[00:00:05] Speaker A: Welcome to the Short Term Show. The show about short term rentals and long term wealth with real property owners hosting real properties who are crushing it in the vacation and short term rental space.
And here's your host, Avery Carle.
[00:00:29] Speaker B: Hey, y' all. Welcome back to another episode of the Short Term Show. I'm your host, Avery Carle. Thank you so much for listening. Today we are bringing you a lot of tax value. So taxes, I don't understand them. I think a lot of you probably don't understand them. So I have to hire people who are really, really good at all knowing what we can do, what we can't do, because I don't want to pay taxes. I know you don't want to pay taxes. And how can we do that with real estate? How can we get those taxes to minimized? I've got one of the best in the business, Brandon hall from. Are you guys called the real estate CPA now? You were called Hall CPA for. I've known Brandon for a really long time. What are we called these days, Brandon?
[00:01:06] Speaker A: It's interchangeable, technically. Our firm name is hall cpa.
[00:01:09] Speaker B: Okay, hall cpa. And I've got Nathan Sosa from his team as well. Nathan, tell me your title again because I told you I was going to screw it up.
[00:01:17] Speaker C: No worries.
I'm the national. I'm the manager of National Tax here at hall cpa.
[00:01:22] Speaker B: Love that.
[00:01:22] Speaker A: Which basically just means that he's a tax genius.
[00:01:25] Speaker B: So for everybody, I was about to say I've got two of the top real estate tax minds in the country on this show and I'm really excited to have y' all. Thank you so much for coming on.
[00:01:35] Speaker A: Yeah, thank you. Thank you very much for having us. We're excited to be here.
[00:01:38] Speaker B: Yeah. Yeah, me too. All right, so let's talk about taxes. Brandon or Nathan, which whichever one of you wants to. To take this. I want to just kind of. For people who might be new to listening, you've been on the show before, but that was a few years back, so maybe if they haven't heard that episode.
Let's talk about the benefits of buying short term rentals in order to save on taxes. What does that look like?
[00:02:01] Speaker A: Yeah. So this is. It's called the short term rental loophole on social media. And I actually think that we created this beast. Back in 2020, I was writing an article, a very long guide on how to qualify as a real estate professional. And I realized through that research and through that developing that guide that if you own a rental, but the Average period of customer use is seven days or less, then you don't have to qualify as a real estate professional. And the significance of that is to qualify as a real estate professional, you have to spend more time in real estate than anywhere else. So if you're working a full time job, you can't qualify as a real estate professional. Many people have tried, every single person has lost in tax court. So it's just, it's just not possible. But through this writing I realized, wait, if your average period of customer uses seven days or less, that is an Airbnb or a VRBox, and you don't have to qualify as a real estate pro, so you don't have to spend more time in real estate than your day job. And then I started looking around and I was like, is anybody else talking about this? And the only other source at that time was Bradford Tax Institute, which is like they do like a newsletter for tax professionals and they had one little article on it. And so I was like, okay, we're going to take this and we're going to put it on the podcast, we're going to start writing about it, we're going to put it on social media because one, I need other tax professionals to challenge this challenge just to make sure that I'm not insane. But two, this is really cool if this works. And thus that's where the short term rental loophole was ultimately born.
So that like that got a lot of legs and people realized, wow, if I buy a short term rental, I can still work my day job and as long as I materially participate, there's seven tests for material participation. Material participation. So as long as I meet one of those seven tests and as long as my rentals average period of customer uses six, seven days or less, then I don't have to qualify as real estate pro. And the losses from the short term rental are now considered non passive, which just means that they can offset my regular W2 income, my business income, even if it has nothing to do with real estate. So that's the, the ultimate loophole. That's, that kind of helped fuel the short term rental frenzy that we saw over the past few years. And, and frankly we had some people that came to our firm buying short term rentals solely for the tax benefit, which I would never recommend. But that's like, it just caught so much fire that that's what people, people hate taxes more than they like building wealth sometimes, which is fascinating to me.
Yeah, but that kind of like that, that's, that led to the Whole snowball of what we have today. Of the short term rental loophole.
