In the short-term rental riches will discuss investing in real estate with a specific focus on short term rentals quick action items to wire. Scale your portfolio I’m your host Tim Hubbard.

Welcome back to the short-term rental riches podcast happier here again as always and I’m happy to have them in the hall and back with me again for the second part of this 2 part series she’s with keystone CPA she’s my tax adviser and my accountant and we covered some really good topics last week so if you missed it make sure you catch it because it will be relevant to you if you’re short terminal investor or your real estate investor in general so I’m excited to be back for the second part covering again some really really important topics without further ado let’s jump back in. Now we do have some things to consider when we’re depreciating the real estate though and that’s when we want to turn around and maybe sell the property later on you want to explain how that works with the added back in yeah so the way it works is when you take depreciation you you are basically out reducing your cost basis in the property right so let’s say I bought the property 400000 I took 20000 depreciation now my remaining bases is 80000 right that’s what I paid for that I I haven’t used it yet so later on when I sell that property let’s say cell of $400000 now I have a tax gain of 20000 because I already wrote off that first 20 so later on when I sell it part of that becomes taxable income even given that though it is still beneficial to take depreciation because you are still delaying the taxes into a future here when you actually sell the property but Westfield today we’re getting a tax saving which is more money for me to reinvest in the interim but I’m also we don’t with respect to real estate at least currently we still have the ability to do a 1031 exchange which is that let’s see I do you want to sell this much amount on a couple years then later on if I replace it with other rental properties I should be able to do for the taxes on the gains as well as the depreciation that I took already that’s a huge benefit for real estate investors that you know something that there’s been talks that might go away and so we’re hoping that that will stay around for a long time yeah fingers crossed and we talked about 1031 exchanges before another way you might be able to incorrect information but you might build a deferred is if you invest in an opportunity zone shows yeah that yeah either potential option yes so currently you know to the extent you sell popping out capital gains you can delay the taxes it’s bass that into 1. Opportunities only it could be opportunities on real estate could be a business located in the opportunity zone but for the most part well we have clients that are reinvesting in the O. zone it is as a passive investor in other people’s deals I think I only have one client who’s kind of redoing their offer only opportunities on just because there’s not a lot of work that needs to be done it’s more than just buying a property that’s located in the zone you have to actually do significant improvements to the property in order to get the tax benefit but yeah that’s what you know that’s so that’s a great. In terms of tax deferral you’d look at 1031 exchange opportunities only there’s also offset strategies right let’s say that I’m selling those this rental property and I’m not ready to buy yet I’m not ready to buy another. A party within the next 6 months well if before the end of the year I do end up buying more real estate even though it’s outside of the 1031 exchange period as long as it happens within the same year I can still use depreciation cost segregation right off from that new rental to reduce the taxes on the rental that I sold to right so you said it outside of a 1031 exchange as well you know that tax world is always changing right and it’s so it can be really complicated I know a lot of times I get confused and that’s why it’s just so important and something that I think a lot of people leave till the end of the year right and they’re like 0 how can I figure this out but but really it’s something that we need to be thinking about all the time especially for getting into big investments or plan on selling or buying or whatever we’re doing it’s really something that we need to consider the whole way through 1 of the things that you taught me early on was just finding an extension I use the number do that yeah yeah I know so I think some people are just kind of afraid of the concept of extension but it’s actually something you know obviously the IRS allows you to do so either the benefit of having an extension anyone or if anyone who’s not organized yet and you know as you get the more more real estate there’s a lot more things to account for it so takes longer but you can’t really just close your books a month longer to get everything in and make sure you’re catching your expenses so the benefit of expansion that gives you more trying to analyze all the numbers and get everything right rather than pushing it to the able to the other benefit that we really like about extensions is it gives you insight into the following year you know so right now we’re trying to figure out okay if we already you know if I have a file last year’s return yet if I know okay laid out you know 86 months later I know all I was gonna do it a conservation by I might sell this property Oct. Are all you know I might not do it in 31 and changed and now we have that makes sense okay knowing what I know today to help my one of my last years which hurts and those are things that sometimes it’s impossible to answer right you don’t even