The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 117 - Short-Term vs Long-Term Rentals: Tax Secrets Revealed
Short-Term vs. Long-Term Rentals: Tax Benefits Explained
Understand the tax differences that can make or break your rental strategy when choosing between long-term rentals and short-term rentals for tax savings, profit, cashflow and wealth. In this video, we break down how each property type impacts your deductions, cash flow, and long-term wealth.
Ready to slash your tax bill? Schedule your free consultation and let's strategize your tax savings together! Book now at: https://www.prosperlcpa.com/apply Or, if you still need more time, here are some other ways to begin winning the tax game...
Take our free Tax Planning Checklist & learn about what tax savings may be available for you in our minicourse at https://taxplanningchecklist.com
You’ll learn:
• How the short-term rental loophole can create large deductions with cost segregation and bonus depreciation.
• Navigating material participation rules between different investment types
• Why average stays of 7 days or less matter for short-term rental tax advantages.
• The benefits of long-term rentals, from simpler material management to avoiding lodging taxes.
• How real estate professional tax status can help offset other income.
• Strategies to reduce taxable income and grow your portfolio.
Ready to slash your tax bill? Schedule your free consultation and let's strategize your tax savings together! Book now at: https://www.prosperlcpa.com/apply Or, if you still need more time, here are some other ways to begin winning the tax game...
Take our free Tax Planning Checklist & learn about what tax savings may be available for you in our minicourse at https://taxplanningchecklist.com
If you’re a high-income earner, business owner, or investor, this is your roadmap to lowering taxes while building wealth.
#realestate #costsegregationstudies #taxdeductionsforyourrentalproperty #howtodeductrentallossesonyourtaxes #howtoinvestinrealestate
CHAPTERS:
00:00 - Intro
01:48 - Short-Term Rentals Strategies
09:44 - Qualified Improvement Property Explained
10:50 - Long-Term Rentals Overview
20:00 - Long-Term vs. Short-Term Rentals Analysis
20:26 - Essential Property Insights
21:39 - Beyond Rental Activities Considerations
22:34 - Free Opportunity Report Access
23:03 - Free Tax Planning Checklist Download
Short-term rentals versus long-term rentals which one is best for me? When we look at the taxes, let's go into the pros and cons and tax benefits of both investment strategies to help you look at this from the lens of a tax preparer. And looking at the tax treatment of these activities to help you understand what might be best for you short-term rentals or long-term rentals. Now, when you listen to this, you're going to have a clear picture of how you can use these losses from either your short-term rentals or your long-term rentals to offset your income and how easy it may be or may not be for you and overall you're going to get to see how the tax treatment of this activity is going to factor into your decision making and overall fits into about what type of tax strategies and which advanced tax reduction strategies we do could apply to you and how much it would save. Go to prosper. Prosper with an L cpacom slash opportunity report for that free interview and video from me. Interview and video from me. Also, if you're ready to just get started with the initial phase and maybe you're not ready to have any conversations and you just want to get some basic details on what type of tax savings opportunities available. Start assessing on your own what you may be able to do for yourself. Go to taxplanningchecklistcom for a free tax reduction checklist and mini course. All right, let's get into it here Now.
Speaker 1:When it comes to reducing your taxes, if you are looking to create losses and use losses to offset your income, if you're looking for immediate tax savings, most of you guys are going to be really excited for what short-term rentals can do. Now, before we even get to that and I've explained this a million times, so I apologize for our longtime listeners, but trust me, we'll get into some more details here but essentially, the biggest thing we can do here, one of the greatest incentives of real estate is we can create massive losses by accelerating depreciation. In a cost segregation study, typically we can see ourselves now that 100% bonus is back writing off anywhere from. I've seen anywhere from 20% to 50% of the purchase price. Those are on the extremes. Actually, 20% is not that extreme. I would say anywhere from 15% to 50%, but anyways, we can create massive losses by accelerating the depreciation, even if you're financing it. Even if you're only putting 10% down, we may be writing off 30%. So it's really a great vehicle to create losses. Now how can we use these losses? There's all these restrictions.
Speaker 1:Most of you guys are going to find it's easiest to create non-passive losses. It's easiest to create non-passive losses, losses that can offset your W-2 income and or your business income or your capital gains income or your interest income. Really, any kind of income can be offset with the losses from short-term rentals, as long as you have material participation and the average length of stay is seven days or less. Now, I've talked for hours about this and you can just Google what is a short-term rental loophole, have a whole hour-long conversation on this, but what we find here is we'll talk about this in a little bit on what this means for long-term rentals but the easiest way for you to achieve the non-passive losses of your real estate is going to be with short-term rentals. But the easiest way for you to achieve the non-passive losses of your real estate is going to be with short-term rentals. We just need the average length of stay to be seven days or less. Now, if you're wondering, how common is this, we've served hundreds and hundreds of short-term rental investors and we almost always find that the average length of stay is seven days or less, unless it's a midterm rental. So even if you're not even doing it in a vacation area let's say you're renting out a short-term rental, like we've seen it in the suburbs of Charlotte and Tennessee not even in the places where people go for vacation we're typically going to find that the average length of stay is seven days or less. And now we just need material participation. We'll talk about what that is in a little bit here. So material participation means that either you put in 100 hours or no one else puts in more time than you, or it may mean that you put in 500 hours.
