All Forum Posts by: Account Closed

So its not very clear in the pubs anywhere... the exact time between making it an STR then converting to a MTR is at minimum 1 year.

 Happy to help Salvatore! 

 Yes you can you need to pass both tests. 7 days or less and the material participation test which I have outlined above 

the 100-hour requirement can be met collectively by you and your wife if both of you are materially participating in the business. The IRS generally allows spouses to combine their hours for the purpose of meeting material participation requirements, especially when both are members of the LLC.

 Biast answer here but i do think its time to hire a professional. Lots of people wait until its a huge mess and they end up paying more then if they had just gone to a real estate focused accountant to begin with. Accountants in my view should be viewed like an investment. if you can spend say 1000 dollars and get back 5000 or even 20000 in savings, it makes sense. You also save aton of time and headache. As for finding one, as accountants, we are not allowed to promote our services as it is against BP rules. I would suggest reaching out to those providing help in the forums! 

One downside I see to this strategy from a tax perspective: You are unable to take advantage of the STR loophole which is a massive offset of your tax liability for many folks. For high income earners, they may want to do an STR and a house hack separately rather then doing this as the net net of it all may actually be higher in some cases.

Hey Marc! 

If you work a W-2 job and want to take advantage of short-term rental (STR) bonus depreciation, you can do so whether the property is purchased through an LLC or in your personal name. An LLC is a passthrough entity for tax purposes unless you make a C corp election. The key factor is ensuring the property qualifies for favorable tax treatment by adhering to IRS rules regarding short-term rentals and material participation.

For the 7-day rule, the IRS requires that:

The average guest stay must be seven days or less for the property to qualify as a short-term rental.

If the average stay is 30 days or less, you must provide substantial services similar to what hotels offer, such as daily cleaning or concierge services.

Regarding material participation, to further classify the income as non-passive, you must meet one of the following criteria:

You spend more than 500 hours actively managing the rental in a year.

You manage the business yourself and spend at least 100 hours, with your involvement exceeding that of any other person involved in the rental.

Please note there are actually 7 ways to qualify, the above two are the most common. Hope this helps! 

Hey Shawn happy to help chime in here: 

1. Does this sound valid, or are there many more complicated steps for this to work?

The strategy you're referring to could work in principle, but there are a few important considerations. By using short-term rentals (STRs) at the end of the year and switching to mid-term rentals (MTRs) afterward, your clients could indeed bypass the Real Estate Professional (REP) status requirement. This works because, for short-term rentals, the IRS rules allow income to be treated as non-passive if certain conditions are met, such as offering substantial services and meeting material participation tests. Since REP status is difficult for full-time doctors to achieve, this approach allows them to take advantage of the tax benefits (e.g., cost segregation studies and bonus depreciation) without qualifying as real estate professionals. However, for the strategy to be effective, clients must ensure that they meet all the IRS requirements, such as maintaining the short-term rental for a sufficiently long period and passing one of the material participation tests (e.g., 100+ hours of active participation).

2. What would happen if someone used the above steps, and instead of transitioning to an MTR, they got out of the rental game and turned their property into a vacation home?

If the property were transitioned into a vacation home after a short period as an STR, this would likely complicate the situation regarding tax benefits like cost segregation and depreciation. The IRS distinguishes between rental property and personal-use property. For depreciation and cost segregation benefits, the property must be used in a trade or business (i.e., generating rental income). If you switch the property to personal use as a vacation home, you would no longer be eligible to claim rental-related tax deductions, including depreciation. The period during which it was rented as an STR may allow for partial deductions, but transitioning it to personal use would limit the amount of depreciation you can claim going forward. It's also important to keep track of personal versus rental days, as too much personal use can disqualify the property as a rental for tax purposes.

For results, RE cost seg (our partner for full transparency) built a calculator that allows folks to see conservative and then more aggressive estimates. I can send the link to anyone who is interested. 

 Of course happy to assist!