- Hey guys, in this video, I'm gonna show you
one phenomenal tax play with short-term rentals
that can put a ton of money back in your pocket.
Okay, let's get started.
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All right, so here's the thing about short rentals.
All right, it's the renting of real estate.
And you may think that the income
or the losses you bring in from short-term rentals
just kind of flows onto your tax return
on your schedule lead
just like all of your other rental income.
Well, if that's the way you're looking at it, you're wrong.
When it comes to short-term rentals,
you can actually treat those as a trade or business
if you meet certain tests under the internal revenue code.
This is something that so many high income earners
are missing out on.
When I talked to a lot of people many times,
they tell me this, hey, Clint,
I wanna be classified as a real estate professional.
And if you've seen my other video
on what it takes to be a real estate professional,
and you know what that means, 750 hours, 50% of your time.
But the fact of the matter is
a lot of people just can't meet
real estate professional status.
Now, why would you want real estate professional status?
For the losses, for deductions,
because when you're a real estate professional,
you can take any losses
you've generated from your real estate.
And I'm not talking about tenants not paying you
because of COVID or some other reasons that they move out,
or they just don't like to pay,
I'm talking about that depreciation.
Maybe you're doing a cost segregation
where you're accelerating the depreciation on your property,
so at the end of the year,
you may have put a lot of cash into your pocket,
but you're showing huge losses on your tax return.
And the key is you wanna capture those losses
so you can offset them against your other forms of income.
Well, there's a lot of real estate investors
as I stated that just don't meet
that real estate professional status.
So what does short-term rentals do for you?
It gives you another opportunity to find deductions.
Now it's kind of complicated, you have to follow the rules,
just like you do with a real estate professional,
but actually the rules are a little simpler
when it comes to meeting this status.
So what am I getting at?
All right, so here's how the internal revenue code
defines short-term rental.
If you have a property that you ran out for an average
of seven days or less, all right?
So if you run out your property for seven days or less,
that's the average, so you add them all up,
how many rental days you have and what was the average day,
if it's seven days or less
or less than 30 days with significant services.
I'll get into that in just a moment, services.
So if you have a rental property,
vacation, Airbnb property,
and you can satisfy one of these two tests,
then it's gonna take it out of the real estate realm.
That means it's no longer considered rental income.
It's considered rental income, or it's considered income
that is from a trade or business.
Now that is the magical step,
because if you can take it out of real estate,
and it's no longer considered income
from rental real estate,
then you're no longer subject to 469 passive loss rules,
and who wants to talk about that
because that's boring and it's gonna put you to sleep,
all you got to know is this, meet one of these tests
and things are gonna look up for you.
So let's assume that I have three short-term rentals
and my average rental days are seven or less.
So I got these three properties here, right?
Got three properties.
Now I just put them into service
or maybe you've had them for a few years
and you've been collecting their rental income on it.
You've been taking some standard depreciation offset
and the income and everything's running fine.
But let me show you now how you can do something
to use these properties to offset income and other places.
For example, let's say your spouse is over here
and your spouse is generating $175,000 a year
in income from his profession,
and you're the one that's running all this, you know?
So you're the wife,
you're running all these short-term rentals,
these three short-term rentals,
and you would like to tap into those properties
to help cut down on this 175,
because you've been looking at it
over the last couple of years, and you're thinking, man,
it'd be nice if we could get some tax savings
from our real estate.
Well, here's how you're gonna do it.
Now, if you average seven days or less here,
the other part of this test
is what we call material participation, all right?
And there's a lot of rules around material participation.
And what does that mean?
So there's seven categories of what it means
that you would materially participate
in this rental activity here of short-term rentals.
Now the most, the simplest one,
the one I'm gonna focus on is the 100-hour requirement.
And this really only applies to individuals
who are managing their short-term metals themselves, right?
If you have a professional management company doing this,
forget about it,
just keep filing your taxes the way you are,
but if you're the one managing them,
then you need to know about material participation.
That means like when I was running my short-term rentals,
I would get on Vrbo and I would set it all up
with the tenants and their stays,
and their stays were averaged seven days,
and so I would be handling all of that.
And personally, I didn't like it, that's why I sold them,
but there's a lot of people that make money on this.
So if you're over here, so here's a spouse,
the spouse is running these properties,
dealing with the tenants as are coming in and out.
And as long as you can show that
she put in 100 hours this year
handling those three properties, 'cause keep a log,
then you've met the material participation test
together with the seven days or less,
which makes their trade or business,
now you're into a whole new realm, okay?
Now some of you may say, oh gosh, Clint,
I don't really get where you're going with this.
Hold on, I'm coming there.
Now what we wanna do with these short-term rentals
is we wanna then figure out a way
to get massive losses out of those properties.
And it's not by having tenants
just decide not to stay there,
it's by taking advantage of the depreciation.
So if I have these three properties here and I go in
and I perform a cost segregation study,
which means I accelerate my depreciation,
and by doing that study,
I'm able to generate $30,000 loss this year,
$25,000 loss on this property
and a $40,000 loss on that property.
