The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 115 - What the Big Beautiful Bill Means for Short-Term Real Estate Investors
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The return of 100% bonus depreciation through the One Big Beautiful Bill creates powerful tax-saving opportunities for short-term rental investors who understand how to properly leverage these benefits within a comprehensive wealth-building strategy.
• Short-term rental loophole allows non-passive loss treatment when average stay is seven days or less and you materially participate
• Cost segregation studies can accelerate depreciation, typically allowing write-offs of about 30% of purchase price in year one
• Second home mortgages (for properties 60+ miles from home) can maximize leverage, potentially recovering entire down payment through tax savings
• Competition has increased as more high-income professionals seek these tax advantages, driving up property prices
• Excess business loss limitations cap deductible losses at $313,000 single/$626,000 married filing jointly
• Strategic income planning needed to maximize SALT deduction ($40,000) which phases out between $500-600K income
• Consider long-term sustainability of continuously purchasing properties solely for tax benefits
• "Phantom profit" can occur when depreciation runs out but mortgage payments continue
• Diversification strategies include 1031 exchanges into DSTs, opportunity zones, or oil and gas investments
• Material participation requirements may become burdensome as portfolio grows
• Creating a holistic tax plan that combines multiple strategies yields better results than relying solely on depreciation
To learn more about how these advanced planning methodologies may apply to you and get exposed to basic tax strategies, get our free tax planning checklist and mini course at taxplanningchecklist.com. If you're ready to see what's possible with advanced tax reduction, go to prosperalcpa.com/opportunityreport for personalized projections.
After consulting with hundreds of clients. One observation I was making around 2021, 2020 was that short-term rentals at that time were the easiest way to make money, build wealth and, in many instances, completely eliminate your taxes. And it just seemed like our short-term rental investor clients were printing money Like they had it all figured out. I couldn't believe what these guys were achieving. Well, things have changed a little bit. The word has gotten out, it's more competitive with short-term rentals and bonus depreciation started phasing out. Well, bonus is back at a hundred percent, and we have all these other changes with the one big beautiful bill that are going to impact you as a real estate investor and a short-term rental investor. So what I'm going to talk about today is how to take advantage of the tax incentives of short-term rentals now that we have this new one big beautiful bill, and what does this mean for you, not only for the current year, but as far as long-term tax planning. From this conversation you are going to learn about what does this mean? What is 100% bonus and what's the long-term consequences? And also, how does this short-term rental loophole and the newly adjusted 100% bonus depreciation impact your overall wealth building strategy, your goals, your ability to build financial freedom and your overall tax strategy and what that's going to mean for your investment decisions. Now, before I get into this content, a couple things. If you want to learn more about how some of our advanced planning methodologies may apply to you and at least get exposed to some basic tax strategies I have a free tax planning checklist and mini course Go to taxplanningchecklistcom, put your info in and you'll get a series of emails, our tax planning checklist and case studies so you can start assessing what's possible. And if you're ready to get started working and seeing what is possible and at the very least to get an opportunity report we are doing opportunity reports for those of you to see what is possible with advanced tax reduction. You'll get projections and an explanation of what applies to you. You'll be exposed to ideas you've never seen before. Go to Prosperal prosper with an L prosperlcpacom slash opportunity report for that discussion to see what it means for you.
Speaker 1:Now let's get into the material. So first, before we even get into how the One Big Beautiful Bill Act is and what that means for short-term rental investors, let's backtrack a little bit and talk about what for short-term rental investors. Let's backtrack a little bit and talk about what the short-term rental loophole is and how it's so powerful With the short-term rental loophole if the average length of stay is seven days or less and you materially participate and you can go back and search what's the short-term rental loophole for more information on what that means. But typically if you self-manage and we say that you put in 100 hours and no one else puts more time than you, you're materially participating. If those two factors are true, you can treat your losses as non-passive. Well, you may obviously be thinking well, I don't want to be a loser, why does that matter to me? I want to profit. Well, we can create massive losses by accelerating your depreciation with these cost segregation studies, where we identify items that depreciate faster in your real estate and write them off immediately. And some of those items are going to be easy to find with the short-term rentals, because you have things like TVs. You have things like kitchen supplies and bed sheets and linens and beds and couches, all these other personal property items that are going to be depreciated faster. So we would approximate with short-term rentals.
