- Hey, what's up guys.
In this video, we're gonna talk
about that real estate professional status,
and how it could hurt or help
your short-term rental side of your investing.
Okay, let's get started.
(gentle music)
Okay, so if you're watching this video,
I assume you've already watched my video
on real estate professional,
and you watched,
that first short-term rental video I just cut
about what it takes to claim the tax deductions
that come from short-term rentals.
But here's the problem,
I said in that video that there's an issue for you
if you're already a real estate professional
and you're running short-term rentals
that you could collide, and you could be missing out,
and screwing things up for yourself,
where you're not gonna be able to capture deductions.
And so what I wanted to do was address that issue.
So really high level, real quick,
remember, real estate professional,
if you wanna be a real estate professional, REPS,
you need this 750 hours devoted to real estate,
50% of your time, all right?
And you have to materially participate
in your real estate investing.
So this is for you know, just standard rental activity.
Now short-term rentals,
what we talked about earlier in the previous video,
if you want to take advantage of short-term rentals
that is get losses from those,
maybe doing a cost seg,
freeing up some losses out of your properties,
then you have to do this,
average rental period seven days or less,
and you have to materially participate in the activity,
or it's 30 days or less plus significant services,
that also has to be in there, so you have two options there.
So here's the problem for someone
who qualifies as a real estate professional,
so you've already done everything
you're supposed to do there, right?
You're running your properties,
maybe you have a portfolio
of say, I have 15 homes over here in Ohio.
So these 15 homes in Ohio, where I live,
live in Cleveland, and I've been working these properties
and I'm a real estate professional,
I'm meeting all the tests,
and now I decide to get into short-term rentals
and I start buying some properties up,
and so now I acquire three short-term rental properties.
And so I get these three short-term rentals,
and I don't know about these particular rules over here
and what I'm required to do,
and so I list them out for rentals
and I start putting people into them
and the average stay let's say is 12 days.
And I'm not doing anything significant services wise
so I'm not, you know, going out there
and offering concierge level services
to the people that are staying there
to help move me in to that phase
where I'm able to capture the deductions
from these properties,
and I decided to do a cost segregation study on them.
Why am I doing that cost seg?
Because I want to free up tax deductions
off these properties.
So I do a cost seg, and all three properties
generate for me $75,000 in a loss that year.
But I also did the same thing up here
on my traditional properties,
and I was able to pull out here an $80,000 loss.
So now I figure, when I go into my tax repair,
I'm gonna take the 80 plus the $75,000 loss here,
when I'm gonna show $155,000 in losses
that I can use to offset my spouse's income,
my other income,
and so I'm feeling really good about what I did this year.
Now here's the problem, okay?
As a real estate professional,
remember, that's what we're talking about here,
if you're a real estate professional
and you're in this one little zone,
and it is pretty unique,
but you could find yourself there,
if you're in this one little area
where you're not fully qualifying over here
for the seven days or less,
or material participation with these properties,
or the 30 days or less with significant services,
if you don't qualify those short-term rentals
to be that trade or business,
then the losses you pull out of here,
well, actually let me rephrase that,
you don't qualify to deduct them
because it's still a trader business,
but you didn't meet either this test
or the material participation test,
that's the problem for you.
Because the losses here, the 75K, you cannot add to the 80.
In fact, what they're gonna do
is they're gonna suspend these losses
and say you can't use them.
They're passive losses to you.
So as a real estate professional,
you get out of the passive loss rules under 469
because you meet that test on these properties,
but these are rentals.
The short-term rentals, although we call them that,
they're not rentals from the IRS's position,
from the internal revenue code.
This is income from a trader business,
but it's income from a trader business
of which you didn't materially participate
or provide significant services,
therefore it's passive.
And now you can only offset these losses
against other passive income,
which doesn't make me happy
because I have income from W2
or my spouse does from working at their job,
that's not gonna free up these losses for me,
they're just gonna get stuck and suspended.
So what I'm telling you if you're trying to figure this out
is that if you are a real estate professional presently,
and you wanna start engaging in short-term rental activity,
you have to meet these tests,
go back and watch my short-term rental video,
you have to meet those tests.
If you do not meet those tests,
then don't consider taking a cost seg on these properties
and trying to accelerate your depreciation
to create a bunch of losses, unless you have this,
huge passive income that you need to write off for the year.
So if you have passive income you're trying to write off,
then yeah, it would make sense
'cause these are gonna be passive losses too
so I could see you wanting to do that,
but ordinarily, it's not an area
in which we would wanna go at this point in time,
so hold off, you don't need to go
and try to create the losses
on that cost segregation study today,
wait until the future
when you're able to meet one of these tests, then take it.
So the thing is, real estate professional
in short term rental, these are two separate activities
and you cannot group them.
That's what you need to know
if you're operating in this sphere,
because I've read some cases on it
where real estate investors have been shocked to learn
that the stuff they did here didn't help them here
or on the other side of their tax line
where they had active income coming in,
'cause they didn't know.
Now you do so you won't be a case I'll be reading about.
Hey guys, if you got any comments, leave the comments below.
If you like it, be sure to like it,
and hey, subscribe to the channel as well.
Thanks for coming, take care with your investment.
(gentle music)