All Forum Posts by: Gian Jr, III

So, even if you materially participate in running your rental properties, you still can’t deduct those losses against other nonpassive income. That is, unless you meet one of the following exceptions:

You can deduct up to $25,000 of losses from rental real estate activities (even though they’re passive) against earned income, interest, dividends, etc., if you “actively participate” in the activities (requiring less participation than “material participation”) and if your adjusted gross income doesn’t exceed specified levels.
If you’re a qualified real estate professional, then your rental activities aren’t immediately considered passive. To be regarded as a real estate professional, you must perform a substantial amount of real estate business, defined as more than half of your time, and at least 750 hours, spent in real estate trades or businesses.

In short, in the context of real estate, the majority of your time has to be spent in real estate activities (usually full-time workers in other professions fail at this level of the test because convincing the IRS that you work two full-time jobs presents a problem) and the time spent must exceed 750 hours.

Again, a CPA can confirm this or tell you I am full of sh*t.

@Gian Jr, III: Learn the term "Tax Court" because that's what you are heading towards. The IRS specifically is looking for people misusing that rule since it's such "easy pickings" for them.

Hi Mike, thanks for your reply. Could you help me better understand what part looks problematic and could end up in court? I am here to learn.

From the tax code that I am reading it looks pretty clear that rental/"business" income from rentals under 7 days are considered active income (and do not require REPS because it is not considered a rental). By documenting with a detailed logbook and performing all of the labor myself (e.g.: handling bookings, cleanings between clients) I can show that I have passed one of the required material participation tests ('Activity that constituted all participation substantially').

§ 1.469-1T

(ii) Exceptions. For purposes of this paragraph (e)(3), an activity involving the use of tangible property is not a rental activity for a taxable year if for such taxable year -

(A) The average period of customer use for such property is seven days or less;

1 Vote

San Francisco, California

Quote from @Darius Ogloza:

This quote below is from your link with bolded emphasis by me:

You can deduct up to $25,000 of losses from rental real estate activities (even though they’re passive) against earned income, interest, dividends, etc., if you “actively participate” in the activities (requiring less participation than “material participation”) and if your adjusted gross income doesn’t exceed specified levels.
If you’re a qualified real estate professional, then your rental activities aren’t immediately considered passive. To be regarded as a real estate professional, you must perform a substantial amount of real estate business, defined as more than half of your time, and at least 750 hours, spent in real estate trades or businesses.

Again, a CPA can confirm this or tell you I am full of sh*t.

Hi Darius, I'm sorry...I Google'd that link and it looked to be focused on materially participation. However that link is for real estate "rentals" which is not relevant to my purchase of a short term rental. The IRS actually does not consider a STR a "rental" -- it is a 'trade or business'. Therefore you won't need to qualify for REPS status.

https://www.therealestatecpa.c...

Here's the section which is most relevant to STRs of 7days or less (or 30 days or less with substantial services):

"If you rent a property to customers with an average stay of 7 days or less, on average, this is a short-term rental. If that's true, you don't have a "rental" activity under Section 469. This means you don't have to qualify as a real estate professional to recategorize that activity from passive to active. You do still have to materially participate."

While you still have to materially participate, you don't have the additional hurdle of needing to spend more than 1/2 of your total working time within the business (like with REPS).

______

My CPA did confirm over the phone that my general understanding is correct but I will be taking the advice and talking with a tax attorney and running the numbers in detail.

Small world, I see you're in Marin! I'm looking at homes in the coastal zone of Sonoma county. But because of high prices and high rates most of the properties seem to be breakeven (at best), so this may be something to look into once rates decrease.

1 Vote

San Francisco, California

Quote from @Darius Ogloza:

I am no CPA (and you should consult with one) but how do you plan to meet the IRS material participation rule with a $400K W2 job. I do not see how it can be done. If I am wrong, someone please enlighten me because I have been leaving a lot of film on the cutting room floor.

Hi Darius, there are a few ways to qualify without REPS status. I plan to manage the bookings and do cleaning in between clients, so I will meet the "substantially all" materially participation requirement. If I choose to hire a cleaning company I will need to log my hours and have the cleaning crew bill per hour so that I can prove I that I am working at least 100 hours/year *and* that my time spent is more than anyone else (so in this case, my hours must be more per year than my cleaning company).

Some more details:

https://www.hwcpa.com/passive-...

0 Votes

San Francisco, California

Quote from @Ryan Moyer:

Maybe I'm missing something, but in the spreadsheet how is a $114k depreciation loss each year netting $74k in saved taxes? A $114k deduction in that tax bracket would be about half that in tax savings, no?

Hi Ryan, thanks for looking it over. The total amount of deductions I've calculated is $186,325.71 (all of the cells in yellow). That includes the $114k in depreciation, mortgage interest, repairs, insurance, etc. I'm estimating that would save $73k in taxes.

0 Votes

San Francisco, California

Quote from @Bill B.:

And plan to hold it forever, even if they outlaw STR. Otherwise all that taxes will come due in one year, not good. Plus you're guaranteed to eventually owe CA taxes even if you exchange out of California unless you hold it until you die.

If your main driver is saving money please pay the professionals. They deal with 100’s and the IRS deal with hundreds of thousands, they’ll spot a mistake at first glance. You want your guy catching it before it gets to the IRS.

Thanks for mentioning this, Bill. I did not know about owing CA taxes even if 1031'ing into another state. I will look into that.

0 Votes

San Francisco, California

Quote from @Ian Tyndall:

You should look to conduct a cost segregation study so that you can accelerate more of your depreciation against your income. It will allow you to deduct 100% of assets with a useful life of less than 20 years for 2022 and 80% in 2023.

Thanks Ian. I will most definitely purchase a cost segregation study to nail down what I can depreciate at an accelerated rate.

2 Votes

San Francisco, California

Hi BiggerPockets community, I am considering purchasing a STR and being an active participant for the opportunity to deduct the STR losses (notably deprecation) against my W2 job. I have been doing a lot of research here and I *think* I understand how this all works. If you have done this before, would you mind checking my math and seeing if I'm missing any large aspects?

I put together a spreadsheet example for a $1M STR purchase, $20k STR income a year, and $400k/yr W2 job in California. None of the expenses are exact but I am hoping to verify that my big picture idea (line 35) is correct and that I'm not missing any glaring issues. Many thanks in advance!

https://docs.google.com/spread...

4 Votes

San Francisco, California

All Forum Posts by: Gian Jr, III

Gian Jr, III has started 1 posts and replied 7 times.

Post: Check my math? Deducting STR losses against high wave W2 job.

Post: Check my math? Deducting STR losses against high wave W2 job.

Post: Check my math? Deducting STR losses against high wave W2 job.

Post: Check my math? Deducting STR losses against high wave W2 job.

Post: Check my math? Deducting STR losses against high wave W2 job.

Post: Check my math? Deducting STR losses against high wave W2 job.

Post: Check my math? Deducting STR losses against high wave W2 job.