Speaker 1:Our typical rule of thumb is you're going to write off 30% of the purchase price when you do this and you do what's called the cost segregation study to accelerate depreciation. So imagine here you buy a $500,000 rental, you get a tax deduction of $150,000 when we have that material participation and the average length of stay is seven days or less. And to sweeten the deal, let's say we want to pull an even bigger lever. If it's 60 miles away from your home, you can get a second home mortgage. So let's say you only pay $50,000 down on this property for that $150,000 tax deduction. Think about the tax impact. That's like you're going to get back almost all of your down payment back, or maybe all of your down payment back in the form of tax savings when we combine all these strategies, so very powerful and you can take that refund from the cost seg and then reinvest and grow and compound your wealth. Well, we started seeing some challenges. That bonus depreciation started phasing out and before the updated tax law we were down to 40% bonus. So instead of writing off 30%, you were going to write off maybe closer to 12% with this cost segregation study.
Speaker 1:But anyways, the short-term rental loophole is a really great way If you can't get that real estate professional tax status you may have heard me talk about, if you can't get your spouse to work full-time. It's really the only way you're going to find where you can use the losses to offset your W-2s or your ordinary business income. This is really popular for high W-2s because now it also gives you the opportunity to create write-offs. And most of you who are W-2s just starting off in real estate investing or maybe you have a portfolio you don't really have the opportunity to use write-offs to offset your W-2s. But now you can also reduce your taxes by having tax-deductible meals and travel hiring your family members. It really is like this domino that opens up all these other tax savings opportunities and fringe benefits and advanced entity structure. It's really powerful stuff here.
Speaker 1:Well, there's some really exciting stuff with this one big beautiful bill and the big ticket item here for short-term rental investors and this also applies for long-term rental investors, by the way but 100% bonus depreciation is back. So, as I said earlier, we have this 100% bonus and that means that we will continue to write off 30% what we would say we would ballpark at 30% of the purchase price Now. Before that, we would only be able to write off around maybe 12%, 15% with the reduced bonus as it was beginning to phase out with the phasing out of the Tax Cuts and Jobs Act. So this is going to be more of a long-term strategy where you can continue to buy more and more rentals, do the depreciation strategies and reinvest your tax savings and really compound your wealth by reinvesting the tax savings into assets that give you more tax savings. How awesome is that cycle right there.
Speaker 1:But some other things to think about here is that rental property has to be purchased after January 19th of 2025. So they really took it literally. When Donald Trump came into the office, he said right after I'm inaugurated, you're going to be able to write off those vehicles and trucks. And they took them literally and they did it right on the day of that cutoff point, on the day of the inauguration. So for those of you who bought the properties in January, maybe a little bit disappointed by that.
Speaker 1:Some other things I want you to think about here is, while the tax savings are fantastic, we're past this sort of honeymoon period where there was a time where not a lot of people knew about the short-term rental loophole. I know because I couldn't really find a whole lot of professional guidance when I was getting started and it was kind of nerve-wracking to wipe out all the clients' taxes and not find a whole lot of articles validating what we were doing. But now everybody's caught on and jumped on the bandwagon. And now you're competing with physicians and highly paid professionals and other entrepreneurs who are dying for a tax deduction. And now that's factored into the price, and the higher the price, the more tax savings. So a lot of these folks don't really care so much that they're paying more because it means more tax savings.
Speaker 1:Now, if the price is going up, that means it's going to be harder to profit and I want you to be weary of this idea of buying assets just for the tax savings. It makes for really good social media clips writing off your yachts and your G-wagons, but it's really freaking stupid because at the end of the day, you still got to buy the asset, you're still paying off the mortgage and paying interest on the mortgage and if you are not profiting and buying assets that, at the end of the day, are just stupid, you might find yourself in a big pickle. Because we're not just doing this to reduce our taxes. You know it should be part of an overall wealth building strategy here. Now here's another thing I want you guys to think about some limitations. There's the excess business loss limitations, and this is really important for you guys who have high W-2s and invested short-term rentals. The most amount of a loss that you can create against your W-2s or your stocks it's really non-business income is $313,000 if you're single and $626,000 if you're married, filing a joint. Now those are the numbers for 25 and it gradually grows and adjusts for inflation. So if you have a really high income or W-2, let's say you're making $1.52 million and you think that this is going to be the only thing you can do to reduce your taxes, you may be surprised to find that you're still paying a lot in taxes out of your W-2 because you're cut off on how much of these losses you can use. And that's why we come in and we can layer on some additional strategies, whether it involves generating tax credits or charitable deductions to further drive down your. So some other things I want you to think about here.
