All Forum Posts by: John Malone

@Tony Capra if the situation is right your tax advisor may want to look at the S Corp but also weave in core tax mitigation techniques

@Ryan Galloway speak to a tax advisor but a lot will depend how title/mortgage held. You’ll also want to ensure what you set up is scalable so if you do grow quickly, the structure is in place

@Phil Contreras yes as a 15 yr land improvement then elect bonus depreciation (80%)

Quote from @Andrew Angell:

Quote from @Evan Polaski:

Non-CPA, layman here.  So like others stated, talk to a CPA.

As for the LLC for Management, I believe most do this for liability protection: i.e. if you did something against fair housing laws (I know you are talking STR and not LTR) you are sued as a contract manager. I feel like there could be some tax advantages, maybe, but you are jumping through a lot of hoops here to likely get a little tax advantage.

Additionally, as I understand passive losses effectively never move over to active income.  The "exception" is qualified real estate professional, but then they are never passive losses to start, in the IRS's view.  And there are fairly strict time requirements and proportion of time spent on that income to hit these thresholds. 

I hope this at least gives you some questions to talk to your CPA about, because while I know a few things about taxes, I am not a tax advisor or CPA.

Thanks for the feedback. That's where the STR "loophole" comes into play. If you have an avg stay of less than 7 days (or less than 30 days and offer specific services to your guests) and you are a "material participant" based on hours worked, then they treat you more like a hotel, which is active. As such, it offsets active income if you have losses, so cost seg and bonus depreciation, etc. can really be cool here.

CPA's and tax attorney's I've spoken with all agree on that, but where I'm getting a bit stuck is that in our situation, because of the passive losses we already have on paper combined with the fact that it's only one $280k property, running it as passive actually makes more sense right now.

The answer I can't seem to get out of any of these professionals is whether or not the act of simply running it as short term, and we end up with avg stay of 6 days, for example, and we're managing it ourselves...are they automatically going to make it active when I actually don't want them to..??

That's the part where I can't seem to get a clear answer out of these people, so I was hoping to get some feedback from people that have already been doing this stuff and have maybe run into these situations before.

Andrew - happy to help.  Having been involved w/ STRs and having a RE focused strategy firm, we get this question a lot.  There are TONS of cases where a passive tax loss makes more sense.  

The answer is NO it does not.  IRC 469 applies here.  We often times look to "fail" material participation with business owners (for various reasons).  In this case, think the inverse!

If you are self managing, can you fail the tests?  Likely but it will take some planning! Go through the 7 tests and ensure you fail.  The 100 hours and more than anyone else could be hard as you'd need a 3rd party to spend more time that you (again, think opposite of what everyone else is trying to do here).

Most times, our advisors are applying this to qualify someone's business interest as passive (generally difficult) but same concepts apply to you.

@Dali Wei they may not be explaining to you correctly.

The mgmt company and ability to deduct a nonpassive loss are different subjects.

The MGMT company proposed does not affect your ability or lack of ability to utilize losses from this STR.

@Dali Wei just replied to your other post on this same topic. What is described is not going to work well and unnecessary.

@Dali Wei what loss exactly? You are shifting RE income to active/earned income, requiring payroll (FICA MEDI taxes etc).

There can be a case for a management company for operational efficiency but not as a loss generator. Perhaps you could use the STR strategy? Several posts if on this (if you search) including below.

https://www.biggerpockets.com/forums/530/topics/1056436-clearing-up-confusion-on-tax-treatment-of-short-term-rentals

@Gorden Lopes from a tax perspective no. Id be cognizant of overall average days though!

Cost seg will not be impacted by renting rooms out 1x1

@Gorden Lopes there are moving parts here but more facts are needed.

This generally works if there is a completely separate unit (such as a basement, whole floor etc). For example, we have a client who is in a market where they rent the basement out on a short term basement and self manage. Completely lock/key separate and 0% owner personal use. The basis has to be allocated properly but it worked for them.

If you are in 1 unit and renting by the room with 7 days or less, this is tricky for several reasons.

@Shaival Patel it depends if 1) Property remains in service 2) ROI on accelerated depreciation at 80% on Pool

We had a client who did major backyard renovations but kept the property running and was able to materially participate.