A brand new bill just changed everything for short-term rental investors. If you’re thinking about launching or expanding your Airbnb portfolio, there has never been a better time. In this episode, we break down how the permanent return of a hundred percent bonus depreciation can dramatically lower your tax bill legally, and no matter what industry.

You are earning your money from. I just love real estate. It is by far the most tax favored asset you could park your money in. Stay tuned as we jump into another episode on the short term Rental Riches podcast.

Well here we go, a hundred percent bonus Depreciation is back The big, beautiful bill. Has passed. And as a real estate investor, we have a lot of opportunity. What a great name to the big, beautiful bill. It truly is beautiful And so what does this mean? I’m gonna break this down really [00:01:00] quickly and then we’ll get into the details. But the benefit is that you can buy a property and potentially deduct 20 to 25%. Of that whole purchase price against your income.

Now, I’ve done this a whole bunch of times with my real estate portfolio. If you’re new to the channel, we’ll welcome. I’ve been investing for over 15 years, and I own property in multiple countries and multiple states within the us So this is of course, just for US citizens.

But the good news is it’s quite an easy process, so let’s go ahead and jump into it. It basically says if you buy a short-term rental that.

has an average reservation length of seven days or less, well then it’s considered inactive business. And the rules around inactive business versus a passive real estate investment are different. 

 Most people are calling this the STR. Tax loophole. Uh, and it’s not a loophole in illegal sense. This is completely legal, but you gotta [00:02:00] follow the rules.

So basically what it says is if you buy a short-term rental and you operate that short-term rental with an average reservation length of seven days or less, and you materially participate, well then you can use the depreciation expense from that short term rental to offset your other income.

So what does it mean to materially participate? Well, there’s actually seven different ways that you could qualify, but the two most common are a hundred hour rule and a 500 hour rule. The 500 hour rule says if you buy a short-term rental and you spend 500 hours on it throughout that year, then you are now materially participating.

The second rule says if you spend a hundred hours on that property, but no one else spends more time on it than you, so not a manager, not a housekeeper, then you materially participate. You can do the bonus depreciation cost EG study, which we’re gonna talk about in a second, and then you can use all that [00:03:00] expense to offset your other income.

So now of course, traditional short-term rental property management is not gonna allow you to qualify for this legally, right? Because they very often own your listing. They take full control. It doesn’t mean that you can’t qualify, but it does make it a lot harder. Before we dive in further, I just want to make you aware that I am not a CPA, but we have had some great CPAs on this channel. If you go back to episode 1 56 and 1 57, you’ll find our interviews with Tom Wheelwright. He is the accountant for Robert Kiyosaki, or many of you probably know through his book, rich Dad, poor Dad, and he talks about how you should be partnering with the government.

So great episode, and anything that I talk about today, you’ll of course want to check with your accountant.

So two main ways to qualify to materially participate. You’ve got the 500 hour [00:04:00] option, or you have the a hundred hour option where you spend a hundred hours on the property. This could, of course, be setting it up, furnishing it, getting it ready, hiring your housekeepers, getting everything aligned, and then you could get help from someone else to help you partner it.

And we would of course love to partner with you on that property. We’ve been doing this in dozens of cities across the United States and across multiple countries where we will take over the full operation for you, but you still own your account listings and it makes it easier for you to qualify for some of these tax loopholes.

Now the amount of depreciation expense that you can use to offset your other income is determined by what they call a cost segregation study. It’s an actual study of your property breaking down all of the different components.

This could be anything from the actual structure of your property, furniture, appliances, the roof, the plumbing systems [00:05:00] improvements, and it even goes as far as your landscaping. , when I saw this on a prior cost segregation study for one of my properties, I was truly blown away.

But landscaping can be an improvement, right? If you put a whole bunch of money into landscaping, it doesn’t last forever, and that’s really what this depreciation expense. Is doing. It’s basically saying, Hey, you own this property and it’s deteriorating over time, and because of that, the US government is going to give you an expense.

And so we like to call it a ghost expense because you’re not actually paying for this, you’re not taking this money out of your pocket. And the ironic thing is that even though they give us an expense in terms of depreciation, we know that the values of our properties. Are usually just going up and up.

Of course, that depends on which market you’re in, right?