Speaker 1:With changes in the One Big Beautiful Bill Act, there's some incentives that we want to take advantage of and there's what I call the sweet spot for AGI. So right now you have this $40,000 SALT deduction, state and local tax deduction deduction. You're allowed to deduct $40,000 of your property taxes, state taxes, local taxes, the taxes that you're paying to the state out of your W-2 paychecks or the taxes that you pay to the state out of your business. You're allowed to write off $40,000 of that against your federal income. Now, earlier it was capped at $10,000. However, that amount is phased out as your income increases by $500,000 to $600,000. And that's a fast phase out. So think about this as your income increases from $500,000 to $600,000, your taxable income doesn't increase by $100,000. Your taxable income doesn't increase by $100,000. It's going to increase by $130,000 because you go from a $40,000 SALT cap all the way down to a $10,000 SALT cap, and we'll talk about this in a little bit here.
Speaker 1:But you may not always be capable of buying assets to save money year after year after year. So we may want to spread out the depreciation. There's all sorts of depreciation elections and ways we can time your cost segs so we can keep you in that sweet spot to give you that maximum $40,000 deduction. There's another threshold we like to get into, which is often around a $400,000 of taxable income. That's going to maximize the probability of you getting the most out of what we like to get into, which is often around a $400,000 of taxable income. That's going to maximize the probability of you getting the most out of what we call qualified business income deduction Lots of variables, but that could be a 20% deduction of your profits. It is extremely valuable if you are a profitable sole proprietorship, especially you guys in Tennessee, and if you are an S corporation and Tennessee, and if you are an S corporation and in particular, if you're an S corporation that's a consultant or a physician or an insurance agent what we call SSTBs and we also want to be able to get that child tax credit. So you have access to all this bonus depreciation. Obviously it's going to be a lot easier to get, but how easy is it going to be and how realistic is it going to be and how much does it make sense for you to buy assets year after year after year? So you want to factor this in to see how you're going to depreciate this, to maybe stay around that sweet spot, to continue to use that forty thousand dollar state tax deduction, maximize qbi and access the child tax credits year after year.
Speaker 1:Now for some of you you may say, hey, I want to pay no taxes at all. I make half a million, let's write off all of it. Well, hang on there. We want to time this and be smart about it. Because if we write off all your income, let's say we offset all your income with rental losses Well, now we lose the ability to use that standard deduction or itemized deduction. You don't use it, you lose it. That $40,000 deduction well, you're not phased out for making too much, but you can't use the deduction because you're at that zero rate. And now, whenever you depreciate things now, you lose the ability to depreciate in the future and maybe your income jumps up and now you make too much to use that $40,000 deduction. So, as a strategist, as we're doing the return and evaluating your situation, we want to consider our depreciation, elections and timing of events like Roth conversions, retirement account contributions and also things such as the elections and how much we're going to depreciate in year one, because there's a lot of flexibility and there's an art to our depreciation strategies to create the ultimate amount of long-term tax savings. To create the ultimate amount of long-term tax savings.
Speaker 1:Here's another thing I want you guys to think about is what's the long-term impact of all this right? So what does this mean for you as a long-term play here, now that we know that 100% bonus depreciation is permanent. And, by the way, not all these tax incentives are permanent the $40,000 state and local tax deduction that's only going to last until 2029. And a lot of these sexy tax incentives like the no taxes on tips and the deductibility of your car insurance. A lot of them are phased out really early and limited to a very small amount and aren't going to last that long. By the way, really good marketing, though Sounds nice to have untaxed tips Sounds like you're really sticking up for the little guy here, but you'd be surprised by how little of an impact it's going to have on most of the general population.
