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Any good agencies in San Diego area?
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So this is...a time consuming business...that is not profitable...but seems worth it...because of tax maneuvers...that might expose you to legal liability...
I wouldn't.
Mentor
Let’s break this down a bit:
Short term rental + cost seg to accelerate depreciation: not a bad strategy. I’m unclear how this works on a house that was previously a primary residence, so check with an accountant on that. I know the cost basis is based on when you bought it, so you may not get the most benefit from this if you bought a few years ago.
Real estate professional status: this isn’t exactly how the “STR loophole” works, but it’s similar. If your friend spent more than 100 hrs AND more than anyone else on the business in the year that he used the bonus depreciation, that’s correct. In future years beyond year 1, it’s not as lucrative.
Having a “profit motive” - I would hope anyone has a profit motive. That being said, it’s not uncommon for businesses to lose money in the first few years while ramping up and learning how to operate. A STR has high startup costs with furniture, stocking a kitchen, etc… but if you don’t think there’s enough demand in your area to justify operating as a short term rental after those initial startup costs, then I wouldn’t pursue it. The tax “advantages” are really just pulling the depreciation forward, but you pay a recapture tax when you sell. Many people don’t realize this.
Counting “work” days vs personal days: yup, this is a thing. But there are IRS definitions of what quantifies as work. And it’s up to you to prove you did the work. I hope your friend keeps a good time log with evidence!
Paying friends to fly in and do menial tasks: I wouldn’t suggest this, but if his CPA will sign off on it, then good for him. It’s all about the risk of whether the IRS will accept his “proof” in the event of an audit. Lots of people write things off that might not be “by the book”, but until there’s an audit, they might get away with it.
It’s 750 hours annually and needs to be more than 50% of your working hours. Very difficult to prove with w2 income unless on LOA. I did it with my 6m parental leave managing 3 properties and IRS hasn’t asked questions (yet).
Anyone have thoughts on this? Done it? I do end up doing some work on the house when I'm there. My friend also deducts cost of flights to have friends visit and then give them menial tasks and counts it as business expense (under recco from his cpa)
lol sounds like pretty obvious tax fraud. If he gets audited by the IRS, expect a large penalty coming his way. People always think they are coming up with some unique way to use the laws, but IRS agents just use common sense and have pretty wide authority to allow/disallow things if they obviously are living up to the spirit of the law
That's a very insightful point. I've also been researching short-term leasing strategies recently, but I've been thinking a lot about the "profit motive" requirement.
In your experience, what factors does the IRS focus on most when determining whether a short-term leasing business is truly for profit?
That's a very insightful point. I've also been researching short-term leasing strategies recently, but I've been thinking a lot about the "profit motive" requirement.
In your experience, what factors does the IRS focus on most when determining whether a short-term leasing business is truly for profit?
We did this last fall but did it legitimately with a second property that operates as an AirBnB. Massive tax benefits but it’s a lot of work
This ^ it’s a ton of time in year 1… and if you are at a big 4, consider independence/getting approval if you are going to form an LLC
Compare the pros against a big con of losing the benefit of zero capital gains on selling your primary home.
Mentor
Ah true. My brain is still in Monday mode