Tax Reduction Podcast

Episode 16. Short Term Rental Tax Write Off Strategy For S-Corporation Owners

• Boris Musheyev • Episode 16

Share episode

Interested in Tax Strategy for your Business? Send us a message with your email address and we’ll help you get started!

Discover how S-Corporation owners can maximize their tax savings with strategic write-offs on short-term rental properties. In this podcast, we dive into effective tax strategies to optimize rental income, focusing on key deductions and real estate tax planning. 

Depreciation and cost segregation can significantly reduce your tax liability. We will explore the best practices for S-Corporations to leverage these tax benefits, ensuring you keep more of your hard-earned money. Don't miss out on these essential tips to enhance your tax strategy and boost your financial success with short-term rentals.

I've put together this FREE resource for you:

7 Write-Offs Every S-Corporation Business Owner MUST Know
🆓 Download FREE PDF here: https://7taxwriteoffs.com/

Ready to start saving money on your taxes?
☎️ Schedule your FREE Tax Advisory Session: https://taxplanningcall.com/

🤩 If you are looking for easy-to-use payroll software, I personally use and recommend to my clients Gusto Payroll Software - https://gusto.com/r/boris466

P.S. When you sign up for Gusto, you get a $100 Visa gift card

*Disclaimer This material & presentation content is for informational and educational purposes only. This material and presentation content is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this reason, ...

Speaker 1:

hey, if you've got a profitable s corporation, like tons of profits coming in, or your llc, doesn't really matter. I'm going to show you how you can take those profits, invest in a short-term rental to reduce down your profits and essentially save a lot of money on taxes. What I'm going to talk about specifically is how to use losses from short-term rental against your s corporation profits, because short-term rental has really favorable tax rules, tax deduction rules in the IRS tax code. We're also going to talk about how you can take your S-corporation profits via distributions to be able to invest in a short-term rental and, at the same time, talk about accelerated depreciation that will help you with your losses and how to do this every year going forward. Ready, let's get going.

Speaker 2:

Welcome to the Tax Reduction Podcast for money-making entrepreneurs with Boris Mushaev. Boris has helped entrepreneurs across the United States collectively save millions of dollars in taxes with the power of tax planning and advisory. The only way you, the business owner, can save money on taxes is by using proactive tax strategies, and this podcast is all about saving you money on taxes. Boris will share with you in-depth and easy to understand tax reduction strategies that you can implement in your business within 30 days or less. Let's jump into today's episode.

Speaker 1:

Welcome back. Now. What we're going to get started with is, first of all, we have to understand what is short-term rental. Think of it as an Airbnb, buying a property, putting it out on a website such as Airbnb or VRBO.

Speaker 1:

Now your definition of short-term rental is very different from the IRS's definition of a short-term rental. You might think, hey, a short-term rental is something I rent out for two months, three months, three days, five days and so forth. Irs's definition is completely different, because IRS says, hey, for it to be considered a short term rental, it has to meet three rules, like the most common, essential, so to speak, three rules, and it has to qualify as a short term rental. Now IRS says, first of all, the average stay per tenant has to qualify as a short-term rental. Now, irs says, first of all, the average stay per tenant has to be seven days or less. So let's take an example you've got Joe Smith, as your tenant stays for two days. Then you've got Jane Smith staying for 10 days. So 10 plus 2 is 12 days. Average between those is six days. So, right right off the bat, you qualify for the test number one. So average stay per tenant is seven days or less.

Speaker 1:

Second thing is that you have to have active participation hours and participate 100 hours in your short-term rental putting the listing up, cleaning or ordering a cleaning service whatever that is that is related to your short-term rental and it cannot be more than any other person. Let's say, for example, you do spend 100 hours, but you also got a property manager that spends 150 hours. That would disqualify this. Now, meeting this rule is essential for you, using this tax strategy so that you can wipe out some of your S-corporation profits. So now that we understand what is a short-term rental, let's move on to a tax strategy in detail, and then we're going to talk about an example.

