Hello, welcome back to the great episode. My name is Sarah Karakaian.

I'm Annette Grant, and together we are Thanks for Visiting.

Let's start this episode like we do each and every week, and that is sharing one of you are incredible listeners who is heading on over to strshare.com, entering the information about your short-term rentals that we can share you here on the podcast and on our Instagram account each and every Sunday. Annette, who are we sharing this week?

This week we are sharing at Fowler Creek Cabin, and Fowler is spelled F-O-W-L-E-R and I I've been looking at properties a lot different lately since we are in the middle of our land project. And one thing that really stood out on this property is they have a wood fired hot tub, and you do not see those very often, and they have done an excellent job of like. Building it in. Um, they're, they are on a creek, like their name says. And so you kind of look outside, there's, um, a walkway and then the wood-fired hot tub is kind of nestled in, um, the landscape. And I just really, um, and drawn to that and I, Sarah and I have been doing a lot of discussions with our partners because we're trying to figure out our hot tub situations instead of like the square, traditional plastic hot tubs, can we do more of a wood-fired natural one? So I love that they have that here. And also they actually have two fire pits too, and I love that they're just using the land that they have with their terrain. And another hot tip that they've done in here is they've given their guests all of their favorite hiking spots. And so I love being able to, um. If you're gonna have guests to help them out, it's right in their Instagram, telling 'em where to hike. And then last but not least, I think this is really important. They have a lot of posts on their Instagram with bears. They're so cute. They're so cute. However, I love that they've made it very clear. Um, if that's not your thing. This might not be the place for you. Like we enjoyed, look at all the, um, bear reels that they had, but I think that's a really nice way to let people know, uh, that nature is abound in your area.

Nature is a nature. Who knew?

Nature is nature. If you stay at Fowler Creek Cabin, but well done. It's just nestled in near the creek. They've got all the things going on. Kudos to you. Thanks for sharing your space with us. Let's get onto the serious stuff. Yes. The fun stuff.

Yes. Let's, what we're gonna do today is we're gonna dive in and talk about taxes and how, if you own short-term rentals, how you can leverage them to save money on your taxes, but it is nuanced.

A little disclaimer from our attorney. Disclaimer, we are not CPAs. Nope. Tax professionals, not even close, or attorneys. Absolutely not. This video is based on our experience as STR hosts and research from tax experts. But please always consult a tax professional for advice tailored to your business. So we enlisted, we did enlist the hope of our friend Amanda Hahn. She's the managing director at Keystone CPA, who specializes in real estate tax saving strategies. So again, we are gonna offer you as much information from our personal experience, but please learn from this and then go see your tax professional

if you need a tax professional. We went ahead and linked. Amanda Han's info in the show notes below so you can go check her out.

Mistake number one is misclassifying your rental income.

Okay, so one of the biggest misconceptions that short-term rental hosts make is that their rental income is similar to that of long-term rental income, but that's incorrect. The IRS treats short-term rental income differently than they treat long-term rental income. This is good news for short-term rental hosts because our losses like depreciation, expenses, repair costs. These can be, these can offset our W twos.

If you don't classify your STR income correctly, the IRS may label it as passive income, meaning you can't use those losses against your tax bill unless potentially you have other passive income. Some hosts also assume that they owe a self-employment tax, which can be up to 15.3%, but that is only true if you were to offer other services like daily cleaning, provide meals for your guests, things of that nature.

The seven day rule, the key to unlocking tax benefits. Alright, so let's dig into this. If your average guest stay. Is seven days or less. Mm-hmm. This means the IRS treats your short-term rental as a business, not as rental income, which means that you could potentially use your STR losses to offset your W2 income and lower your tax bill. Now, if your average guest stay is seven days or more, but less than 30, you might still qualify, but you'll have to prove that you're actively involved. More on that and mistake number two,

we're gonna run through some example scenarios with you and who pays and who saves more.

Okay. So let's keep track of this. Host A, rents their property for an average of 30 plus days. So like a midterm rental. All right. Okay. Okay.

Yeah. MTR

and doesn't actively manage it. They have a property manager.

Alright. Very common.

The IRS considers this passive income, right? The investor is not actively involved and the stay is 30 plus days. So they cannot use their losses to lower their W2 taxes. Okay.

Asterisk. Asterisk as attorney, right. Ask your CPA.

