All Forum Posts by: Michael Meegan

I've been researching the short term rental loop hole alot and right now I'm trying to figure out whether to depreciate over 39 or 27.5 and whether or not I have passive activity loss limitations like the $25k cap up to $100K of non-passive income (W2) and then the $25K phases out as you approach $150K of non-passive income (W2) and now I also need to start understanding the difference between schedule C and E and also how I handle renovation expenses whereas are they depreciated or simply deducted. The de minimis safe harbor thing-a-ma-jig is in there and the other caveat is that my STR is an addition on my house. It makes up 24% of my total floor plan and it's exclusive for my guests. My average daily use is 7 days or less, I do not provide services and I did materially participate at least 100 hours and more than any other individual and when I say individual I mean human and I have time logs from them. And my materially participating hours steer clear of investor research, booking keeping, paying bills, traveling to events and education hours.

So which of the schedules, C or E, are you subject to the 15.3% self-employment tax that I keep hearing about? 

In 2022....

I renovated 23% of the square footage of my primary residence (addition on the house that has a private entrance) and launched that space as an STR.

The average daily use was/is less than 7 days.

I kept/have accurate time logs for me and all other individuals during the renovation and after the launch. I participated more than 100 hours and more than any other individual.

I did not use or make of use of the space for personal use.

It operated/operates as a STR using the AirBNB platform.

My expenses were $28,000 for the renovation, furnishings and all other costs associated with launching and operating the STR.

My revenue from the STR was $1,500.

I earned $109,000 of non-passive income at my W2.

1. Do I depreciate over 27.5 or 39?

2. Am I limited to the Passive Activity Loss Limitation of $25K and the phase out, or do I have an exception whereas I can take all of my STR loss towards my non-passive W2 income?

I’m going to look for and find a CPA that knows RE IRC.  Easier said than done when you don’t know what you don’t know, right?

But, I have a strategy.  

I will ask for CPA referrals from other investors in my area and reach out.  I will ask these CPAs if they are taking new clients and if so I will ask them if it would be alright if I explained my operations, income and expenses for 2022 and if that’s alright I will explain and after that if they offer to explain to me how they would file my taxes and explain to me why they will do it that way and why they know to do it that way then honestly I’m not sure what I will do after that.  Because it seems like it would be easier to find Bigfoot.

What on earth would I do with myself if a CPA can actually explain to me what they recommend and why?

I think I may become a tax professional.  It’s the only way I think I’ll ever know the truth.

I will name the firm “Bigfoot CPA Professionals”. Or maybe “Unicorn Tax Preparers”.

I don't know if my CPA understands and is preparing my taxes correctly.

I love her and want to grow my business with her, but I need some knowledge so I can have a good conversation with her.

Here's the scenario:

In 2022 I earned $109K at my W2.  Non-passive income, right?

Also in 2022 I spent $28k renovating 430SF of my primary residence and launched that space on Nov 14th 2022 as a short term rental earning $500 of income for the year.  So I took a loss of $27,500 not counting any depreciation which my CPA said she will still calculate because it will carry over, right?

My average night stays were less than 7 nights and I did work of course to operation the short term rental, but I did not record my hours.  My CPA btw isn't aware of the less than 7 average nights rule thing that's apparently in the tax code.

She does understand the $25,000 cap of writing off losses towards my non-passive W2 income if earned less than $100K and then the $25k cap gets reduced as you approach $150k in earnings and after $150k you can't write off anything.  She did speak to that.

But she says it's ok to write off those losses towards my non-passive W2 income because I'm running a "business".  I'm worried that my business is considered "real estate" and therefore generates passive income and passive activity losses and therefore cannot be used to offset my non-passive W2income.

Can anyone speak to my specific situation and is my CPA doing the right thing by writing off my AirBNB losses towards my non-passive W2 income?

She also said that she will depreciate over 27.5 years and not 39 years because it's residential not commercial, but this is a short term rental not a long term rental.  So is 27.5 correct?

Thanks - Mike

What I'm asking is:

What's the point in getting your REPS?  Where is the tax benefit?

Can you give me an example as to how you would be able to offset your non-passive income with passive activity losses and you're only able to do it because you have REPS?

I don't get it.  Because if your getting income by materially participating in real estate isn't that passive income anyhow? And, passive activity losses will of course offset passive income.  What's the point in getting REPS?

If you get your REPS by materially participating more than half your time in real estate than your passive activity losses can offset your non-passive income, but how is it possible to acquire any non-passive income if you need to spend more than half your time in real estate which is considered passive?

With 3.4 acres sounds like you could really offer an amazing experience for guests with a tiny home built from scratch. That sounds awesome. Sorry I can't offer any insight, but I love the direction of this strategy to get into the STR market using the current asset. If you pursue I hope to hear more. I would benefit from following your progress on this strategy. Thanks @Shawn McDonnell for giving great information about zoning and the subdividing.  Now I want to understand all I can about zoning.  I'm considering the Delaware Beach market for my next buy and hold STR deal.

Devon....Could you guys try the strategy by setting a camper for starters?  Get some cashflow going and build your rental systems while you dig into the zoning and permitting process.

I'm not understanding something.

The NOI of $2,100/month is before the refi, right? And if so, what is the PITIA before refi?

Thanks - Mike

I appreciate you organizing the MeetUp.