Speaker 1:But anyways, some of the things I want you to think about here for the long term impact is think about this Are you going to be able to continue to buy assets year after year as your only tax reduction strategy? Because a lot of people will obsess over cost segregation studies and these depreciation strategies and while we love them we've done it hundreds of times how realistic is this going to be for you to use that as your only way to reduce taxes, especially when you're 10, 20 properties in? Are you ready to go full-time real estate and leave that cushy W-2 job or that highly profitable business of yours, just because you need to buy more assets and now this beast is starting to consume so much of your time to oversee. Now also, because we're able to front load so much of our depreciation. And if we can't continue to buy and gain more sources of depreciation, what's that going to mean for you down the road? As your profitability increases on these short-term rentals and you get more and more cash flow and you've already front-loaded the depreciation. Now there's a lower probability that we're not paying taxes on our cash flow from the short-term rentals. So we may find out that the short-term rentals are actually going to increase our tax liabilities over time.
Speaker 1:Here's some other things to think about. On the positive, because we have this 100% bonus, it's going to be easier to mitigate your cap gains. With 100% bonus, we're going to get more of a deduction by buying new properties and this is true for long-term rentals, by the way so you can use cost segregation studies to create losses to offset the capital gains events from other rentals. Now your short-term rentals can run cost segs to offset the gains from the short-term rentals. The long-term rentals can use cost segs to offset the gains from the long-term rentals, and what's really cool is you can invest passively in other people's deals and use those cost seg losses to offset your long-term capital gains as well. And so this just becomes. It makes it more feasible to continue that cycle if you're exiting out of properties, and this is really also helpful for our real estate syndicator investor clients to redeploy their capital and grow and compound their wealth in a much faster and efficient way with using those losses.
Speaker 1:Another thing I want you to think about here is we don't know if 100% bonus depreciation is really going to be permanent. Obviously, it's made into law. It's not going to be phased out like it was earlier with the Tax Cut and Jobs Act. But if you look in history, bonus depreciation has moved in and out. It's been at 50%, then 100% temporary, then down to this percentage. It's been moving around forever. So yeah, and it's kind of a new concept. So I wouldn't be too surprised if there were some sort of backlash or changes in the law down the road where maybe we don't get 100% bonus in the future.
Speaker 1:Now here's a very unrealistic possibility, because if there's one thing that the Democrats and Republicans have in common they both suck at maintaining a budget and bringing down the deficit. So the Republicans are going to give tax breaks and the Democrats are going to overspend. Neither one of them are very good at managing the budget and also it's really hard to get votes when you raise taxes. So I don't know if anyone's ever going to consider adjusting bonus to help manage our deficit, but it's just a thought. There's a possibility it could change in the future.
Speaker 1:Now another thing to think about is you're going to have to materially participate in your rentals and for those of you relying on short-term rentals for tax savings unless you think you're going to eventually pivot all the way over into full-time real estate investing a lot of you guys are going to find that the greatest return on your time is at your W-2 jobs. You know you may be seduced by this concept of mailbox money which we see all the time. I mean, we love BiggerPockets. It's a great resource. But a lot of the times you listen to these conversations and you may find that they've over glamorized what real estate investing is and there is a lot of headaches associated with short-term rentals. People are going constantly in and out, in and out, and they can't. You know they're going to complain that the toaster doesn't work, they can't access the Wi-Fi. You know people steal stuff, break stuff. There's more stuff to break and it can be really time consuming so you may find yourself burning out.
Speaker 1:So here's one potential solution. With that you can exit out into a more passive investment and not pay taxes. You can 1031 into any type of investment. You can hire a property manager to manage your investment. Or, if you just want this thing off your plate, you can defer the gain by rolling it into a Delaware statutory trust where it's essentially a 1031, but it's rolled into a collection of more stable passive investments where you just collect a check. By the way, look up up reads and DSTs with Jason Pruschel. I have an episode on that. That was wonderful. So that could be your exit in the future.
Speaker 1:To move into the passive bucket, some of our clients are going to be, and already are, consolidating their assets. So it's a little bit easier to oversee some bigger, larger, more unique, more profitable cash flowing assets instead of being spread so thin. You get 1031 into them, as that could be your future goal there, and short-term rentals will continue to see volatility. They will be competitive because of the tax incentives attached with these things. So it's not going to be easy money. It isn't easy money anymore. We've seen a lot of people get burned because they jumped in too soon. So you got to be.
