Ep 127: Learn this Short-Term Rental Loophole

I recently hosted a workshop with Mitchell Baldridge and covered bonus depreciation, cost segregation and other opportunities that make real estate the most tax-advantaged business in the world. In this snippet, we cover how operating short-term rental properties like AirBnBs can act as a tax advantage for you. To learn more about Mitch, visit RECostSeg.com.

Your income is generally split between active income and passive income, and you need to pay tax on both. But passive losses can’t offset active income like your W-2 job (in most cases), so taking losses on paper in real estate through bonus deduction or other means can only offset other passive income, like earnings from your real estate portfolio.

If you own and operate short-term rentals the IRS considers that an active business. Meaning if you buy a short-term rental property and accelerate your writeoff through bonus depreciation it can offset your W-2 income. Real estate rentals are usually considered a passive business, but an AirBnB host is more like a hotel operator than a landlord, which makes the business active. Tons of owners are already doing this work anyways and not taking advantage of the tax laws because they don’t know about it. I have a friend who bought a great beach house for $2.5M in California and his short-term rental business is so strong that when he travels there he just rents a different property for himself, and he was able to take out $600K in bonus depreciation in his first year. 

The rules to determine if you’re eligible to treat this as an active income source is called “material participation”, which means you either spend 500 hours a year on the property or 100 hours and more than anybody else or you’re the only person working on it. The best way to verify this all if you get audited is to simply track your time.

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I started the Sweaty Startup in December of 2018 because I believe the Shark Tank and Tech Crunch culture is ruining the real spirit of low-risk entrepreneurship.