know the answers back by February or March or April because some of those those transactions come to your head or become available to you later on in the year and then the transactions in that year you know might impact how you would want to file the previous year’s tax return so that’s another benefit of doing sanctions I will say though you know there are some things that come with extension and that the IRS allows you more time to file your return but you don’t get additional trying to pay the taxes which means you know what taxes you do you want to change them before April 15 to try to avoid or minimize any potential penalty. All right which would just be a in interest charges on the amount the potentially L. yeah yeah something like that he’s right so he owed something by me and sell June then there’s 2 months worth of interest and penalty then yeah I know some investors do you weigh the cost of that against you know the cost of them to borrow money it like when the loans and things like that so yeah that certainly is a consideration as well yeah I remember a suggest trying to cram everything in before that deadline and then it’s like you know you file your taxes in 2 weeks later you discover something else that you could potentially written off you know maybe some plumbing renovation for 1000 Bucks well now to go back and amend it one that he has just a pain in the **** right and can be costly yes Sir because you money to maybe a man dead you know painted to redo the work and also more importantly the increased and honored right whenever you have to do an amended return you need to tell the iris what changed you know why did these change and so it’s kind of you know and just kind of that the the process of explaining all cash for god upon the receipt and all that I just raises an eyebrow that you otherwise maybe didn’t meet you so that’s certainly something to you know take into considerations here a lot of I people when they’re starting out with short term rentals were investing in general they and this is what I did is I bought a 4 plex right so I lived in one unit and renovated the other ones run an amount which is both your primary residence but also investment property but because it’s an investment property you get to write off the percentage of the investment right right now you also have some benefits with it being your primary residence were you get your personal. Zacks exclusion on the call but 250000 if you are a pro gains yes your honor just explain kind of how that might work if someone out there has a smaller multi family property up to a 4 plex in there either you’re running it was short term loans but it’s also a primary residence yeah things that we do see that a lot of qualities especially people starting out for people who are in a single they’re able to kind of move around quickly so yeah the way works for me and in a simplistic example all right that you know so if it’s a let’s say to a duplex 1 unit as a rental 1 is a primary home so on the unit as a rental property you know it’s treated like any other rental short term rental where you’re taking depreciation on the property or right all you know all the costs associated with that property including rehab clinician and all that now the other side that other part of the duplex which is exactly well you’re still running up the mortgage interest and property taxes and your home and if you have a home office in there right let’s say 1 of the brand right now my office like normal and the benefit is eventually if you were to sell the property you know part of that gain would be tax free assuming that you lived in that unit as your primary home trend these juniors repairs within the data sale so so you you know as a single person you screwed up to 250000 if you’re married up to 500000 and then the other part that’s the rental portion you know he’s not regain you could potentially do a 1031 exchange so that superpower where some tax be some taxes were all the writing off on both parts of back to backs even if it wasn’t a duplex or a 4 plex but maybe they had a guest house they’re renting the guest house is still gonna sort of function the same way right yeah so that’s a similar in terms of you know eventually when you sell the key is you know for that to be primary home for at least a minimum of 2 years in order to write a home game excludes. Yeah mark your calendars everyone that’s important day. I you know I I’ve done that before and I I mean it’s amazing if and especially all the money that we’ve been training in an inflation in asset prices are going really high so a lot of people have a lot of equity in their homes right now yeah and to be able to take that tax free man let’s just say that’s a really powerful one for sure and you know you can use a one time deal right so so you can that strategy over and over again I live here in over 2 years and solid move into another place to live there for a couple years and solid well we do have clients who kind of use that as a strategy in going forward as well and I think it yeah I mean you’re exactly right in that you know I mean it’s no secret the government has been printing money and yes we we we we have to pay rise I know it’s crazy so it is really important to to spend the time to think about I know people don’t like to talk about taxes. Because it’s you know can be very scary and unpleasant but I think you know you seem like a nice meal from your own experience how tax savings could be so impactful right when you do when you saw him packed full of doesn’t have to be the super scary thing and you know I’m and going back to what you’re saying about leverage you know if you