All Forum Posts by: Daniel Murphy

I'm interested in knowing the difference between co-hosting vs. being a property manager.  

A friend had 3 properties in Lee county of Florida that they STR. They started the idea of being a property manager for others in the area but found out that you need to be a licensed realtor in order to be a property manager. Could they co-host instead?

What are the tradeoffs, differences, pro/cons etc.  

Thanks in advance... 

My dad gave each of my kids $5k 2 years ago. 

I put the money into UGMA/UTMA (uniform gift to minors accounts) for each of them.  The money is in my kids name, but I am the custodian. Most states have an age of majority of 18, but I was able to make the age of majority on these accounts 21 through Charles Schwab.  The accounts are pretty easy to open up. They are non-qualified meaning they are not tax deferred. 

The nuance is that once your kids turn the age of majority, the money is theirs. No questions. You can't do anything with them.  In fact, no one can make changes (buy/sell/distributions etc) to the account until the paperwork is signed over into the kids names. BUT, that's not necessarily a bad thing.  My goal is for this money to buy my kids an ASSET when they're older, not a wedding or a car... So I plan to keep the funds invested into good diversified funds so there's no major "risk" in losing the investment.  

If my kids are smart financially, (they already want to buy real estate like us), I'll help them transfer the accounts into their names & buy an asset.  If my kids have questionable intentions, they don't actually know where the money is held.  So if they turn 21, are on the wrong path & tell me they want their money my response will be "it's yours once you find it." :) 

There are always ways to mitigate risk.  

Ashish is correct, bonus depreciation is not optional. If you do a cost seg study, you get bonus deprecation. How it flows through to your tax return is the next set of questions / situations. 

First, either you or your wife must materially participate, AND, your average rental day must be 7 days or less to have the deprecation go against your active income for the "str loophole."  

OR, like you say you're a mid term rental, you must provide substantial services.  IE- daily linens, food service etc. 
OR, you must be a real estate professional. My understanding is that if you have a regular job, it's almost impossible to sufficiently claim REPS.  

I'm not a CPA, but I have been digging into cost segs very deeply recently.  

My experience with CPA's, cost segs & interpretations: Tax code & tax forms are fairly formulaic.  "multiply line 6 by 50% & enter on line 7" type of thing.  However, when you get to forms 8582 & 4562, Passive Activity Losses & Deprecation, this is when the formula's tend to stop and tax professional interpretation steps in. As a result, you'll likely get a different answer from multiple CPA's on deprecation & active/passive rules.  
You may consider getting a second opinion (or third). 

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.