Speaker 1:Now there are other tests. I'm not going to go into all the minutiae here and overwhelm you guys on YouTube, but the most common ways we'll achieve it is either the 100-hour test, where we say we put in 100 hours and no one else put in more time than us in either our rental or collection of rentals, or we put in 500 hours into our rentals or collection of short-term rentals. So what this means is you don't have to be full-time in real estate. You can have a high-paying W-2. You can have a high-paying W-2. You can have a high-paying business. You have a profitable business and you can invest into short-term rentals, even if it's their cashflow positive, create massive losses and create savings against your business income and W-2 income. This is really fun for our W-2 guys because they get refunds, because all the money's coming out of their W-2 check, all of their hard-earned money, is just being taken from them. And then we do these short-term rental investments. We run the cost eggs. Now they get a really big fat refund that they're all so excited for, and so that becomes a possibility here.
Speaker 1:Now some other things that you can think about here. With short-term rentals, obviously we have our cost segregation studies, because we can identify property that depreciates faster, like the ceiling fans, like the driveways, like the refrigerators. You're actually going to get more items that qualify for that accelerated depreciation, or what we call bonus depreciation, when you invest in short-term rentals, because you're also going to have items like TVs and couches and linens and silverware. All those things are what we would call five-year life property, and the five-year life property can be deducted immediately. Now we have that bonus depreciation.
Speaker 1:Now another exciting thing for some of you guys, especially if you're just starting off or you don't have a lot of capital. Here's something that we see a lot of our short-term investors do and it's not really related to taxes, but you're going to see how this fits in and makes it really exciting from the purpose of building wealth and reducing your taxes. A lot of our clients will invest in second home mortgages. If your property is 60 miles away from your personal residence, you can get a second home mortgage. What that means is, instead of having to put down the typical 20% to acquire the property, only putting down 10%. And this gets really exciting because when we do our projections, we usually estimate that you will write off 30% of that short-term rental in year one. It's a little higher than most rentals because of all these additional items of personal property.
Speaker 1:Usually, when you get that second home mortgage, especially if you're getting something in like a mountain lodge or a beach rental, you're going to find that those properties come with the furniture already in it. So what we are likely to find here is, if you could put 10% down and you write off 30%, how exciting is that? You're going to get a tax deduction that is three times your down payment. If you're in a high bracket let's say you're over 33% bracket you're going to get your down payment into that rental coming right back to you in the form of a refund from that cost segregation study, not to mention especially for the UW2 folks. This is your first time to get tax deductions and business write-offs that'll further drive down your income and create additional savings and additional refunds.
Speaker 1:Now most of you listening here when we talk about real estate professional tax status for long-term rentals in a little bit you're likely to decide that short-term rentals are favorable to you because there's fewer boundaries to be able to use your losses to offset your ordinary income and with short-term rentals you still have the favorable treatment of your income. It's not subject to self-employment taxes, you can still do 1031 exchanges and you're also going to find that you're going to see pretty much a lot of these same passive types of treatments and benefits of your real estate the depreciation offsetting your cash flow. But it isn't all sunshine and rainbows here, because there is this thing called the lodging tax. Some of you may not even realize you're paying so much of it and the lodging tax is usually a tax based on not the profits but the revenues of your short-term rentals, and a lot of times we see it maybe they'll call it a hotel tax. We see around 6% to 8% of the revenue, so that means at $100,000 of revenue, you're paying $6,000 to $8,000 in taxes. That's going to be on top of if you have federal and state taxes as well. You could be operating at a loss. You could bring in $100,000 in revenue and $200,000 of loss. You're still paying that tax. Now, a lot of times you don't realize this. If you're using the short-term rental and VRBO platforms, they're taking out the taxes for you, but you may be surprised to realize how much in the state and local lodging and hoteling tax that you are paying on your revenue. So that puts a little bit of a damper on things.
Speaker 1:And now another thing I want to talk about here, and this is applicable to long-term rentals and short-term rentals. More so to short-term rentals. There's something called qualified improvement property and that is going to allow you to qualify for bonus depreciation any improvements made to the interiors For short-term rentals. This works because we call it non-residential, because people are coming in and out on a transitory basis, assuming the average length of stay is seven days or less, and so people are coming in and out. You can write off the immediate renovations to the interior, as long as it's not an elevator or an escalator. Why they made that rule? I don't know. However, there are some American Disability Act tax credits, by the way, you can get for that. So I don't want to go on too much of a tangent, but anyways, you can get immediate bonus depreciation on those renovations. Now, with long-term residential, you don't get that immediate bonus deduction on the renovations. So if you're planning to do massive interior renovations and enhance the value, short-term rentals are going to allow you to have even more of that immediate tax deduction.