can save $10000 in taxes that could be $50000 more of real estate right if you USAA the right right if he’s 20 percent down yeah taxes super super important I highly encourage anyone out there just spend more time on your taxes you should be tax planning right it’s a it’s a year round type thing and I think people are often scared to just tax planning itself sounds really scary but I think you know from working together it’s really that I mean our goal is not for you or any of us are to become a CPA and understand everything there is to know and I think even some of the things we talked about you’re likely I didn’t know that. This is true. But really the the job of investors to just have the basic knowledge but but really that the key action items just to make sure that you are updating your CPA and your tax adviser before transactions occur you know here’s what I’m thinking what are my options what’s the tax just so you don’t get a surprise you know tax bill at the end right and that’s that’s really all you need to do. So quick example real life example of this right now I’m selling some condos and before we decide to sell them I emailed me and said Hey Amanda I’m looking at selling these properties I think this is what they can go for and this is when I you know and we’re able to get a rough estimate of what my tax burden would be either in the current year potentially in the future your cell this particular property we decided to sell next year so it was closed now we’re in next year. Anyone. So is supposed to close in 1 week so right after the new year turns but that basically gives us a whole year to do some more planning right we have a limited time if we’re going to do 1031 exchange but we have other ways to expense maybe some of the income capital gains from it from a different spot exactly so that’s the exact the were talking before about you know if you know certain so first step is okay what is the potential of taxes and the U. S. investor make the decision do I want to do a 1031 exchange I want to go into a different business venture and if so then are there offsets strategies from my new business right if it’s a long term management the start of business are there off the strategies where I can use this to offset the real state game so yeah that’s the timing is key to write like if you’re just selling it you have all year and if at the end of the year before the end of the year you say Hey I do want to do more real estate than great you buy more rental properties and then that could be used to offset the gains on the properties are selling in January let’s just talk about some of the basic expenses someone someone’s invest in real estate or investing to turn into a short term rental we get that we have a lot of expenses a lot of different things we can write off and so for the short term rental that can be the furniture of course which they can look at doing the bonus depreciation of the do it Cottonelle need a cost segregation for that as well right yeah furniture and furniture you generally don’t need a conservation because it’s something that you are buying yourself right you you’re going all right right okay yeah classifications usually for the the kind of the internal components of the building things that you and I don’t you know we can’t break out maybe visual we are you know so that’s what that would be like cabinets like built in cabinets and stuff like that flooring yeah okay yeah I mean furniture is that you know strangers pictures up lions use 1 I specially for short term or short term right. And now there is there’s a there’s a point there where you can either write off all of that expense in the first year or you have to depreciate I think it’s 2000 something or what is that. So yeah that’s a good question so the the 2500 years but did minimus wall which says if you have an improvement that you’re making sure they’re real estate but if it’s under $2500 you can write those off immediately the full expense yeah as an expense now store furniture picture buying things like that a currently at least those are considered usually consider 5 to 7 your property so even if it’s over that dollar amount we can take what’s called bonus depreciation which essentially result in the same answer of immediately writing all on Monday in the first place and insists are best so we had 2 different firms used a little bit differently but the result is okay so I’ve got all of our furniture any improvements but we also have a lot of smaller time expenses like consumables and into a toilet paper and cleaning products and things like that that we’re gonna be able to expense yeah right the little tale those usually are just consider supplies you know operational so quiet write those off the only things that we you know we talk about depreciation those are things that have a useful life of longer than a year I know people are hoarding you know toilet paper and stuff like that yeah probably gonna use all that I’ve been in. Do you have a short term Airbnb guest like hoarding your toilet paper stash. I’m sure that we had more toilet paper disappear than we normally would. I wasn’t monitoring that role per roll mmhm you know we recently went to a hotel supplier and purchase like just I’m awake 0 or something rolls at a time so you are the horrors. I am the order now. But while yet toilet paper got really expensive there from home especially if you’re ordering on Amazon which is what we had historically done I mean yeah it I went through the roof any I can’t run a rental with no toilet paper so. You know. Okay so we got our supplies we’ve got our we’ve got our furniture constantly renovation cons now I