Speaker 1:If you're going to do this, you want to be smart. And, by the way, for those of our clients listening, we have a webinar on I believe it's August 12th on getting started in short-term rental investing. You have all received a calendar invite for that. That's also on our school page. We're going to have a veteran real estate investor, john Pasilio, walk you through that Mistakes to avoid tips, tools and all that good stuff. So I'm really excited to riff on that with you guys all that good stuff. So I'm really excited to riff on that with you guys.
Speaker 1:And also, I want you to think to yourself again, evaluating this versus your job. So here's what we may see for some of you guys and we were already seeing this even with a hundred percent bonus, you still may find yourself wanting to pivot down the road when your portfolio has grown to the point where you can't buy any more rentals or you just can't find any good deals, even with a 100% bonus. Another thing I want you to think about. 100% bonus can also apply to your vehicles. You could write off 100% of that truck that you're putting in the business all these other things to create tax savings. You are still going to need other strategies that are going to be less intensive and allow you to preserve your energy if you're going to continue this road of having your high W-2 and creating tax losses to offset it, especially if you become cash flow positive and don't continue to buy and start showing profits on your short-term rentals. So what that means is we got to make sure, just like they say you want to diversify in your investments, you want to diversify in your tax planning strategies.
Speaker 1:I want you also to be aware of what I call phantom profit. If we're creating paper losses, where you're writing off an asset before you've really paid for it because you're using mortgages and financing, eventually you're going to continue paying off that asset, but you're not writing off all the money that leaves your pocket because some of it is just paying off the debt. So what's going to happen when you're paying off all these debts? The cash is leaving your pocket and you may be cash flow negative, but you're not writing off getting write-offs equivalent to the money leaving your pocket. So imagine I'm spending $40,000, $50,000 a month to pay off debts from my mortgages and now it's being applied to the principal and I only get a tax deduction of $40,000, sorry, of like $10,000. So now our profit is going to be greater than what we're actually pulling in. It's going to be harder to set aside money to pay the taxes on that, and so some of the thoughts here is, you know, being able to.
Speaker 1:Some of our clients are also pivoting into oil and gas, similar tax benefits. You're not pulling as big a lever all the time as you could with the second home mortgages where you can write off three times your down payment, but it's a truly passive vehicle managed by experts that can offset your W-2s and you do absolutely nothing at all most of our clients and then, when the money comes in, it's tax advantage. You can get the depletion deduction so you don't pay taxes on all the money that hits your account and you may even get a 20% deduction for qualified business income. So that's really exciting stuff that we can move our clients into or stack on top of the short-term rentals and again and I always emphasize this having a holistic tax plan. So we're not just relying on buying assets to reduce our taxes, because we don't want to buy assets that don't make sense for us in our business. So we want to layer this in, see how we can stack this with the charitable and the credits Write-off strategies, capital gains planning strategies, timing of investments, timing of expenses, timing of expenses, strategic family planning, hiring the kids, maybe partnering with family members and seeing how that plays in. And then again the work that we can do with timing on when we're going to recognize your losses based on your current and future year income. All this can be considered and when you do that, you can create magnificent savings and wealth building.
Speaker 1:So the one big beautiful bill act has had an incredible impact for those of you using depreciation and you short-term rental investors. But be aware that it's not just about buying assets. It's not easy money with the short-term rentals and you want to consider other tax strategies and maybe other investments. You may decide to pivot into other investments or mitigate your capital gains by rolling into those investments, not to mention I'm not going to get into it today but also qualified opportunity zones are going to be really interesting starting in 2027. So lots of wonderful opportunities, especially if you're just getting started short-term rentals.
Speaker 1:I hope you have a game plan. You're ready to assess and evaluate and find profitable deals. So not only are you driving down your taxes, but you're also building your wealth and your cash flow and this can help you achieve your goals. All right, if you found this helpful, let me know like, subscribe all that good stuff. And if you want to be introduced to these concepts again, go to taxplanningchecklistcom for a free checklist and mini course. And if you want to learn how we can potentially help you and how some of these advanced planning strategies may apply, go to prosperalcpacom. Slash apply and we'll share with you what may be possible. Have a wonderful day. We got more great stuff coming your way.