Speaker 2:

If you have a tax preparer and you do not have a tax advisor, the only way you can save money on taxes is by using proactive tax planning strategies that only a tax advisor can give you. Bora's put together a free PDF for you, the business owner Seven tax write-offs every S-corporation business owner must know. In this PDF you can find seven tax strategies that you can start using in your business to instantly start saving money on taxes. Click on the link in the description below for a free download.

Speaker 1:

All right, perfect, welcome back. Let's talk about tax strategy Now. Why is short-term rental such a great Rental real estate any rental real estate? One of the main benefits of any rental real estate is that it can produce losses due to depreciation. That is called a paper loss. You may be cash flow positive, but that's going to be a paper loss. That loss can be deducted against your business profits. If you've got a long-term rental, most likely that loss is a passive loss. You will not be able to take a deduction on that.

Speaker 1:

But short-term rentals, they play a different rule. They're considered under a different rule in the IRS tax code. That means any losses generated by a short-term rental can be deducted against your other ordinary income and, in your case the business owner, against your S-corporation profits. Remember, you have to qualify for these three rules and in order for you to really know these three rules, ladies and gentlemen, you've got to be working with a tax advisor and start working with a tax preparer. This is not something that you can plan for after the year is over. You really have to work with a tax advisor to plan this out, to make sure you meet this rule, plan for your profits and be able to deduct your short-term rentals against S-corporation profits. Now that we've determined the fact that you can actually take the losses from the short-term rentals and invest into real estate excuse me, write it off against your S-corporation profits. Let's talk about how can you invest.

Speaker 1:

A lot of business owners, s-corporation owners especially. They've accumulated profits in the business. There's money in the bank account and they're already taking out salary, they're already taking out distribution and like hey, how do I take out the rest of the money? Can I really invest it in real estate and how do I do that? One example what they do, which is, for the most part, is incorrect they take the money out as a loan to invest in real estate. That could be a short-term rental, a commercial property or residential property, it doesn't matter. Now, when the loan is taken out, it's very easily recorded by the tax preparer and your bookkeeper as hey, loan two and so forth. But you never have an intention, so to speak, to pay the loan back, right? Usually, a business owner takes his own money from the S corporation to invest into something he has no intention of paying it back. It's his own money. But now the loan is recorded on the books, which is incorrect, which is not really in compliance with the IRS. Because when you take out a loan, you have to have a loan agreement, you have to pay back that loan, you've got to pay back the interest.

Speaker 1:

And what I teach a lot of business owners I'm like look, you've got enough profits in the business to be able to take out a distribution. Now, in some cases, those distributions could potentially be drawn against the equity, meaning to say how much equity US and S Corporation could have in the business not to draw against your S corporation profits. But in most cases, as a tax advisor, we assess the equity shareholders' equity in the business. Do you have enough equity to take out the profits instead of us alone and invest in your short-term rental or a long-term rental? So that is the tax strategy. You've got to work with your tax advisor to be able to come up with that strategy, to be able to do that. Once you've determined that, hey, I can take my losses from the short-term rental by qualifying with these three rules, now I can invest with my S-corporation profits.

Speaker 1:

What you're going to do next, once you invest in short-term rental, is to make sure you take an accelerated depreciation. An accelerated depreciation could be taken by using what's called a cost segregation. The cost segregation is a whole different topic, but what cost segregation allows you to do is take a property and accelerate its depreciation in the first year. We're going to talk about it in an example right here which, in most cases for your short-term rental, that could produce a really nice big loss. And now that we've talked about that, you can actually qualify under IRS's definition of the short-term rental. That loss can be taken against your S-corporation profits and that accelerated depreciation can help you every year. Now when you do cost segregation and take the accelerated depreciation, you can only use it in your first year because All of that accelerated depreciation, so to speak, is taken in the first year. Next year you will not have that same benefit from that same property.

Speaker 1:

So what do you do? That's a tax strategy. Once you know that you have enough profits in your business, you've got distributions to take out. And again, you've got to do this with your tax advisor, not a tax preparer. Not when you do it at the end of the year, okay. When you do that, repeat end of the year, okay. When you do that, repeat that strategy every year and that's going to multiply your savings we're going to talk about this example, exactly how this works, everything that I talked about. Also, I've put this, all of these notes in the show notes below, in a pdf. Just click on that and download the google drive and, uh, we'll be right back after this break if all your accountant does is, you may be overpaying in taxes by thousands of dollars every year.