need the loan side we get to write off any origination fees or an appraisal and also interest stress yes so the interest you right off immediately the long because the all along consular service here you know appraisals origination fees closing costs are bills are generally amortized so long these are generally amortized over the life of the loan so you have a 15 year long right off over 60 years of Yemen 30 year loan it goes off of it 30 years you know I just think comparing short term versus long term rentals you know the first your start up cost is obviously you know higher usually speak for short term versus long term just because of the furnishing and supplies and all you have to stock but really you know of my castle perspective we see much better performance than short term rentals and also from a tax perspective to like you know long term rentals you know I mean if you make under 150000 it’s fine we don’t really care about real estate professional or any of that bye if you make over 150000 you’re really you know the goal would be to try and qualify as real estate professional status of course it’s much larger runs balls you know again the the you don’t have to worry about real estate professional just need to want to meet the material participation which is like 500 hours yeah there’s actually 7 task I will go over in almost all of them just because a lot of them is a are very difficult to qualify for the 2 most common when one of the 500 we talked about the other one is actually somewhat easy still so the other one is that you can’t spend 500 then you what you have to spend at least 100 hours in the short term rentals and you have to spend more time than anyone else in the short term rental property if you have a cleaning crew for example that goes in you have to compare that how much times in spending versus how much time at the cleaning crews writer P..Gardner and you got repair people remain. One company that’s what you’re up against your time worsens they are trying so that’s the second here we have some clients that try to go under that but yeah I think the strongest one is to try to go. This is all sort of new or relatively new I guess I should saying and so actually determining that like if if you had you know housekeepers hours verses like a receptionist hours for example someone in answering calls answering messages I mean I guess it’s kind of hard to to really prove maybe the one spending more time than the other I don’t know if you know. Right and that’s the thing yeah I mean in the short term rental spaces from you right in general and so the tax side of it the audit team of that is is also here as well so yeah that’s one of the hurdles that I see in court cases or is they okay well how do we prove how much time the cleaning crew was there are some other week rules how much time the property management company was there versus teams time right it’s a difficult question to answer but I think you know the downside of it is when it comes to taxes are one of these days the taxpayer is guilty until proven innocent hi so it’s always upon us to prove our case and you know if if you can’t get. The the hours records from your cleaning crew for example then the next best thing to do is to should be able to get at a reasonable amount of hours a week okay well reasonably speaking right to talk to different people from Mali made as an example how many hours does it take to clean a 3 bedroom 2 bath 1200 square foot right and then go from there you can still be building cases they’ll get this is how much time on average it takes I didn’t charge time cities thanks bye your son out yeah and this number that but yeah I mean the tried and true is still you know to help people track hours and unfortunately a lot of the new changes in the tax well the last couple years has been hours driven and you know we have this recurring question like how my gonna get the hours for my management company or cleaning crew. Yeah. You know what else might be kind of tricky to and I guess I haven’t asked you about this because I’m not personally doing but this this model of lease arbitrage which shows are still short term rentals but someone’s actually leasing an apartment or a house or whatever it is and sublease Cena now I would assume they still get the same write offs in terms of furniture and consumables and all that but if they’re not buying the property then they don’t have the depreciation expense Ryan is on the building but is there anything else they might wanna you know for those the listeners that are doing the lease arbitrage model that they might want to consider with. Yeah we do have plans to join the arbitrage and doing very well in nasty smell I’m certainly you know something to work insurance you know you don’t have enough capital rights bond by a. If you just watch I’m not yet the main **** or I guess the the that you get this month your participation and the ability to use those losses to offset other income is the same as a regular short term rental that you all but the big difference is like you mentioned no depreciation our building because we don’t own the building thank you but a little of that we get to write off the branch networking should the actual property. So it’s still some Bennett just come the difference for me we we call it renter’s expense rather than depreciation. Is there anything that she’s seen maybe that we haven’t talked about well I don’t I just want to say no you know like we’re talking earlier short term rental is still fairly a fairly new space for I know not for you not for you and I but it’s fairly new to a lot of. Real industry as a whole and I think we’ll continue