[00:04:31] Speaker B: Yes, the short term rental loophole has, it really, has kind of really picked up a lot of speed in the past few years as people, people who are high income earners are, their, their CPAs are catching onto this and saying oh well, you need to buy X amount of real estate, preferably short term rentals this year. So and we've definitely seen that and we definitely have to have a lot of conversations with clients who are coming to us and they're like I want to buy, I've always wanted to have a Beach House on 30A. I've always wanted to have you know, insert place here. And they get really excited about it being for their family and want to look at these places that are great, they're beautiful but they're probably not going to cash flow, not going to generate, I mean they can generate wealth in other ways through appreciation and the guests paying the debt down. But you do want these things to cash flow otherwise they are losing you money. So you don't want to let the tax tail wag the cash flow dog so to speak like.
But you can only utilize the loophole once per property and once you do that, if you're stuck with a property that you're having to dump money into every month because you bought something that's wonderful for your family, but maybe it's not in a great location for rental, doesn't get a lot of traffic, then you haven't really built any wealth at all. And when you sell it, you're going to have to pay. What's that little. The tax that you have to pay. The recapture tax, what's it called?
[00:05:53] Speaker C: Depreciation. Recapture.
[00:05:55] Speaker B: Yes. So you know, make sure that it makes sense as a real estate investment also and not just tax benefits. Got to have both.
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[00:07:05] Speaker A: Well we've actually seen that too, especially in like saturated markets. Like Broken Bow for example is a big one. But people have bought short term rentals. Everybody went into this buying frenzy and I think what we saw in 2021, 2022 was like Covid stimulated demand, if that makes sense for vacations. Just because everybody had the COVID stimulus and they had money to spend.
And so it was super easy to make money running short term rentals. The problem is if you bought in these really oversaturated markets, number one, as you mentioned, if it's not renting well today there's a lot more competition. Right. So if it's not renting well today that's a problem. But if you try to go sell it today, you're probably not getting the price that you thought you should be able to get. But also you have depreciation recapture. And the way that that works is if you buy a million dollar property and you originally use the short term rental loophole to effectively cost the property, get this bonus depreciation and use this tax loss to offset your income. Well, this million dollar property, the basis, the adjusted basis is probably a 750k. So if you sell it for even a loss, let's say you sell it for 900,000, you might think you lost money and you get a tax write off for losing, losing money on the sale. But then you go talk to your accountants and your accountants are going, well your basis, your adjusted basis is 750k. You sold it for 900, you actually have 150 gain and the gains coming from that original depreciation you took, which is why it's called depreciation recapture. But people have to be aware of that. And that's catching people by surprise, especially in those oversaturated markets where it's really hard to get the rentals now.
[00:08:40] Speaker B: Yeah, and I can speak to the, the Broken Bow piece a little bit because we have an office there. So what, what we are seeing, what we've seen people do over the past few years. And actually so Orlando is where I've seen this the most to be honest. So where people will buy.
And the thing about saturated markets is like there's a reason that they're saturated because there's a ton of tourism demand.
But you do have to do something to kind of stand out from the crowd. And a lot of times that something is not a big something. You don't have to like buy the biggest and the best, most beautiful, most expensive thing. You have to manage well you have to price right and you have to have good photos. You have to optimize. And what we've seen in my Orlando example, people in Orlando, you have to theme like you have. You cannot just slap a Mickey sticker on the wall and call that theming. It has to be kind of an immersive experience and you know, like one immersive theme per room. And you can do that actually relatively inexpensive or Orlando real estate is very cheap compared to other markets. But what we saw is people would buy these things and they'd say, okay, this is a lot of the builds in Orlando for the short term rental stuff like early 2000. So a lot of like beige, like khaki colored tile and like the kind of Mediterranean light fixtures.
So it looks pretty dated now. And what they would do is they'd say, okay, I'm going to buy this thing and then I'm going to theme it, I'm going to slap that Mickey sticker on the wall and then I'm going to rent it. And then they're like, oh, well, wait, this, this didn't work. I'm not making money. Well, it's because you didn't differentiate yourself. Yes, you got a Mickey sticker on the wall, but everything else looks like 2001 threw up in here. So. So when you're buying in these markets like this, the demand is absolutely there because 55 million people a year go to Orlando for Disney and there's only four resorts, or sorry, two resorts, I think, no, sorry, there's only four.
That if you have more than four people, which is so me, my husband, two kids, we could stay at any Disney resort. But once you get to one more person, like you add one more kid or you're coming with your sibling or something, then there's only a few resorts that can house you. So there is a huge demand still for those short term rentals. But you can't just slap a Disney sticker on the wall of an outdated property and expect it to work. And it's the same thing with Broken Bow or Dustin or the Smokies or anywhere. You can't just have a grandma, Golden Girls, you know, your mama's house and throw it on on Airbnb and expect it to work.
