All Forum Posts by: Daniel Murphy

We just had one of these requests (guest ended up not booking).  We asked them to allow our cleaner to come in twice during their stay to check on the property & also so they can get paid.  Just a thought.  

Another thing to consider is the tax effect of this.  If your average rental stay is less than 7 days, you fall under hotel rules & most of your things are deductible like normal.  If you average longer stays, you may run into having to pro-rate expenses.  As in, you may not be able to 100% deduct all of your expenses.  

This is a tough question to weigh.  Ideally, you have cash reserves to float your new purchase through the slow season. 

We just purchased our first STR in Jan. We were lucky enough to hit the end of the peak season & were booked for the first few months. Not only did it help financially, but very quickly we ramped up to 30+ five star reviews. I think that and a combination of other things really helps us to navigate our first slow season.

Starting out during the slow season would mean reviews come slower. This isn't necessarily horrible, it's just something to factor in.  We're a review society... 

The pro's > You'd have more time to get your place set up & dialed in.  There are also a lot of learning opportunities during those first few months of being a host. Any "mistakes" could be amplified during the peak season, but they could be relatively minor if you experience them during the slow season.  

Ultimately, if you have cash reserves to float you through your first slow season, I would be more focused on finding the right deal & the right property over the seasonality of the purchase... 

Real Estate is a long term game... 

One more thought, I bonds are great investments now in the current market environment. But if your kids are 2 & 4, you'll be much better off investing in the stock market for the long term.  

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.