Ask your CPA. But interesting, right? 'cause a lot of people are out there talking about midterm rentals, but you gotta be careful because mm-hmm. If you're an SDR host and you like the benefits of these tax. Mm-hmm. Breaks, but then you pivot or someone tells you that MTRs are easier, you would no longer be able to leverage that.

And you also, this is something that's, the popularity rises here. If you are a short-term rental investor who has a co-host, you really wanna chat with your CPA about that because are you actively involved anymore? So there's kind of that co-host caveat too that, again, the more, um. The more conversations, the more transparency that you can have with your tax accountant, the more it's gonna behoove you. So all those little details that sometimes, you know, get just lost in translation, that's why it's important to meet with them several times throughout the year and just have, instead of just sending over documents in their portal, you wanna have these conversations so you explain to them exactly how you're running your property, who's running your property, and what kind of guest you're hosting.

Okay, so now host b. Rents for an average of four nights, so it's less than seven days. They actively manage their short-term rental, like their messaging guests. Maybe they're even like cleaning it, like they are ordering all the things. Um, and they need material participation hours. So they have to participate for a certain amount of time, the IRS to be able to consider them eligible, but they only provide basic lodging. The IRS considers this non-passive, right? They are actively involved so they can use their STR losses to reduce their W2 tax bill. This is like the ideal STR scenario. If you wanna the most tax savings and this, you know, host B, the scenario is why. So there are so many people interested in short term rentals, but again, that's why we're going through these scenarios because.

We wanna make sure that you're actually falling in that particular scenario. Right. All right. What's up next?

So, host C runs for five nights days, so again, less than seven days, but they provide daily cleaning and breakfast. The IRS is gonna consider this an active business now, meaning they'll owe self-employment tax on top of their income tax.

Ooh. Again, this is something that chat with your. CPA because maybe you are doing the cleaning, but it's not daily, it's just before and after stays. Um, you know, maybe you do have more of a bed and breakfast type scenario, which I know a lot of hosts are interested in. So make sure to check it out.

Makes things different. Alright, so to recap, mistake number one, how to avoid these mistakes, right? Track your average guest. Length of stay because if you are seven days or less, you can take potentially full advantage of the tax benefits. Also, understand what services you provide. If you go above and beyond basic lodging, like providing meals, everyday cleaning, maybe intense concierge services, you could be. Uh, eligible to pay more taxes.

Yeah. And last but not least, please work with A CPA who specializes in short term rental taxes. We mentioned our friend Amanda at the beginning of the video because you need to make sure that this income is classified correctly and that you are making sure that you are covering yourself with the, you know, you're getting those tax benefits. That you're working so hard for.

Yeah, you could potentially save thousands on your taxes each year if you align everything, just so. Mistake number two. Failing to track material participation.

If you actively manage your short term rental properties, instead of hiring a property manager, you may qualify for these tax advantages, but only if you prove material participation.

It's so hard to say material participation,

and it might be hard for you to qualify so what is material participation, Sarah?

Okay, so you have to prove that you're either involved in 500 or more hours in the property. Or if you do have some help, you have to still work on it at least a hundred hours, and you have to work on it more than your help does. Mm-hmm. Now, proving material participation is a great strategy to offset the losses against your W2 income, and this is a great strategy. If you are a high income earner on your W2, this is where it really comes into play. Okay, let's give you an example. Okay. You make a hundred thousand dollars at your W2. Your short term rental has $15,000 in expenses. If you qualify for material participation, that is so hard to say, you can reduce your taxable income by that $15,000, reducing it to $85,000,

potentially reduce it,

potentially talk to your CPA. Mm-hmm. What you need to do is track the time you spend on your short-term rentals. So maybe you have a log, something that you can prove the hours you spent with guest messaging, maintenance, bookkeeping. If you have a full-blown property manager, you likely won't qualify, but if you manage yourself, this could be a great tax saving strategy.

Mistake number three, ignoring depreciation deductions.

Depreciation is one of the biggest tax benefits for STR hosts, yet many fail to take full advantage of it. So here are the basics. The IRS allows hosts to take a portion of their property's value, a deduction up from it for every year up to 39 years. Even if your property appreciates, you can still take advantage of this tax benefit. Okay, this is why this matters because depreciation can be one of the biggest benefits to short-term rental hosts, often leading to tens of thousands of deductions each year. And if you make major upgrades, so from the drywall in, make sure you're tracking this 'cause you might qualify for bonus depreciation, which is even more savings.