[00:11:11] Speaker A: So I'm curious to hear from you and I'm flipping the script here, but what markets have you seen that have held up pretty effectively? And I guess maybe what I'm trying to ask is the level of effort to get the return.
And I'll preface it by saying, my theory is that the beach rentals do pretty well no matter what because they're landlocked. You can't just go and add new cabins and things like that.
What are your thoughts on that?
[00:11:43] Speaker B: Yeah, so I did just buy one, another one here on 38. And you're, you're kind of right about that. So you're not going to see people building these because there's only so much beach real estate even, even off the beach in these beach markets. There's only so much beach real estate that's close enough to the beach that tourists want to stay there. So you're not going to see a whole lot of inventory being added. And the inventory that is being added are these big 11 bedroom monstrosities, which, yeah, that's great. You can make a lot of money doing that. But none of mine at the beach are bigger than three bedrooms. I've got three, I have three, three bedrooms at the beach.
So, yeah, you're right about that. There's not a lot of, like, creativity in terms of these big, huge spreads that people can do with all these glamping sites and things like that. So they've held up well. I mean, honestly, I have seen people, I've had a few people on the podcast recently that bought at the height of prices and the height of interest rates and still have absolutely crushed it because does not require a huge amount of, like, attention and time. But so many people in Covid because short term rentals picked up so much speed during that time, which I hate to call them Airbnbs, like, they're vacation rentals. They've been around for decades. Picked up so much speed during that time that everybody kind of treated it like, oh, cool, I'm going to pull this slot machine and I'm going to quit my job on one property. And that's not real life.
And granted, some people did, but I mean, if you're going to quit your job on, you know, $50,000 worth of rental income, you are one accident or something breaking away from making 30,000 a year. So I think a lot of people didn't take that into account and they're like, oh, cool, Look, I'm doing 50,000. That's what I was making at my job. I'm financially free, but then realizing as soon as something breaks like, oh, I'm actually not. And so anyway, I think everybody kind of treated it like, oh, I can just slap this thing up there and it's going to make me rich. When that's not real life, I think.
[00:13:46] Speaker A: What we've seen too, in our client base is just that I think people don't realize that they're running a hospitality business now. I think that they just think it's like buying a long term rental. And I'm done not realizing, like a lot of effort needs to go into it from the design perspective, as you were mentioning, but just also from like the continuous operational perspective to get the five star reviews to fuel the SEO searches. And I just think people just kind of gloss over that when they're doing their due diligence on their first one or two. And I know you guys actually do workshops with your community on a consistent basis, really help them with that. I remember I've been to a couple of them and they were really helpful. But yeah, I just think that some people just buy because they get sucked into the hype and they see the tax benefits and they're like, heck yeah. And don't realize six months into it, like, oh, wait, wait, I just bought a mini business here that I have to run.
[00:14:35] Speaker B: So yeah, yeah. And at the end of the day they're like, well, I don't want to buy myself another job. And it's like, okay, you're not buying yourself a job, you're buying yourself a business. There's a difference between those two things, but it does you. It's definitely not a set it and forget it. You got to look at your pricing every day. Like every day Luke is in there looking at our pricing. And if five weeks out it like, so the Smokies is like a five weeks out booking lead time.
And if we've got anything under four weeks, he's like, oh, you know what? We've got vacancy under four weeks. He's like, okay, I need to mess with my prices. So a lot of people are just like, oh, cool. Price labs click. It's on autopilot. And then they're like, my God, why am I not getting bookings? Well, you, you still have to pay attention. It's still a business that you have to run.
So.
Yeah, it's not a long term rental.
All right, cool. So what else is. I got. Let's get back to. Let's get back to taxes. So short term rental tax loophole. I want to ask you a question. So we've got the tests for material participation. There's seven of them. Usually it's one of the first three that people are trying to hit, which is. Give us a quick recap of that before I ask my next question.
[00:15:39] Speaker C: Yeah, so those three tests are substantially all one, you spend 100 hours plus more than anyone else or 500 hours in the property. Those are the three main ones that most that real estate investors can hit when it comes to strs.
[00:15:53] Speaker A: Can you explain the substantially all one?
