All Forum Posts by: David Orr

If your business is fairly simple, I would say any of us who specialize in real estate also can handle a typical Schedule C sole proprietorship or small business, since most of our clients do have other income, often including small businesses.  If the business includes inventory, employees, partners, etc., that may be out of the scope for some real estate specialists.  You could contact me and/or some of the other accountants who you see posting in this group for an initial consultation or to ask about some of the specifics to see if it would be a good fit for you.

A note about the Certified Tax Coach program mentioned in the other comment.  I think that's a small privately-owned group that tax preparers can pay to join (if they meet certain requirements).  I don't think it's related to real estate tax specifically, as far as I can tell. 

Yeah, that's a good question since REP status only makes sense if your primary job is a qualified real estate profession, and you can't qualify as just a W-2 employee (unless you own 5% or more of the company).  So, when does it really offset W-2 income?  A common scenario we see a lot is when there is a married couple filing jointly and one spouse has W-2 income and the other is a real estate professional (such as a real estate agent, or if the spouse manages their own rental portfolio).  It's perfect for that situation.

Aside from that, REP status can also offset your business or self-employment income.  So someone who is a real estate agent for commission is again a good example of that situation.

It is possible to do your own taxes correctly with TurboTax, but there are some things to watch out for.  A big one is make sure you carried forward any unallowed passive losses from your previous year's form 8582, and other carry forward amounts from your previous tax return.  If you have rental properties, there's a very good chance you had built up some unallowed passive losses, and if you don't find that info from your previous return and enter it in the software, it just goes away.  Just this week I filed an amended return for a client that used a CPA/EA who did their taxes and completely neglected to enter their passive loss carry forward (even tax pros often make that mistake).  And that means missing out on what can often be a huge tax savings in future tax years.  

The other thing people tend to often get wrong when they do their own taxes is depreciation.  It's not really optional, you essentially have to claim it, and this is another item where you have to be sure to correctly enter the past depreciation amounts from the previous tax return.  

Other than that, mistakes related to expenses are common, and not electing things like the De Minimis Safe Harbor election, which can save you if you get audited.

An option you might want to consider if you do your own taxes is at least have a tax professional review your return after you complete it (but ideally before you file it).  Not all tax professionals offer that as an option, but some of us do, and it can be a fairly inexpensive service.

Treasury Regs 1.469-1(e)(3)(iii)(C)(1) addresses that scenario, and it's not good news for your situation unfortunately.  If you have a stay that runs through the last day of the year, you have to count the entire length of that stay when calculating the average stay for the year.  

I'm happy to answer any other tax questions for anyone looking for tax help, and I also do free initial consultations. 

Primarily, I would just recommend looking for a tax professional who specializes in doing taxes for real estate investors. There are some generalists CPAs/EAs who know how to correctly handle taxes for real estate investments, but unfortunately the majority don't. If you have long-term rentals, the most common misconceptions are generally around properly calculating depreciation (proportioning the value for improvements vs. the land, which isn't depreciated, and also including applicable closing costs in the depreciation/amortization). And understanding when real estate losses can offset other types of income, and when rental losses can qualify as non-passive. If you have short-term rentals, then the common misconceptions really multiply, including using the right depreciation period (39 years), using the right schedule (it's generally still E, not C), and considering if a client qualifies for the "STR loophole" (most generalists typically won't know about that option at all). They should also be able to help with advising whether a cost segregation study or other accelerated depreciation strategies make sense in your situation.

Those are the kinds of things I would ask about.  I specialize in taxes for real estate investors, and so do a lot of the people you see posting in the forums here.  I'm in Texas, but a lot of us work with investors in all parts of the country.  If you're only wanting someone local, that does significantly limit your options, and there may not necessarily be a real estate specialist tax professional in your area.  But you can try doing some Google searches and also looking through the posts and other info here and it's always possible there may be someone. 

I assume he was referring to the "STR loophole".

If the taxable income from a rental property is negative (which can happen thanks to depreciation), usually you can't use that taxable loss to reduce the taxes you pay on your regular W-2 or business income. But there are several exceptions, including the "STR loophole". If you have a rental with an average stay of 7 days or less, and you "materially participate" (basically, if you self-manage it), then you qualify to have your taxable losses from it reduce your regular income.

If your rental isn't producing a tax loss at all, there are ways to accelerate the depreciation (cost segregation combined with bonus depreciation), which can give you more taxable losses sooner to get you a big tax deduction.  The trade-off is you use up some of the depreciation that you would normally have for future years, but the trade-off can be worth it depending on your situation. 

First, even an STR that isn't rental arbitrage may in some cases be reported on a Schedule C rather than a Schedule E depending on whether you provide "substantial service".

In the case of rental arbitrage, I believe the best and arguably only acceptable choice is Schedule C.  The rent you pay is an expense and it would go on line 20b ("Other business property"). 

Why Schedule C?  First, if you're generating a positive net income, the Schedule C is the safe choice because you're paying more tax (specifically the self-employment tax), so you can't be faulted for tax avoidance as you could be if you improperly use Schedule E.  Secondly, I think it's at best questionable if Schedule E can be used for rental income from a property you don't own.  I haven't found any guidance from the IRS that says that Schedule E can or can't be used for rental income from a property you don't own, but the Schedule E instructions and related guidance all seems to be based on the assumption that you own the property.  I don't think rental arbitrage was considered when the relevant tax law and guidance was written, so it may be an area of uncertainty.  And in that case it's best to err on the side of caution, and that would mean using Schedule C instead.  

@Jordan Moorhead Do you have the numbers on how much he charges for the rooms vs. how much the whole house would rent for?  I just haven't seen rooms posted for rent at prices that are more than what someone would get for the sum of renting out the whole house.  Does he advertise them on Facebook Marketplace or somewhere else? There have typically been rooms for rent on there starting from around $600/month, which isn't a lot of money compared to what the whole house would rent for.

Maybe he rents the rooms out fully furnished?  A furnished room posted on Airbnb, etc. would probably bring in more income.  I did consider furnishing it but didn't end up trying it.

There was another discussion on here about this a while back.  It makes sense if you're talking about renting out rooms in your own house and you want to be able to rent out part of your house and still live there also.  (But actually, I would instead do what we did, section off part of the house and just rent out part of the house if you can and keep your part of the house private for you.  We put a fridge, hot plate, and microwave in a hallway and sectioned off that part of the house to rent out, worked great!)

But if you're talking about choosing to rent out a whole house by the room instead of just renting the house as a whole, my experience is it's a huge hassle and it doesn't make any more rent.  Some people say they can get more rent that way, but we tried it with a awesome house in the center of Austin that's great for students and young singles etc, but I found we couldn't get any more money by renting it by the room than we could renting it as a whole.  People just aren't willing to pay as much to rent a bedroom in a shared house in Austin.  But they will pay a good price to rent a whole house.  

And when you rent by the room it's a TON of work. One room renters tend to not stay as long, about a year at most.  With 4 bedrooms and each person staying about a year, that means we were looking for a new renter on average every 3 months!  And they had to get along with the others.  And we had to deal with conflicts, issues with the common space, etc.  All that and we couldn't get as much rent as we did when we finally just rented it out as a whole.  Renting by the room was a complete mistake for us.

Homads.com https://www.homads.com/ is an Austin-based website that exclusively focuses on MTR listings.  It's free to sign up for it and it's worth listing it on there. We do get some leads from it, which is nice because while there are some fees it's still cheaper than the Airbnb fees.