Speaker 1:Let's get into long-term rentals Now long-term rentals. When it comes to creating immediate tax deduction, let's get into long-term rentals Now long-term rentals. When it comes to creating immediate tax reduction, it gets a little bit trickier. With long-term rentals, most of you are going to find that you're going to need real estate professional tax status to offset your ordinary income, which would be typically your W-2 income and or your business profits. You also will need real estate professional tax status to use any losses from that real estate, any losses you can take from that bonus depreciation. And the cost segregation where you're accelerating the depreciation and give those in immediate write-offs is really only going to mean anything to you in most circumstances. If you have real estate professional tax status, it's not going to offset your stock cap gains or your dividend income, it's just going to be suspended and carried forward. Now, that's not the end of the world, because it's still nice to have losses, because you can be bringing in cash flow and profit and using the losses to offset your profit. But if you're looking for immediate savings, that's going to be harder to do with long-term rentals.
Speaker 1:Now here's an advantage you're going to see here. Now, while it's going to be hard to use those losses, obviously you may have heard of real estate professional tax status. So if you or your spouse spend at least 50% of your time and in at least 750 hours in your real estate trade or business, now we can use those losses against our ordinary income. But we also, just like with short-term rentals, we're going to need that material participation and the material participation like we talked about with short-term rentals, you got your 100 hours test and your 500 hours test. Now this is where we start seeing some advantages of long-term rentals over short-term rentals. Here's why, with short-term rentals, it's going to be trickier to materially participate.
Speaker 1:Now, remember, with short-term rentals we need to say we put in 100 hours and not any single individual puts in more time than us. Well, think about this. You have this whole cleaning crew coming in and out. If you're managing the short-term rental from afar, it may be hard to take that stance that no single cleaner puts more time than you. Think about how much work that goes in to changing the sheets and cleaning the whole place. You're going to at least need a whole crew of people coming in and out so we can take that stance that no one puts more time in than you. See and I'm warning you guys who are listening to some of these gurus out there and gurus who don't read the law it's not just about putting the 100 hours. You need to say you put in the 100 hours and no one else put more time than you. So for some of you big shots out there getting these gigantic beach cabins with multiple stories, just remember somebody's going to be going in there and cleaning the entire place and we need to take the stance that not a single one of those cleaners is putting more time than you. And you're going to have to defend that in an audit. And we have been audited and scrutinized on it and we passed the audit.
Speaker 1:But it was a ton of work and I realized that material participation is not so easy with Short Term Rentals because of all the manual labor that it takes to clean between the guests and change all the sheets, restore the towels and put out the toothpaste. And change all the sheets, restore the towels and put out the toothpaste and the soap. And all the cleaning that has to get done between the guests is incredibly time intensive and even if you can't have more time, you're able to put in more time than the other people here, than the other cleaners most likely is the most challenging thing here. You're still going to find it a little bit challenging to dedicate that much time into another activity. Long-term rentals material participation becomes a lot easier, so you're not competing with all these other cleaners for hours.
Speaker 1:Also, there's another test for material participation that a lot of people are ignoring here. For material participation, you can also pass what we call the substantially all test. Essentially, we need to say that we put in substantially all of the work involved in managing this rental. So if you have real estate professional tax status and let's say it's December, you're not going to have enough time to put 100 hours into your short-term rental most likely. But you can buy a long-term rental and just do all the managing of it. Now you passed a substantially all test and now we can do a cost tag on that long-term rental to offset your taxes so that material participation becomes a lot easier. It's a lot less time incentive to manage your rentals if you need that material participation.
Speaker 1:So think about this here. If you can achieve that real estate professional tax status now all you got to think about is you can have some more so passive investments where, let's say, it doesn't take so much maintenance and oversight to build your rental portfolio, you're still materially participating by passing that substantial YAL all test. And, by the way, if you're wondering, well, what does that really mean substantially all? What if someone's coming in and maybe you know, checking in on the sprinklers? Well, the IRS had never defined what substantially all is. So I've asked the smartest tax educator I could find on the topic and if you were to look at prior court cases, essentially we're trying to say that you put in at least 80% or more of the total time into this rental.
