The Short-Term Rental Loophole

There was once a day when all income was grouped into one bucket. This was great for high-income individuals, because they could buy rental property or other passive investments, take losses (on paper), and use these losses to offset their active income. But in 1986, Congress overhauled the tax code, creating two separate buckets of income:

Non-passive income, which comes from your W-2 job, a 1099, business income that you actively participate in, etc

AND

Passive income, which comes from stock dividends, real estate, businesses you’re not actively participating in, etc

With this new tax structure, it was no longer possible to offset active income with passive losses (in most cases).

Here are two ways to use real estate to lower your taxes:

1. Become a 'Real Estate Professional': This lets you deduct real estate losses from your regular job income. But there's a catch - you must spend most of your time in a real estate business. If you already work in real estate, it's easy. But if you have another full-time job, it's tough to meet the time requirement.

2. Invest in short-term rentals like Airbnb: If guests stay for a week or less, you can use rental losses to reduce your taxes without needing 'Real Estate Professional' status. You just need to be actively involved in managing the property, like doing cleaning or communicating with guests. Just don't leave everything to a management company."

There’s two options for the hour requirements:

Option A: You need to spend at least 100 hours working on your property, and you must work more on it than anyone else you hire. So, if you put in 110 hours, and your cleaner and landscaper combined put in 140 hours, you're fine because you worked the most.

Option B: You simply need to spend 500 hours on your property. It's easier because you don't have to track anyone else's time.

 All that being said, you should start to see why short-term rentals are such a great investment opportunity. For those of us who don’t work in real estate full time, it’s a way to invest in properties, get that cash-flow, and offset our normal, non-passive income.

 **As always, be sure to talk to your CPA or financial advisor before making any moves. My advice isn’t a one-size-fits-all solution, so make sure you find a strategy that fits your specific financial situation.

The Short-Term Rental Loophole

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