Harvest Tax Savings From Short-Term Vacation Rentals

Whether you’re wanting to get started in real estate or you’re seeking to increase your cash flow, investing in short-term vacation rentals (i.e. Airbnbs) could be a great investment opportunity for you.

Investing in short-term vacation rentals has many benefits and can be a great strategy to begin your path to creating generational wealth. Those who choose this path can take advantage of its numerous benefits, one being reducing your tax burden.

Why So Many Choose Real Estate

One of the main reasons why so many choose real estate as their investment of choice is the tax benefits. You can alleviate a large portion of your tax burden through real estate investing in a number of different ways. For instance, you can deduct expenses that are directly tied to the operation and management of the asset.

These tax write-offs for rental properties can include expenses such as property taxes, mortgage interest, repairs, maintenance, and depreciation to name a few. However, the new tax laws and the landscape are changing. As a result, it is very important to keep up with how these changes can affect your assets and how they perform. 

In recent years, there has been a lot of excitement surrounding real estate professional status (REPS). A large part is because of the tax advantages you get when you qualify for REPS. 

On the other hand, qualifying for REPS isn’t an option for most physicians because the hour requirements make it difficult, if not nearly impossible, to benefit from the tax advantages since they already work full-time outside of real estate.

How To Qualify For Real Estate Professional Status

Briefly, the definition of a full-time real estate professional means you have to meet several requirements the IRS stipulates. However, there are two main qualifications that generally either qualify or disqualify you:

  • You must perform more than half of your total personal services in a real estate trade or business during the year in which you materially participate.
  • You must work at least 750 hours during the year in a real estate trade or business. 

How To Relieve Your Tax Burdens

Most physicians want to maintain their current clinical hours and, therefore, are unable to qualify for REPS and the resultant tax benefits. 

What can you do if you fit into this scenario?

One possibility is your spouse can qualify for REPS in order to take advantage of the tax benefits as long as they don’t work in another job that they spend more time on than real estate. 

It ultimately comes down to what type of losses can offset what type of income. With REPS, passive losses from long-term rentals can be used to offset active income, such as your W-2 income. 

By purchasing cash-flowing assets and doing a cost segregation analysis on them, you can offset some, most, or possibly all of your taxable income.

With a cost segregation analysis, you can apply the result of accelerated depreciation to offset your active income. The drawback is you can only take advantage of the tax benefit if you can overcome the hurdles to qualify for full-time real estate professional status (REPS). 

What can you do if you can’t meet the requirements to qualify for REPS?

One viable solution is to have an active business, such as an Airbnb!

Harvest Tax Savings From Short-Term Vacation Rentals

An Airbnb is an active business and is treated as such by the IRS.

Remember, what we know about active losses…they offset active income.

To clarify, I’m not saying you should plan to lose money on your Airbnb! What I am saying is you can do a cost segregation analysis on your Airbnb, just like you would with an apartment complex.

The accelerated depreciation you get from the cost segregation analysis will cause a large paper loss on your active business. These losses can be used to offset your active income (W-2 income) as long as you meet these additional requirements for Airbnb operators:

  • You materially participate in the business 100 hours per year. 
  • The average length of stay for guests at your Airbnb must be less than 7 days. If it’s greater than 7 days, it needs to be lower than 30 days with “substantial services” provided by you. 
    • These substantial services can include a variety of different things, from something simple like a mid-week linen service to booking your guests for a local experience in your community.

The more Airbnbs you own the more cost segregations you can do and the more W-2 income you can offset. Meanwhile, you’re purchasing assets that generate cash flow. This is an excellent way to harvest tax savings from the Airbnbs you own in addition to increasing your cash flow.  

Accelerate Your Journey

Too many physicians today are paid insufficient compensation for their time. As a result, they feel beholden to the career often experiencing depression, anxiety, or burnout. These symptoms end up permeating all aspects of their lives. 

How can you prevent burnout and stop trading away your time for insufficient compensation then? 

As a physician and entrepreneur, I know how freeing it can be for doctors to find their path toward financial independence. By pursuing a path toward financial independence, you can alleviate the feeling of dependency on your physician income. You’ll be able to improve your financial well-being, grow wealth that can last for generations, and gain the freedom to practice medicine on your terms.

If you’re interested in learning more about how to harvest tax savings from short-term vacation rentals (i.e. Airbnbs) or any other tax savings strategies and investment options, click here to schedule a free 30-minute call with me.

Together we’ll carve out the next steps to begin a journey toward winning back your time!

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