... for the direct booking. 

We have a single family pool home in Cape Coral.  Cape has a 7 night minimum, but it's not enforced.  There are tons of bnb's in Cape, and from what I've heard / experienced, the 7 night minimum is not enforced unless you get reported to the city.  

Our experience has been very good so far.  $400k pool home, 3/2. I'm hoping to gross 55-65k this first year.  Lots of learning mistakes so I think that year two can be 75k or more.