It's always important to keep track of all of your expenses, but especially when we're talking about this bonus depreciation, make sure anything that you're doing, let's say appliances, flooring, furniture, anything that might be included, you wanna make sure that you're tracking that. Of course, you're gonna wanna let your CPA decide, but this is where you really do wanna keep, uh, meticulous records.

So work with your CPA to set up a depreciation schedule for your short-term rental. And like Annette said: track everything, even if you're not sure. Mm-hmm. So when it comes time to decide whether you are eligible for a bonus depreciation, um, you have the receipts, the work, the pictures, all of that, that you can provide. Mistake number four, not reporting personal use accurately. Ooh.

If you, your family or friends are using the property for personal use, you must record this and. Why does it matter? Well, there are IRS rules around this. You cannot use the property for more than 14 days or 10% of the total rental days allowed. And you might, at this point in time, disqualify for those deductions. And you know, why does this matter? Like just if you kind of just step back and think about it. You can't be double dipping. You know, you, you're like, you're trying to get the write offs, but then you're trying to use it for all this personal family and friends. Fun. This is going to be a huge red flag if the IRS ever audits you. Mm-hmm. So this is where it's really important that you wanna keep records. Um, and we all, you know, we have a coaching program where we always tell everybody, you know, every month when you're looking at it, obviously you have your rental days, but keep track of the exact days that. If you did use the property that's in there. 'cause number one, you wanna know how many days, um, you were using it and what that potential revenue you lost for your personal usage. But again, make sure to track it. Have it in your records that if you are ever audited, you know where you're at. And also talk to your CPA about that. If you know you are planning, um, this is before maybe you even purchase or after you've purchased, like, Hey, this year we're planning on using this property a lot more, um, this summer or this winter. Have that conversation and see what that would do to your tax deductions. Mistake number five is you're overlooking those state and local taxes. Many hosts just focus on federal taxes instead of looking at that, uh, local, state and city tax. And this is so important. There are so many short term rental hosts that are out of state and investors, right? So that adds that additional layer. So again, we just wanna make sure that you're paying attention to your state and local taxes, and we're going to explain to you what some of those could be.

Yeah, they are. The occup occupancy tax. Sales tax and tourism tax. Now, your area might not have all three. They might have two or three, one of the three, whatever. But it is up to you to know, and if you own multiple short term rentals in different areas, even within the same state, like this could differ and it's up to you to keep track. So this matters because failing obviously pay, failing to pay state and local taxes. You can incur penalties and pay fines and that offsets any of the tax savings that you've done up until this point. And a common misconception is a lot, we hear a lot of hosts think that Airbnb, or vrbo, booking.com, wherever they're listing, that those platforms are remitting the taxes for them. Mm-hmm.

And sometimes in some areas that's correct. Sometimes it isn't. But you. Are responsible. This is not something where you can like throw your hands up and go, I didn't know I was responsible for those particular taxes. Again, disclaimer, this is where you want to chat with your CPA and also A CPA that's familiar with the taxes in that local area.

All right, so here's what you wanna do. You wanna check your city, county, and state taxes of wherever your short-term rental is located and make sure you understand them. There are tools out there like a company, Avalara, they have my lodge tax, which helps you, uh, collect and remit taxes appropriately. There's obviously a cost to that service. And last but not least. Make sure you're setting this up with your CPA and you fully understand it before you put your short-term rental into service. Because getting it all figured out now rather than later will help you save tons of money.

But also, let's face it, some of you might have been up and running for a very long time.

Yeah.

It doesn't mean you can't just slow down to speed up. Now, put that call into your CPA start fixing these moving forward.

All right, so in conclusion. Talk to your CPA. As a reminder, Annette and I are not CPAs, we are not tax advisors. But also if you wanna reach out to our friend Amanda again, Amanda Hahn we'll put her information in the show notes. Um, she's made quite the name for herself being a go-to tax advisor for real estate investors. But I know a lot of us I've seen all the time where. Short-term rental owners, just kind of talk about the tax advantages, but not realizing how nuanced it is to remind your CPA, that this is what, this is a strategy you wanna take advantage of, and making sure that they're setting you up for success, that you are setting yourself up for success as well. And with that, I am Sarah Karakaian. I'm Annette

Grant, and together we are Thanks for Visiting.