[00:15:55] Speaker C: Substantially all is the one that is the most facts and circumstances based. So this one's essentially like, hey, if you basically like you do, it's kind of created. So like not all activities are created equal. So there might be an opportunity, there might be a chance that you don't spend 100 hours in the activity. So if you. But if you still spend more time than anyone else did and also did most of the work yourself. And so when I say most of the work that's going to be. You basically operate and act as like a handyman kind of sort of. It's like you like, hey, guess what? Something was busted. The cabinet. The cabinet door broke off.
[00:16:25] Speaker A: Right.
[00:16:25] Speaker C: You wouldn't take care of that yourself, right. You don't necessarily do the plumbing, don't to fix the H Vac yourself. Right? I wouldn't, I wouldn't touch that. I don't think anybody else wants to touch that either. So you're going to hire a specialist to come in and take care of that stuff. So that wouldn't hurt you per se. But a lot of the tax court cases that are out there kind of go against. If you don't, if you hire someone else to do stuff, you're probably not going to be seen as doing substantially all. It's very facts and circumstances based kind of test. Like yeah, look at the. I don't like it as much for clients. Doesn't mean it's impossible to hit. It just means it's difficult to get there at the end of the day. Gotcha.
[00:16:56] Speaker A: But if you are doing substantially all the work, then in theory you can do less than 100 hours of work every year and still materially participate. In theory, definitely that's the idea, yeah.
[00:17:07] Speaker B: Okay. But it's very difficult to prove that.
[00:17:10] Speaker A: It's just hard to totally run a property by yourself. Right? That's the idea. It's like, like if you are. I think it's like more so for like running a small business totally by yourself, like that's substantially all, even if it takes you 60 hours a year to do consulting or something, you know. But running a property requires a lot of specialists to come in. So that's why it's a little bit more difficult to achieve.
[00:17:32] Speaker B: Okay, got it.
Now this is a question about getting audited on this So I. We have a huge Facebook group with like 80,000 people. So I.
I'm seeing, you know, everybody's questions go through all day, every day. And around tax time this year, I saw a lot of angry people posting about, I got audited on the short term rental loophole, and I lost, and this is garbage, and everybody's lying about everything. And then people would ask some qualifying questions, and then they would post their log of time and listen, I am just a dumbass real estate agent. It's a very low bar to entry into my field. I'm not a cpa, but I could. Looking at their log, I'm like, it's very clear that you just did this once. They hit that audit button and you were like, oh, crap, let me make a log and send it to them.
So can you talk a little bit about what it looks like when you get audited for this and what you really need to be doing before you get audited so that when that does, if it happens, you aren't posting on the Internet being pissed off.
[00:18:35] Speaker C: Yeah, the before isn't is important.
[00:18:37] Speaker A: Yeah, let me.
Let me actually touch on this, and then I'll let Nate speak because Nate. Nate actually represents a lot of the incoming clients that have these audits. He's the guy to go to in our practice at this point, one of the guys to go to. The first thing I'll say is, if you are getting audited for the short term rental loophole, give us a call.
We've gotten a lot of inbound audit help requests from other tax professionals and other real estate investors that are using other tax professionals that push this.
And Avery, to your point, when we. When we get them, we'll kind of do.
I've been calling it like our landmine review of their situation, because what we find is that very few people actually do the things that you need to do to substantiate using the short term rental loophole or even real estate professional status.
In our firm, where we're probably a little bit different from most other accountants, is we won't take the position for you if you're our client and you're like, let's claim the short term rental loophole.
[00:19:34] Speaker B: We.
[00:19:35] Speaker A: We won't take the position for you, no matter how much you kick and scream, unless you can give us a time log that we believe will be substantiated under audit and the receipts with it. So we're. We're pretty thorough with that, which is why our clients are much more successful whenever this stuff gets brought up. But I'll, I'll let Nate kind of talk to the specifics because he's been, he's been on the phone with a lot of auditors over the past six months or so helping, helping people, helping people out.
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[00:21:10] Speaker C: What I'll say to that is like what Brandon said, documentation is the biggest and most important piece. We've got documentation, we've got receipts, we've got bank statements, we've got everything that proves out what needs to be done. Then we're going to be fine, right? It's like getting an audit doesn't necessarily mean definitely it's a scary thing, right? You never want to get one of those in the mail. Open that up. It's not a fun, it's not a fun time. However, if you've legitimately gone out to the strategy, you've listened to your CPA or accountant and you've actually documented everything that you're, that you're supposed to when it comes to the time log, right? You documented that in the beginning because here's the biggest issues. A lot of these audits are coming from 2022, right? That's three years ago. So now you're going to go back and try to remember what happened two years ago. Probably in a very busy time in your life when you're trying to get the, get the property operational, trying to get everything put together, going in to get a cost, finding a cpa. There's so much probably happening in your life, you're not going to properly remember everything. So that's why it needs to be done during that time frame. So you're going to be much better off that way if you do that. Also keeping all those receipts like I know it's obnoxious, right? Keeping all those Receipts, scanning them all, keeping like, look, I'm not a fan of it either.