What I now have between these two is $105,000 in losses.
I just generate 105k in losses, all right?
So that's what's gonna show up on my tax return.
Now, if you didn't materially participate 100 hours,
didn't have an average seven days or less,
this wouldn't benefit you, okay?
It's not gonna help you.
But if you do it this way, you materially participate
average rental is seven days or less,
and then you perform this cost segregation,
accelerated appreciation, I'm gonna do a video on that,
and you get this $105,000 loss,
now things are gonna be different in your life
because you're gonna be able to take that loss
because it's a trade or business loss now,
and you're gonna be able to offset it
against your spouse's income or your income, whatever it is,
and so now you just offset it there,
and so you have $70,000 in income for the year.
Look at what we just did.
We took our properties that before,
we're just generating income for us
and we had some depreciation and losses standard stuff,
and maybe we were netting out for tax purposes
across all these properties, 25, 30K a year or 10, 15,
whatever it is a year,
now we're gonna go into a (indistinct)
and free up a whole bunch of losses here
that we can accelerate and take against our income.
This is a huge tax play.
Now, do you do this every year?
No, you can't.
This is really a one-time thing.
Now, if you were to furnish these places,
so if somebody is just starting up
and you're gonna go in, you're gonna furnish them,
hey, there's bonus depreciation right there.
You can write off all the furnishings as well.
So let's say I spent $50,000
furnishing these three properties.
Well, there's another $50,000
I'm taking on my tax return against that other income.
You see, it gets even better
when you're understanding how the tax code works
and how it works with your property here.
Now, if I did this this year,
let's say started from day one.
I bought three rental properties this year
that I'm gonna make short term rentals.
I'm gonna write off all of my furniture
that I'm gonna buy, I'm gonna do a (indistinct)
suck up all this depreciation, put it on my tax return.
And next year, if I look at it and I go, hell,
this is too much work.
Guess what?
You can stop.
You don't have to keep doing it.
But as long as you met at that one year,
you get to have these losses.
And here's the thing.
Maybe you're looking at me, you're going Clint.
I don't make $175,000 a year, I make $65,000 a year.
What am I gonna do with $155,000 in losses?
Not pay taxes for the next two to three years,
'cause you can carry it forward.
That's what you're gonna do with it.
This right here is a tremendous tax benefit
for people who engage in short-term rental activity.
Now, one other thing that I didn't hit on was this,
less than 30 days with significant services.
Okay, so let's assume that your rental period
it's not seven days, all right?
So your average rental period is 18 days or 14 days,
whatever it is, are you out of luck? No.
Now, if you're out the average rental period
is less than 30 days, but more than seven,
which you need to then focus on is providing
what the IRS determines
or what they call significant services.
And so now you have to become more like a concierge.
So you have to offer your tenants maid service
while they're there,
offer to set them up on excursions, do something more,
make it feel like a hotel experience for them.
Maybe if they wanna bring in someone
to cook one evening for them.
So they wanna have a dining experience, things like that.
As long as you're out there providing
those additional types of services and document them,
then you can go under this other test, all right?
So the seven days you don't meet that,
but because the average is 12 days or 14 days,
just start offering significant services on top of that,
and then you can qualify under this second prong
that's available to make this a trade or business.
Now you still have to materially participate.
You can't get away from that.
So you've got the 100 hours, 30, less than 30 days,
more than seven is your average,
but you're now giving significant services.
And so then you can take massive deductions as well.
And the thing about this that I've been looking at
is that if you're in the short-term rental space
and you're generating this type of income,
this first year, great, you get these losses.
And I said, next year,
you could turn it over to someone else
and let them handle it again.
But maybe you don't wanna do that.
Maybe you still wanna work in this line of business
and you wanna handle the properties on your own.
Well, if you're handling the properties on your own
and providing that significant service,
what that's gonna also do for you going forwards
is it's gonna allow you to take that income
you're generating from these properties,
and you can now make it active income.
Now active income means that it's eligible to be contributed
to a retirement plan.
So let's assume that you made $19,000, right,
from your rental activity.
You could take all $19,000 of that.
If it came from short-term rental activity,
material participation, seven days or less,
or 30 days or less with significant services,
you need to do this.
You need to give those concierge type services.
Now you can contribute that 19k to a solo 401k,
and you have zero taxable income.
You see, there's just so much opportunity out there
with real estate.
I was talking about asset protection,
but there's also the tax side to it as well
that you need to be aware of,
and a lot of CPAs or tax repairs,
they just don't understand it.
Be sure to watch out for my upcoming video
on short-term rentals,
and if you're a real estate professional,
because that's where we're gonna have a problem
and you have to account for that and a certain matter.
So be sure to watch for that, if you fall in that category.
Otherwise, Hey, if you liked this video,
hit the like button for me.
Got any questions, throw them in there.
You know how I like to respond to your questions guys,
and all the best with your investment.
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