All Forum Posts by: David Orr

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. 

I think doubling the rent is probably overstating it, and you also have to account for increased vacancy and other costs.  We have one studio that we rent this way on Airbnb, and another that we considered doing but decided not to.  For a studio that we can rent long term for $1100, we can get about $1650 renting it monthly on Airbnb.  Another one that rents long term for $950, we can get about $1350 monthly on Airbnb.  Keep in mind the prices you see on Airbnb when browsing listings include a lot of fees that Airbnb takes, so the owner doesn't get all of that.  And there there is also cleaning and turn-over costs and added vacancy that you have when renting it this way.  

So, it's definitely worth considering doing, but it's not a slam dunk.  

It's a good idea to disclose to renters if there are flood issues.  But not much really happens to landlords if they don't, according to this law.

That last answer about what happens if you don't provide notice is interesting since the penalty is very minimal... "if the landlord fails to provide the required notice and a tenant suffers a substantial loss or damage to their personal property, then the tenant may terminate the lease by giving a written notice of termination to the landlord no later than 30 days after". That's it? I would like to think most landlords would be ok anyway with letting a tenant out of the lease in 30 days if the place flooded and the tenant lost the majority of their personal property. I would think you would probably want them out to repair the damage in most cases anyway.

Has anyone here found that they get better income by renting a house by the room rather than as a whole?  Someone said they do it here, but I wonder why.  (There was another topic about this a little bit ago but it was in the marketplace rather than the Austin forum here.)

We have a house that we rented by the room for a couple years, but we found that the market rate rent for bedrooms (we were at about $675/month in north central Austin) isn't any more than the market rate for a whole house, and it was harder to find renters for rooms.  And renting by the room was a ton more work (more turn over, more issues). I'm curious if anyone has had a different experience with that.