[00:22:18] Speaker A: Yeah, we all own real estate. We don't like doing it either. But that's what you have to do.
[00:22:22] Speaker C: You have to do that because you'll have, like, I like you will get questions from an auditor being like, I want the invoice and I want to see the matching deposit on the other side coming from your bank account. So you got both those things. You're going to be fine if you have all of that. The issue we run into is clients that don't necessarily work with us, that come in from the other, from another influencer or whoever that sold them on the strategy, they don't have all that documentation. They don't have everything put together. They don't have all that stuff. So now we have to go and recreate. And now instead of arguing from a position of concrete, now we're. Now we're like, we're kind of getting to a little bit shaky your ground where I'm like, hey, we're gonna have to make sure the auditor doesn't even look in this area. We're gonna try and push their attention somewhere else versus looking over here, because if they do, we're not gonna, like, we're gonna have very unfavorable changes now. So.
[00:23:11] Speaker A: And that's just, that's just material participation documentation. But we, we also see like, really shoddy work around cost seg studies. We see, we see missed grouping elections. There's like a whole bunch of these landmines that, to Nate's point, the. The influencers that have effectively like, just kind of regurgitated what the short term rental loophole is. And they can get people excited about it and sell them for 10, 20, whatever, thousands of dollars.
They can't. They can't help you during an actual audit. And that's the, that's the problem.
So people will come to us and then we'll look at it and be like, you know, sometimes, hey, we can help you. Sometimes it's like, we can help you as long as we can steer the auditor away from X, y and z issue.
But these are your landmines that we have to avoid. And we'll, we'll like coach people too. Like, okay, don't use the term group or any synonym to the term group in your conversations with the auditor. We want to avoid that word totally because you missed your grouping election and there's nothing we can do for you right now. So if that is discovered, that's the trump card that the auditor can just, you know, kill your, kill your audit on. So, so some of this stuff, like you could do all the material participation stuff, right? But if your accounting team misses something else, that blows it all up too. And that's what makes this stuff so complicated. And it's again, important to make sure that if you are getting audited, you get really proper professional representation. Because you don't want a lot of the auditors, like the first, the agents that actually contact you and do all the interviewing, they're not Experts at section 469, which is the material participation rules, passive activity, loss rules, all that stuff.
So it's a game of how do you successfully answer their questions in a way that gets them to move on to the next topic without giving away too much information that triggers something in their brain to go, wait a second, I need to do more work here or I need to call on a supervisor, or I need to call on the special team that is an expert in this and will tear it apart.
And so that's kind of the game that we, that we play with our clients and with the auditors.
[00:25:13] Speaker B: So I think I don't want to make any generalizations here, but, you know, it's kind of the same personality type that thought, okay, I'm going to pull this slot machine and make a zillion dollars by slapping this on Airbnb. I'm gonna throw my phone in the trash and just lay on the couch and eat donuts the rest of my life.
Same thing, same kind of mindset with this short term rental loophole. Like, oh, cool, I'm going to hit this button where I'm going to save 1000-002000-00300,000 on taxes, but not actually do the work to prove that I'm doing the thing right to get that. So, guys, what I'm hearing here is like, nothing is free. If you want several hundred thousand off your taxes by using this loophole, you do have to do the work to make sure you're properly documenting and then you're good to go. So do that work upfront. Don't just like, you know, fly by the seat of your pants.
[00:26:02] Speaker A: And if you do the work like, like part of our value proposition that we try to offer our clients is just peace of mind. And it's like, and that's why we won't take the position for you unless you do the work. We don't, we don't want you to lose sleep, and we don't want to lose sleep overtaking a weird position for you. Right, but that, but that's what it requires is just the consistent work. We actually had a client who won a real estate professional audit and they had used our tax planning services back I think in 2020 when I was still doing a lot of the day to day tax planning for our clients. And I remember I used to recommend everybody use a, an app called toggl T O G G L that tracks your time.