Speaker 2:

Every week, Boris releases a tax strategy on his podcast so that you, the business owner, can pay less in taxes every single year. Be sure to subscribe to our podcast to be notified when a new tax strategy is released. If you're ready to work with a tax advisor on your tax strategy and planning, be sure to schedule your call by heading over to wwwtaxplanningcallcom. Again, that's wwwtaxplanningcallcom.

Speaker 1:

Awesome. Let's get back to this Now. Let's talk about an example. Okay, so I've got Sam right here. Okay, he's an S-corporation owner, pretty profitable S-corporation. After salary, his profits are $750,000. It's like Boris. What can I do with my profits? I want to start investing in real estate. What is the best way for me to do so? Now I have determined that in this case, for him to invest in a long-term rental is not a good idea because he's going to have losses that are tax deductible. So I said, hey, short-term rental could be a great idea.

Speaker 1:

If you find a property that is worth $500,000, right, $500,000, and you put a hundred let's say $100,000 down, guess what IRS will allow you to do? Irs will allow you to take a tax deduction not on $100,000, but on a $500,000. Now, this is not to say that you can write off the entire $500,000. There are depreciation rules that we're going to talk about. So we've then determined that the net value of the building, net of land, right after deducting the land, because land you cannot depreciate is $425,000. Doing a cost segregation study, which allows us to do the accelerated depreciation, sam gets $106,000 in depreciation deduction Give or take. This is approximate estimate $106,000 in his first year, because Sam qualifies under the IRS definition of the short-term rental and he's done accelerated depreciation, was able to invest his profits into it. He's got a $106,000 deduction in its first year. The $106,000 will be deducted against his S-corporation net profit on his personal tax return, essentially reducing down his profits to $650,000. If he is in a 30% bracket, if you are in a 30% bracket, you, the business owner in this similar situation, 30% on $106,000 is about $30,000 in tax deductions, excuse me, in tax savings. $100,000 is a deduction, $30,000 in tax savings. Now, if you do this three years in a row, not only do you have a cash producing short-term rentals but at the same time you're generating yourself a really nice deductions and tax savings of about $30,000 every year.

Speaker 1:

Now let's talk a little bit about the IRS compliance. When you have a short-term rental, it may be considered as a trade of business, depending how you operate your short-term rental. So definitely speak your tax with your tax advisor now. Is there a drawback to that? There may be a drawback to that. Now all the profits from your short-term rental may be subject to self-employment tax once you start generating profits in year two, three, four or five, okay, and then your tax advisor, based on the situation that you have, can decide decide whether these profits from your short term rental are subject to self-employment taxes.

Speaker 1:

Now we as tax advisors tell our clients hey, if you do this, this and that in your short term rental you may qualify, that you do not have to pay the self-employment tax and instead would have to file a Schedule E for this short-term rental.

Speaker 1:

There's a lot of planning that goes into it, but I promise you, once you've got a proper plan to be able to qualify for short-term rental under the IRS definition, be able to invest your profits. If you have profits in the business or distributions, or maybe you have some money in the savings account, then go ahead and invest in the short-term rental. Accelerate depreciation, get accelerated depreciation, excuse me, produce really nice tax deduction in your first year and tax savings. If you are working with a tax preparer or just a bookkeeper or somebody who does your taxes once a year only, I guarantee you these are not the things that you talk about with your tax preparer. If you want to start saving money on taxes, you've got to start working with a tax advisor. Show notes again for all of this is below. There's also more resources for you below down in the description. Thank you so much. Until the next time.

Speaker 2:

That's it for today's episode. Be sure to check out the description below for some free tax reduction resources that Boris put together for you. If you're ready to work with a tax advisor on your tax planning, be sure to schedule your call by heading over to wwwtaxplanningcallcom. That's wwwtaxplanningcallcom. And be sure to subscribe to our podcast to be notified when the next strategy is released.