So that’s what depreciation is in a nutshell. And now normal depreciation usually happens over a schedule. It has a lifetime, so different [00:06:00] things will deteriorate or be expensed over a schedule. Appliances, for example, aren’t going to last as long as a roof, and so any of the components of your property may have a schedule between five.

To even 39 years. But what bonus depreciation allows you to do is to do this study, break everything down, and then take all of that expense in year one.

Now, you can’t do this yourself. You do have to have a professional help you with the study. The good news is. As this tax law has become more and more popular, more and more people are taking advantage of it. I hope you will too. There’s lots more companies that can help you with the cost segregation study.

I used to pay thousands of dollars back in the day for these studies, but now there’s a lot more affordable ones. Meaning if the purchase price of your property was lower. And the cost segregation study is a lot lower, then it can still make a lot of sense for you no matter the value of the property. I [00:07:00] got a couple names for you.

 I’m just gonna read these off. These are well-known cost segregation study companies. The first one is U-S-T-A-G-I check ’em out. We’ll make sure we’ve got all the links in the show notes.

The second one is engineered tax services, and the third one is c. SI, so there’s new ones popping up all the time. Again, make sure that you plan all this out with your accountant beforehand as well. You really do need a plan, and I’ll break down those action steps at the end of the episode today.

Make sure you do your research. Make sure you get multiple bids. The actual study itself isn’t going to take that much time.

Okay, so we’ve got a general idea what bonus depreciation is. We’ve got some companies to help us do this. Does it make sense for you to find a property to qualify for bonus depreciation? Well, that really depends on how much income tax you are paying. It also depends on how much time you have. Remember, you do [00:08:00] have to have an upfront time commitment.

Now, I said upfront because you don’t have to be managing that property in years, 2, 3, 4, or five based on the way the rules are written today. You just need to qualify in the first year.

One of the beautiful things for you, high income earners out there, first of all, you have more money to invest in real estate, but you can also carry those losses forward.

So let’s say you went out and bought a $5 million property. You went through the cost segregation study, you made sure that you materially participate, and maybe now you have potentially a million dollars of bonus depreciation to use to offset your income. Well, it doesn’t mean you have to use it all in year one, and that’s the beautiful thing.

You can carry that loss forward. So let’s say you had $300,000 in income tax. You can use that to write off a whole big chunk, but then you have $700,000 left over for the next year and the following year until you’ve used it all [00:09:00] up.

So the real quick action plan, decide if this actually makes sense for you. Talk it over with your CPA, decide if you have this upfront time to invest. And now remember, it could be a married couple, and so if you are filing jointly and one of you is making a lot of money. But you file jointly. Well then the spouse can spend time on the short term rental and you could still qualify.

Remember, double check with your accountant.

Next step, find yourself a property. And I gotta say, today’s market, I think’s not a bad time to be shopping around prices have softened and it is definitely a buyer’s market, so you can negotiate your way through a lot of good deals.

Okay. One other thing to keep in mind, if you’re going for the a hundred hour rule, you may consider buying a property in the second half of the year where you are going to spend more time setting up the property, and then later you have a manager take it over after you’ve qualified.

So really all this just comes down to planning. [00:10:00] Actually qualifying and taking bonus depreciation is really quite easy and straightforward.

One last thing to consider is that if you do go through the process, and you decide to sell this property that you took bonus depreciation on in the future. Well, there will be some tax consequences.

You of course may have a capital gains tax, so that’s gonna be the difference in value from the property. The price that you paid versus what you sold it for. Let’s say it was a million dollars and you sold it for 1.5. Well, you have $500,000 in capital gains tax, which is a lower tax. It’s lower than your income tax, but you could also have depreciation recapture, which is another tax on that depreciation that you took, and it can be up to 25%.

And one of the other amazing rules in the real estate world tax benefits is a 10 31 exchange. So just because you sell this property in the future doesn’t mean you need to pay those taxes. As long as you’re rolling that [00:11:00] investment into a new investment, you can defer those taxes and you can defer the amount that you save from the depreciation.

So I hope you found that helpful, and if you’ve been on the sidelines for a while and you haven’t pulled the trigger yet on a short term rental, and you’re also earning a lot, and paying a lot in income tax, well, this is just an incredible opportunity.

Make sure you check with your accountant. Until next time, I hope you have a fabulous week.