And to my knowledge this is like the only client that actually used it and got audited with it. And it went over really smooth. The auditor was like basically in and out was like, wow, you did a phenomenal job tracking your time. And I'm, I'm moving on to the next topic. The real estate professional status piece is closed. And so that was really cool to see. And I can't say this, I can't say that everybody's doing that, but that was, I was like, yes, finally somebody's, somebody's doing it the way they're supposed to.
[00:27:05] Speaker B: Yeah, I mean guys. And I think the key also is so a, you do have to do work if you want money in any sense, whether it's money, whether you're doing your job working for somebody else or you're running a business working for yourself. Because even if you own a bunch of long term rentals with a property manager, you're still running things there, you're still going to hear from them because they're going to need to know what to do about this or that or somebody's getting evicted, something like that.
So you have to do the work.
And my question is, so moving on to a new topic.
Let's say I'm an ultra high earner, I make $10 million a year.
How many like can I just buy a thousand short term rentals and use this loophole over and over and over and over again to get my taxes to zero. And then I have a bunch of properties that are now benefiting, that are now cash flowing, generating income and I've paid no taxes. Is there any limit on that?
[00:27:53] Speaker C: So yes, and I want to say first before that is that like a lot of people want, like before we get to like the, there's a, there's a cap sort of I want to mention too is that it's. Everyone dreams about having to pay zero taxes or getting their income, their taxable income to zero at the end of the day. And I will say if you're an ultra high income net worth earner, you make over a million dollars. It's actually not Worth it for you to get to zero taxable income dollars on your tax return.
[00:28:18] Speaker A: Return.
[00:28:18] Speaker C: It's not worth it. There's a diminishing amount of returns, right? So at some point we're, for every tax dollar we save, we're saving 30 cents on the dollar, right? Totally worth it. At some point though, we get down the tax bracket because we live in a progressive tax bracket system in America where at some point you're only getting a 15 or 12 cents or less on the dollar and that's not worth having those deductions. It's not worth paying that type of stuff at that point in time or utilizing those losses. It's not worth it. And the reason why is because like now you're looking at a time value of money, you're looking at overall returns and it's not worth doing it. So I want to say that first, like, look, if you want to get to zero, I totally get it. It's probably not worth it for you. It's not worth your time, money or effort. Now back to the cap.
So there's something called excess business losses that came in place back in 2017. It's very. So I say, I'm going to say it's new. It's been around for basically for eight years now, but it's new for taxes. And so essentially as of right now, if you have, let's say you earn a million dollars to $10 million, right? You earn $10 million. Let's say you're a doctor, an attorney, that's your, that you get that on your W2. $10 million. Wow. It's fantastic.
The issue is if you have $10 million in short term rental losses, you are only going to be able to deduct up to $600,000. Because there's some. Because of the excess business loss, it allows you to offset what they call trade or businesses. So if you have other businesses, this cap is kind of doesn't exist for you as much. But if you are a W2 earner, portfolio income, interest, dividends, something like that, you're going to be stuck at $600,000 and you won't be able to duck beyond that.
[00:29:52] Speaker A: So to simplify or to summarize, not simplify, but to summarize, there is a, there is a cap for the total business losses that you can take if you don't have business income, right? So if I am a doctor or an attorney and I make a million, 2 million, $5 million on a W2, that is not business income. So I can only claim 600k of losses against that income. So to answer your question, Avery, you could not. You can buy thousands of rental units if you would like, but it's not going to eliminate your income.
[00:30:30] Speaker B: Got it.
[00:30:31] Speaker A: If you're a business owner and you make a million dollars, that's different now. Now you can, now you can totally offset your business income with business losses plus 600k.
[00:30:41] Speaker B: Okay, so, but if you. I can't imagine where there would be a W2 or somebody's making $10 million like the example that I use, but let's say it exists. So you can only get up to 600,000, you said, correct.
[00:30:53] Speaker A: Yep. Unless they have business income. That's part of that.
Yeah, yeah. So you can always offset. You can always use a business. A dollar of business loss to offset a dollar of business income, but if you don't have any more dollars of business income, then you're capped at 600k of business losses. And that's if you're married, filing joint, if you're single, it's, I believe, half that.
[00:31:13] Speaker C: 300. Yes, half that, yeah.
[00:31:15] Speaker B: Okay.
All right, moving on to my last question. So I see investors ask this all the time and I want to know if it's allowed and if it's, if it's okay.
