STR Investors: Your Tax Bill Just Got Slashed

The tax code just handed short-term rental investors one of the biggest opportunities we've had. What if I told you that you could buy a million short-term rental, put down $200,000, and potentially write off that whole $200,000. Now, this ratio of numbers pretty much works for any purchase price. So, if it was a $500,000 property, you could potentially ride off around $100,000. Today we're breaking down one of the best pieces about being a real estate investor, and that is the ability to take deductions from our taxes

based off depreciation. Now, with this new bill that just passed, even if you are not a real estate professional and you work in a completely different industry, you have a lot of opportunity to offset that income tax with a short-term rental. We're going to break down the whole process today. How much you can save, where you can go to find someone to help you with this process. We'll take it from start to finish. Stay tuned. Well, here we go. 100% 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. 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, well, 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, it basically says if you buy a short-term rental that has an average reservation length of 7 days or less, well, then it's considered an active business. And the rules around an active business versus a passive real estate investment are different. Most people are calling this the STR tax loophole. And it's not a loophole in a legal sense. This is completely legal, but you

got to 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 7 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 100 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 100 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 seg study, which we're going to talk about in a second, and then you can use all that expense to offset your other income.

So now, of course, traditional short-term rental property management is not going to allow you to qualify for this legally, right? Because they very often own your listing. They take full control. 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 156 and 157, you'll find our interviews with Tom Wright.

He is the accountant for Robert Kiasaki 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. It's a great episode and anything that I talk about today, you will of course want to check with your accountant. So, two main ways to qualify to materially participate. You've got the 500 hour option or you have the 100 hour option where you spend 100 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, 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 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 1. 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 got a couple names for you. I'm just going to read these off. own cost segregation study companies. The first one is US AGI. The second one is Engineered Tax Services and the

third one is CSSI. 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 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 5 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 dollar 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 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, the spouse can spend time on the short-term rental and you can 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 market. So, you can negotiate your way through a lot of good deals. One other thing to keep in mind, if you're going for the 100 hour rule, you

may consider buying a property in the second half of the year where you're 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. 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 going to be the difference in value from the property, the price that you paid versus what you sold it for. or let's say it was a million dollar 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 can 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 1031 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 investment into a new investment. You can defer those taxes and you can defer the amount that you saved 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.