Short-Term Rental Tax Strategy: A Smarter Way to Lower Your Tax Bill

The Short-Term Rental (STR) Tax Strategy could be the solution to reduce your tax burden legally and efficiently.

What is the STR Tax Strategy?

The STR Tax Strategy involves using short-term rental properties (e.g., Airbnb or Vrbo) where the average stay is seven days or less. These properties generate income while creating tax-deductible expenses and depreciation to offset taxable income. In addition, a cost segregation study, combined with bonus depreciation, can further accelerate deductions, though it’s essential to plan for any tax liabilities upon sale of the property.

Unlike traditional long-term rental real estate, which is typically classified as passive income (limiting its ability to offset active income), the STR approach can avoid passive loss limitations if you meet material participation requirements. This allows you to offset active income like W2 wages or partnership earnings without needing Real Estate Professional Status (REPS).

Key Benefits

• Potentially reduce your taxable income.
• No REPS required to offset active income.
• Accelerate deductions with cost segregation and bonus depreciation.
• Material Participation Tests

To qualify for the STR tax benefits, you must meet one of the following material participation criteria:

• Participate more than 500 hours in the activity annually.
• Your participation is substantially all the involvement in the activity.
• Spend more than 100 hours on the activity and more than anyone else.
• Significant participation of over 100 hours, combining activities to exceed 500 hours.
• Active involvement for 5 of the last 10 years.
• Involvement in a personal service activity for any 3 prior years.
• Regular, continuous, and substantial participation based on all facts.
• Strategic Tax Planning for STRs

To maximize the benefits of this strategy, consider the following steps:

• Consult a Tax Advisor: Work with a specialist who understands STR-specific tax strategies.
• Perform a Cost Segregation Study: Maximize depreciation and deductions.
• Document Material Participation: Keep detailed records of your hours and tasks.
• Understand Bonus Depreciation: Plan ahead as bonus depreciation phases out.

Conclusion

The Short-Term Rental Tax Strategy can significantly reduce your tax burden while enhancing your wealth-building potential. By meeting participation requirements and leveraging the tax code strategically, investors can turn their short-term rentals into powerful, tax-advantaged tools. Consult with a Wealthstone Group Advisor to learn more and start planning today!

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