February 3rd 2025.
Short-term rentals are an excellent opportunity for investors to save a significant amount of money on their taxes. In fact, it's possible to save up to six figures in federal and state income taxes through this avenue. However, in order to make the most of this option, it's important to be well-versed in the rules and to plan ahead. Luckily, the tips outlined in the paragraphs below make it easy to navigate this process, and the best part? They're all simple and straightforward to implement.
First and foremost, when investing in short-term rental properties, it's crucial to do so with the intention of making a profit. This could mean using it as a means of building wealth or preparing for retirement. Ultimately, the goal is to invest in multiple properties to gain economies of scale and build expertise. This is important because the biggest tax savings come from investing with the intention of making a profit and growing your wealth. This requirement is outlined in Section 183, commonly known as the hobby loss rule, and Section 162.
Another key tip is to aim for an average rental interval of seven days or less. This is because if your average rental interval is longer than seven days, you may not be eligible for the major tax deductions that come with short-term rentals. However, with intervals of seven days or less, you can potentially save big on taxes if you spend more than 100 hours a year managing the rental. In some cases, you may even be able to get significant savings with just a few hours of work per year. On the other hand, if your average rental interval is longer, you'll be considered a real estate trade or business according to tax law. This means that in order to deduct any losses, either you or your spouse must qualify as a real estate professional by spending more than 750 hours and more than half of your work hours on real estate businesses. This can be a difficult requirement for new or part-time investors to meet.
It's also important to track the hours you spend on your short-term rental business, starting from the moment you begin your search for your first property. This is because even if your average rental interval is seven days or less, you must also materially participate in the business. The easiest way to meet this requirement is to be the only person working on the rental, such as in the case of a single person who purchases a property late in the year and rents it out for a week. However, the most practical route is to spend more than 100 hours working on the rental and more time than anyone else involved. It's also possible to combine the hours that spouses work, but some hours may not count. It's important to document all hours worked, including those of others involved.
Once you've followed these tips, you're ready to start taking advantage of deductions on your tax returns. One effective way to do this is by expensing any individual item that costs $2500 or less as "supplies." This includes items like chairs, sofas, TVs, and appliances. However, it's important to note that you cannot expense individual components of a larger item, such as a bed that includes a mattress, box spring, and frame. Instead, the total cost of providing a place to sleep must be considered. This may seem unusual, but it is allowed by making an election in your tax return, as outlined in Treasury regulation 1.263.
Finally, for those looking to increase their deductions even further, it may be beneficial to pay for a cost segregation study. This study, conducted by a civil engineer or consultant, breaks down the cost of a building into real property and personal property. Without this study, the building portion of a short-term rental must be depreciated over 27.5 or 39 years. However, with a cost segregation study, it may be possible to depreciate the building over a much shorter period, potentially leading to greater tax savings. For example, a $1,000,000 property may be divided into $200,000 for land and $800,000 for the building. The building portion can then be depreciated over just a few decades.
Did you know that short-term rentals offer one of the biggest opportunities for investors to save on taxes? It's true – in many cases, investors can save six figures on their federal and state income taxes. But, as with anything tax-related, there are some rules and planning involved. Lucky for you, I'm here to give you the lowdown. And here's the best part – these tips are easy to follow and not too complicated.
First and foremost, it's important to remember that you should be investing in short-term rental properties to make a profit. Whether it's to build wealth or prepare for retirement, the ultimate goal is to make money. And the best way to do that is by investing in multiple properties, gaining economies of scale, and building expertise. This "pursuit of profits" is crucial because the biggest tax savings come from investing in short-term rentals for profits and growing your wealth. This is outlined in Section 183 (aka the hobby loss rule) and Section 162.
Next, let's talk about rental intervals. It's recommended to have an average rental interval of seven days or less. Why? Because if your average rental interval is more than seven days, you may not be able to take advantage of the big tax deductions your property generates. However, if you do have intervals of seven days or less, you can potentially save a lot on taxes if you spend more than 100 hours a year on your rental property. And in some cases, even just a few hours a year can result in significant tax savings. On the other hand, if your average rental interval is more than seven days, tax law considers your short-term rental a real estate trade or business. This means you (or your spouse) will need to qualify as a real estate professional by spending more than 750 hours and more than half of your work hours on real estate businesses in order to deduct losses. This qualification can be difficult for new or part-time investors to achieve.
Now, let's talk about tracking your time. This is a crucial step for achieving material participation in your short-term rental business. You should start tracking the hours you spend on your rental business from the moment you begin your search for your first property. Even if your average rental interval is seven days or less, you still need to materially participate in the business. The easiest way to do this is to be the only person who works on the rental. For example, if you are single and you buy a property in November, and then rent it out for a week in December, and you're the only one who works on it – you've got it covered. However, the most practical way to achieve material participation is by spending more than 100 hours working on the rental and spending more time on it than anyone else. If you're married, you can combine your hours, but not all hours will count. It's important to document your hours, as well as the hours others spend.
Now, let's get to the fun part – deductions! Assuming you've followed the first three tips, you're now ready to start loading up your tax return with deductions. The best way to do this is by expensing anything that costs $2,500 or less as "supplies." This includes things like chairs, sofas, TVs, and appliances. However, you cannot expense individual components of a bigger item. For example, if your master suite bed includes a mattress, box spring, and antique frame, you cannot expense each of these items separately. Instead, you would look at the total cost of providing a place to sleep. If this seems strange, don't worry – you can make an election in your tax return to write off these items as supplies, as outlined in Treasury regulation 1.263.
Lastly, let's talk about cost segregation studies. This is another way to increase your deductions. A cost segregation study, conducted by a civil engineer or consultant, breaks down the price of your building into real property and personal property. Without this study, you would have to depreciate the building part of your short-term rental over 27.5 or 39 years. But with a cost segregation study, you may be able to depreciate the building over a shorter period of time, potentially resulting in higher deductions. For example, if you buy a $1,000,000 property and determine that $200,000 is for the land and $800,000 is for the building, you can depreciate the building over a shorter period of time, resulting in more deductions.
In conclusion, short-term rentals offer incredible tax savings opportunities, but it's important to know the rules and plan ahead. By investing for profit, tracking your time, and taking advantage of deductions, you can potentially save a significant amount on your taxes. And remember, these tips are not difficult to use or understand – so why not give them a try? Happy investing!
[This article has been trending online recently and has been generated with AI. Your feed is customized.]
[Generative AI is experimental.]