Speaker 1:Another advantage of long-term rentals over short-term rentals is that there that hotel lodging tax where, even if you're having a highly unprofitable year, you're still shelling out money to Uncle Sam, kind of like a sales tax on the revenue. There's none of that with long-term rentals and also, from an economic perspective, there's a lot less volatility. It's a much more established form of real estate, so we have a little more predictability going on here. Here's another advantage not to be overlooked. We talk about long-term rentals or short-term rentals. Obviously, the real estate professional tax status has to be a part of this, but let's talk about grouping elections, where we can look at the group of rentals to achieve that material participation status.
Speaker 1:For those of you looking for long-term wealth and maybe having someone eventually working full-time in real estate, as a long-term rental investor you can eventually shift your focus and invest passively into other people's deals and a lot of those syndications, like investing in the large multifamily syndications or investing in the large multiple home parks and maybe invest in some student housing right, where you're passive, you're not doing anything anymore and you're just collecting a K-1. Well, we can do that and still use the losses to offset our ordinary income, as long as we say we've put 500 hours into our collection of long-term rentals. Now, when we have short-term rentals, this becomes a little tricky because you cannot group your short-term rental activity with your long-term rental activity. So if you find that you've done this short-term rental loophole activity and you have real estate professional tax status and now you're like thinking to yourself, well, I need somewhere to put my money so I can invest and use losses, why don't I invest in all these syndications? Well, you can't do it Because unfortunately the IRS says you're not materially participating in this type of activity. You're only going to be able to take more losses by buying more of these short-term rentals where you have to achieve that material participation. So obviously you can group your short-term rentals together to make this more feasible, but as far as coming a limited partner and using other long-term rentals to offset your ordinary income, that's not going to be a possibility anymore.
Speaker 1:So another thing we talked about earlier was qualified improvement property. This will work if we are using non-residential, so you can still see that benefit on the internal improvements, but only if you're doing commercial real estate, so your self-storage, your office spaces, your retail spaces then we can still get that opportunity. So here's what I want you to think If you really want immediate tax savings and you can't become a real estate professional and most of you can't, because to be a real estate professional, we need to say that more than 50% of your hours are dedicated to real estate trader business and you can't get this with the W-2. It won't fly, okay. So if you can't find you or your spouse working full-time in real estate, you may decide to go with short-term rentals, because the short-term rentals are going to give you that immediate savings and it's going to allow you to really grow and compound your wealth, where you get a good chunk of that down payment into the purchases back to you in the form of tax savings Really incredible things that you can do here.
Speaker 1:And you know, like I've said this many times, I've seen people completely eliminate the federal taxes with short term rentals. However, there are still some advantages of long-term rentals. It's a lot easier to oversee your long-term rentals, it's less work for some of your basic long-term rentals and it's a lot easier to achieve that material participation element of what's needed to use your losses with the long-term rentals. So if you have real estate professional tax status already, you may decide to go to the long-term rental route over the short-term rental route because of that factor. Now, another thing that you want to see here is, let's say you don't need to see the loss benefits of the profits. Let's say we don't need to see the lost benefits of the profits, you know. Let's say we don't need the losses here.
Speaker 1:Right, think about this. We're not just in this to reduce our taxes, because there are some more efficient ways to do this that you probably don't know about if you're a high income earner and you're overpaying in taxes. But think about this Real estate is an incredible vehicle to reduce your taxes, but it's also an even more incredible vehicle for building your wealth and building cashflow and building equity, taking an advantage of appreciation and really hedging against inflation, and also having profits in a way that you may never pay taxes on it. You can defer your gains indefinitely. There are so many advantages of real estate and a lot of you guys who are going to get seduced by the short-term rental loophole may not realize you can still take advantage in a lot of the tax incentives of long-term rentals.
Speaker 1:So hopefully this gave you some clarity on long-term rentals versus short-term rentals and, at the end of the day, you shouldn't just be looking at rental activities as the only way to reduce your taxes. There's a whole world of additional tax savings opportunities out there that we can stack on to the real estate to help you drive down your taxes. So let's say you can't get real estate professional tax status and let's say you're not interested in short-term rentals. There are still other opportunities, when you have an advanced tax reduction strategist, to reduce your taxes and what's best for you. Obviously, the taxes can be considered into the equation, but at the end of the day, you got to choose something that you're going to be interested in, where something that you're doing is going to be tapping into your greatest strengths, where you're most likely to commit to excellence in this area of real estate investing.
Speaker 1:So I hope that gave you some clarity on what's the difference between the tax treatment and opportunities with short-term rentals versus long-term rentals. And if you want to learn more about how any of this may apply to you, and if you want to get a free opportunity report where I will prepare a custom video sharing with you what potential tax savings opportunities you may have missed and you may be able to take advantage of in 2025, or maybe even how you can get prior year taxes back, go to prosperwithanlcpacom slash opportunity report. And if you want to start getting introduced to some foundational tax planning opportunities and tax write-off strategies. Go to taxplanningchecklistcom for a free tax planning checklist and mini course. Have a wonderful day.