to see changes in both you know practically speaking in terms of how they operate and also from tax treatment adds more of these get audited they might define more of some of the questions we talked about how do we prove the time of the workers that we hire and things like that so it’s really important to just make sure you are staying up to date with you know your tax adviser and getting kind of the latest and and the various tax treatments and things like that but I think you know for investors I know you know like your taxes and then there’s so much to talk about but the key thing to remember is that you don’t have to become a CPA you don’t have to memorize any of the rules are you have to understand 50 percent of what we talked about today but you just kinda know enough to have a good conversation with your own tax advisor I think most importantly is to keep that line of communication open with you know what your transactions are talking to advisers about that before you do it and being proactive throughout the year you know what are some things I need to do we talked about you know real estate like some of the benefits like okay we need to track our expenses we need to know what the appliances are so make sure you have a system to track those right just because you now those deductible doesn’t mean automatically your CPO to doctor you need to track those things or have a system keeping bookkeepers to track it we talked about material participation the hours you need whether 500 or 100 hours you need to know what to track and how to track it and how those systems in place so I think that’s the main action item from an investor’s perspective to be doing during the year and I think a good thing that can help out with that is using quickbooks online because of its links with your bank accounts if it’s linked with your credit cards and let’s say you buy a new appliance well then that’s going to show up in your quickbooks it and there’s gonna be a transaction there that’s that you’re gonna need a label one way or another right. Yeah yeah that’s what I mean I love you know as I think for me as an investor in the business owner I love the concept of systems Bryson city mining automating so yeah what you described with quickbooks in some really great example I think everybody needs to go out and use quickbooks United for someone like me got lots of properties your partner’s all kinds that then yes quickbooks makes your life so much easier but you know for smaller investor if you’re not into your order you know those kind of software even if you use the excel better than not spend money put into excel download your statements into excel format kind of accomplish similar things yeah it just depends how much time you want to put in or how much you like but I don’t like the bookkeeping side I mean it’s like I love numbers and investments and like looking at projections and things like that but the tedious like everyday transactions and with short term rentals there’s tons and thousands you know you get runs coming in every day and so it’s a lot to organize but if you’re diligent with it yeah I agree you can use excel you can use whatever works best for you as long as you’re tracking it is the most important thing what thank you so much man it was really great having you on as the first interview guests I’m sure people appreciated getting a break from my voice it’s been over a year now so nice to have you on in and for anyone that wants to get more information about you or find out about keystone CPA what’s the best way for them to get in touch yeah our website is the best way we have tons of great information and and tax updates and things like that so W. W. W..keystone CPA.com that’s K. E. Y. S. T. O. N. E. C. P. A.com um and you mentioned earlier book so anyone who you know wants even more information check out our book it’s on bigger pockets and Amazon as well thank you so much what we’ll have to do it again in the future. Because taxes are always changing right so yeah I love to I’ll I’ll for sure come back if we see some major tax changes this year. Awesome well thank you so much and thank you for all the help of the last few years to really appreciate. Take care. So we just had our live virtual fan and I gotta say it was a blast as always we done to live events before and this was basically a replica except for we got to attend from the comfort of our own homes and the beautiful thing about doing a weapon or is it was easy to record so if you missed it jump over to rest methods.com forward slash virtual and you can get your copy we jam packed it full to the brim everything that I’ve found to be the most important setting up your short term rentals and making sure you’re earning maximum revenue and highest occupancy but all while not giving up all of your time in creating passive systems so I give you all my resources we go over my actual properties case studies with pre and post code numbers and then my outlook in the future I think there’s a ton opportunity so if you guys are just getting started or you have several properties already there’s no need to reinvent the wheel get all my tips and tricks things that I’ve learned and save yourself the headache and frustration just head over to rest message star forward slash virtual I know you’ll find a ton of value in it enjoy.

RELATED PODCAST EPISODES

• Episode 61: Pro Tax Advice directly from my CPA (part one)
• Episode 51: Three questions to ask yourself before selling
• Episode 35: Quite Possibly the BEST Tax Break Ever (1031 Exchange‪)
• Episode 20: Are You Getting Denied By Lenders?
• Episode 03: Owning a Short-Term Rental vs. Lease Arbitrage