LET’S TALK TAXES!
Some of the most under-discussed benefits of real estate investing are the tax benefits that can come from owning investment property, and today I want to give you a little bit of insight into some of the specific tax benefits that can come from owning short term rentals (STR’s).
Let me preface this by saying all of the information I am about to share comes solely from my own experience and the knowledge I’ve learned through the process of managing my short term rental business – I am not a tax expert and this post is meant to encourage you to dive deeper into the possibilities, not to be a roadmap for your own tax situation!
So what are some of the benefits you can find from investing in STR’s when it comes time to put together your tax return?
1. Short term rental income is by definition NON-PASSIVE.
Why does this matter?
Most rental property income is automatically considered PASSIVE income unless you are able to prove that you have Real Estate Professional Status (REPS) which requires you to be working more than half of your time (AKA your primary job) in real estate and be able to document 750+ hours/year of work in real estate.
If your rental income is PASSIVE, you cannot use any “losses” to offset your tax burden from your full time (W2) job or jobs because your W2 income is NON-PASSIVE.
With short term rentals your income is automatically NON-PASSIVE, which means as long as you materially participate in your STR’s (do substantially all OR 100 hours + more than anyone else) “losses” can be used against your W2 income to lower your overall tax burden, which can lead to significant savings depending on your personal situation!
TIP: You MUST track your time/participation in a detailed log in order to claim you materially participated.
2. You can use Bonus Depreciation
What is it?
With STR’s you can deduct the full cost of the property (including appliances, furniture, etc) all in one year using 100% bonus depreciation, which lowers your taxable income for that property
TIP: Be aware that “depreciation recapture” will occur upon the sale of your property unless you do a 1031 exchange
These are just two of many benefits to consider.
One of the best things that we did when we first started on our short term rental journey was to invest in a tax class with The Real Estate CPA. Not only did it teach us about all of the benefits we are taking advantage of today, but it gave us a greater understanding of the whole process which helps us to be more aware of what our taxes should look like and ensure we aren’t missing any potential opportunities as we continue to expand our investing.
If you are just getting started with real estate investing there is no better time to educate yourself on all of the tax benefits and implications involved in real estate investing!
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Based in the Greater Boston area, Beth helps buyers, sellers and investors across the country achieve their real estate goals. From navigating the purchase and sale process to growing your vacation rental business, Beth provides a one-stop-shop for all of your real estate needs.
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