So they'll say, okay, I want to buy a short term rental this year, run it as a short term rental just for a year, and then I want to convert it to a long term rental next year. So I just want to buy this thing, use the loophole. I don't want to be a short term rental manager and I want to convert this to a long term next year. Is that allowed?
[00:31:44] Speaker C: It's a great question that we've not had answered from the IRS or tax courts, but there is something called economic substance.
And if you went after a strategy and just tried to do a short term rental and your whole plan, let's say a lot of people will do this, so they just get a property they buy beginning November, get it all, rent it, get all ready to be an Airbnb, list it, have it, get rented a couple times in December and then starting January, they immediately turn it to a long term rental. A lot of times that people want to do it that way. Yeah, we believe, and we think that's not a legitimate strategy because you never had a desire or business purpose to have it be a short term rental. So we think the irs, and at some point, if you tried to litigate it went all the way up to tax court, they Would say, look, your intention was never to have this be true. It's like you just wanted to be a long term rental. No, like it's impossible. That's not going to qualify. On the flip side, let's say you're running a short term rental, you want it to be a really good property, you think it's going to work out and then turns out you're just getting crushed because you're, it's not, doesn't work well, you're not a good short term rental manager or it's a bad area, there's a lot of saturation, whatever, and you have a business purpose. And like you run the numbers. Maybe flipping to a midterm rental or a long term rental makes more sense from an economic standpoint that I would approve and say it's more, more possible to be defended again with the IRS versus just having this whole intention the entire time to go from short term to long term.
[00:33:09] Speaker A: Yeah, there's a there. I know there's a lot of people that buy like in December, and if you're going to buy in December, run it as a short term rental in December and run it as a short term rental the following year, that's fine to use this in that, in that year of acquisition. I think if you're going to buy, you know, rent it three times in December, then immediately flip it to a long term rental, that's where it gets pretty, pretty dicey. But to Nate's point too, you know, my position on something like this is as long as you can document and very reasonably, okay, so not like we're making up fake stuff here, but document that, hey, this is actually an economically better deal for me to switch the function of this property.
Then I think that you will win a lot of brownie points in the face of an audit or even if you took it all the way to tax court. And what I mean is you could be running it as a short term rental. Maybe you did buy it in November and you're running it as a short term rental and you know that you could potentially switch it over to long term rental, but you're not doing it yet. And then for whatever reason, early January, you're just like, I'm looking at my time log, I'm looking at how much money I made. This doesn't actually make sense for the number of hours that I'm putting into this. If you can document that reasoning as to why you switched, then I think that you stand a much better chance of being able to substantiate the position of, yeah, I bought it in Q4, but I intended to run it as a short term rental and then only through running it I found out that I'm not made for this and this doesn't make sense for me and my family and it's not economical and I'd rather just run it as a short term rent or as a long term rental and be passive. I think if you can document that, you stand a much better chance at substantiating it.
[00:34:50] Speaker B: Yeah. So basically, like, I think it's kind of common sense. Same thing with short term rentals. I mean with investing in real estate in general and like trying to do tricky things with the mortgage that is in a gray area that if it probably went, you know.
[00:35:04] Speaker A: Yeah.
[00:35:05] Speaker B: In front of the right people, then you're probably going to get popped for mortgage fraud. Like, let's just stay away from gray areas. Let's just do things right on the way in. And the funny thing about gray areas is it's kind of obvious. Like you, like I just had to ask you that question because I felt like that probably wasn't something that was good to do. You know that when you're trying to do one of something like this. So if it feels like that, make sure you're asking the professionals who can help you with this to make sure you don't put yourself in a position of doing something wrong. Because I like to color inside the lines personally.
[00:35:37] Speaker A: Well, and kind of on that topic too, I guarantee you that if you, if you take that same question, you go and you ask some of the tax, I'll call them influencers, they'll tell you, yeah, you can do that all day long. The difference though is that they don't have the audit experience and the actual throughput that we have.
And so that's where you as a consumer of professional services, you have to be really careful in not just hearing what you want to hear. This is something I try to like, really try to like educate the entire real estate community on over the years is there are always people, not just CPAs, but it's attorneys, it's vendors, anybody. There's always people out there that will tell you what you want to hear because they want your money.
And so you have the responsibility and the duty to yourself to protect your own finances and your own economic stability, to make sure that you do your due diligence and get multiple perspectives and not only pick the one that aligns with your risk tolerance, but make sure you pick the one that's more likely to be right than wrong.
And I think that, frankly, I think that's very challenging to do. But you just have to be careful. You have to be careful.
[00:36:42] Speaker B: Yeah, I totally, totally agree with that.
Pick the thing that is more likely to be right than wrong. And yeah, then there are tons of influencers out there who will tell you, oh, yeah, you can do this because they want you to use them for that particular service. And then it doesn't matter once you've bought or once you've done your taxes or once you've, you know, done whatever legal entity, whatever kind of service you're using, once you've done it, like you're the person who's on the hook for it, not the person who told you it was okay.
[00:37:15] Speaker A: Yeah, My, my, my favorite influencers are the ones that sell, like the whole life infinite banking plans. And I always like to ask, oh, how do you make money? And then, and then they start, you know, backtracking. My, my second favorite ones are the, the groups that set up like, just ginormous entity structures that sound really great at the beginning, but then you can never keep up with them on an annual basis. It's just way too much admin work. Nobody factors that in. So it's just, you know, you just, you just gotta be aware of like, of what you're getting into.
[00:37:44] Speaker C: And.
[00:37:45] Speaker A: Yeah, but, but if you can, if you can ask questions and make sure that you are trying to take as an objective view as possible, not get emotionally excited about the answers, not make sure you're not hearing what you want to hear.
Seek out the truth, like what's more likely to be right than wrong. I think that you'll be, you'll be in a much better position, especially if you ever get audited.
[00:38:04] Speaker B: I. That is a wonderful mic drop place to end and thank you guys so much for coming on. Is there anything else before we get your, your links and your apps and everything for people to follow you that you feel like our listeners would benefit from hearing?
[00:38:20] Speaker C: Yes. So right now the tax bill is in Congress and it is moving at a decent pace. I won't say fast pace, but, but what is, I can almost guarantee is going to stay is the return of 100% bonus depreciation. Now, there's a lot of caveats to it and unfortunately, if you purchase before 2025, you might not get this 100% bonus appreciation. But if you're on the sidelines, you've got cash, you're thinking about making a purchase, and it happens to be right now or after January 19th, you're going to be eligible for 100% bonus appreciation.
[00:38:52] Speaker B: Love that. And how long. I've seen conflicting reports of how long the 100% lasts. So I've seen, okay, you get, potentially, if this passes, 120, 25, 6, 7, 8 and 9. But then I've seen it's only 100 for 25 and 6 and then it kind of sunsets to 80, 60, 40.
[00:39:10] Speaker C: Nope. So, yeah, so it's going to be 100%, 20, 20, 2025 through 2029. So that's the cut off. However, there is no as of right now. We'll see what happens. A lot can change in five years, especially in Congress. But there's going to. There's no sliding scale like we had in the past where you went down to 80, 60, 40. It goes from 100, 100, 100 to 0%. So after that year. Yeah, you'll be stuck. Yeah. You go straight down to zero.
[00:39:38] Speaker A: Yeah, yeah. And we have a page on our website where we actually track all this stuff for people.
And I don't remember what the page is specifically, but if you go to the realestatecpa.com and hover over, I think, resources, you'll see the tracker. Nate actually is the one that keeps most of that updated on a. On an daily basis, I think.
[00:39:57] Speaker C: Daily. Yeah. Real, real time basis.
[00:40:00] Speaker A: Yeah, yeah, yeah, it's good. It's a really good. Like that. Whenever I'm like, what, what's in the bill again? I go to that page.
[00:40:07] Speaker B: Love it. Well, I'll definitely check that out because I know I'm constantly, like, googling and trying to find the right thing. So I will be utilizing that the rest of the week and. All right, guys, so if our listeners want to follow you, hire you, where can they find you to do that?
[00:40:23] Speaker A: Best place to go is our website. Therealestatecpa.com I'm on Twitter, HallCPA. And Nate, what's your Nate Sosa, CPA. Nate Sosa, CPA. And then you're on. You post on LinkedIn too, correct?
[00:40:36] Speaker C: Both LinkedIn and Twitter. Yeah.
[00:40:38] Speaker A: There you go.
[00:40:39] Speaker B: All right. And I'm at the Avery Carl, thank you guys so much for listening and we'll catch you next week.
[00:40:45] Speaker A: Thanks, everyone.
[00:40:46] Speaker C: Sierra, Sam.
