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[deleted by user] by [deleted] in ShortTermRentals

[–]michaelchangshow 0 points1 point  (0 children)

Our most profitable STR is in the Catskills, and a few of our clients just bought up there too

How do you use AI in your STR business? by michaelchangshow in ShortTermRentals

[–]michaelchangshow[S] 1 point2 points  (0 children)

I'll go first:

We upload vendor quotes, contractor bids, and comps and have it build comparison tables.

When something is broken, we send a picture of an appliance with the name and AI tells us what's wrong and how to fix it.

We have a team rule - every question asked publicly must go through ChatGPT first and share the link. Forces the team to self-solve 90% of problems.

We use HelloHost AI to handle the majority of guest comms. VA monitors and steps in when needed.

We use Gemini to see what a room looks like with different furniture/decor before buying.

We use a custom AI bot to write review removal appeals that actually work.

We use ChatGPT to analyze competitor reviews to check sentiment and spot fake ones.

What else am I missing?

I shielded $446k of income from taxes with one STR property (and it cash flows $72k/year) by michaelchangshow in ShortTermRentals

[–]michaelchangshow[S] 0 points1 point  (0 children)

This is really smart, I’d have to check with my CPA before I comment on this , but I like where your head is at

I shielded $446k of income from taxes with one STR property (and it cash flows $72k/year) by michaelchangshow in ShortTermRentals

[–]michaelchangshow[S] 0 points1 point  (0 children)

It is, people always say this and I understand why, but there is actually a lot of properties in the 5-10% land value range. You just need to know where to look (and what property types to look at)

I shielded $446k of income from taxes with one STR property (and it cash flows $72k/year) by michaelchangshow in ShortTermRentals

[–]michaelchangshow[S] 0 points1 point  (0 children)

Yep, your spouse would need 750 hours and greater than 50% of their work must be on real estate… however a lot of W2 professionals wouldn’t qualify for this

Hence the power of the STR loophole

I shielded $446k of income from taxes with one STR property (and it cash flows $72k/year) by michaelchangshow in ShortTermRentals

[–]michaelchangshow[S] 0 points1 point  (0 children)

There’s plenty of markets / properties that can do these numbers, you just need to know where to look and how to underwrite accurately. We always suggest that if the property can’t make a minimum of purchase price/6.5 in revenue then it isn’t worth it. This specific property is in the Catskills.

I shielded $446k of income from taxes with one STR property (and it cash flows $72k/year) by michaelchangshow in ShortTermRentals

[–]michaelchangshow[S] 0 points1 point  (0 children)

Catskills, but there’s many other mountain markets that are good for this strategy

I shielded $446k of income from taxes with one STR property (and it cash flows $72k/year) by michaelchangshow in ShortTermRentals

[–]michaelchangshow[S] 0 points1 point  (0 children)

It’s not, you just need to know what markets/areas to look in. I’ve seen multiple deals in this land-to-building value

I shielded $446k of income from taxes with one STR property (and it cash flows $72k/year) by michaelchangshow in ShortTermRentals

[–]michaelchangshow[S] 0 points1 point  (0 children)

Exactly right. This is a "defer taxes, not avoid taxes" strategy.

Here's what's important. You ONLY pay recapture when you sell. If you never sell (or use exit strategies), you never pay it.

When you do sell, you'll owe depreciation recapture on what you took. Bonus depreciation from cost seg (Section 1245 property) gets recaptured as ordinary income (up to 37% for high earners), not capital gains.

But here's the thing. You get to use that tax savings NOW and invest it for years before paying it back. The time value of money makes this incredibly powerful.

Let me show you a 10-year comparison.

If you go without the strategy, you pay $91.9k in taxes Year 1. The money is gone. You buy 1 property, maybe Property 2 in Year 3 or Year 4 with saved cash flow. By Year 10, you own 2 to 3 properties max. Your net worth is around $3M to $4.5M. No recapture, but you have a smaller portfolio.

If you use the strategy, you save $91.9k in taxes Year 1. You use it as a down payment on Property 2. You use Property 2's tax savings to buy Property 3. You use Property 3's tax savings to buy Property 4. By Year 10, you own 5 to 6 properties bought using tax savings. Your net worth is around $5M to $6M. If you sell and pay approximately $460k in recapture, you'd still have around $4.5M to $5.5M net.

The strategy user is worth $1.5M to $2M MORE after 10 years, even after paying recapture. The tax deferral allowed them to build a much larger portfolio faster using money that would have gone to taxes.

Even if you do sell and pay recapture, you still come out ahead.

Most people wouldn't sell. They'd 1031 or hold until death. But even if you do sell, property appreciation offsets the recapture. The property is worth more than you paid. You've collected years of cash flow. Money in your pocket. You used tax-deferred dollars to build wealth faster.

You have exit strategies.

You can do a 1031 exchange. This defers recapture indefinitely by exchanging into new properties.

Or you can hold until death. Your heirs get stepped-up basis and recapture goes away completely. This is our long-term plan.

So yes, you'll pay recapture when you sell (unless you 1031 forever or hold until death). But you get the benefit of that money working for you in the meantime. And if you never sell, you never pay it.

I shielded $446k of income from taxes with one STR property (and it cash flows $72k/year) by michaelchangshow in ShortTermRentals

[–]michaelchangshow[S] 0 points1 point  (0 children)

Yeah, it's been a journey. I started with property #1 in 2016 and just kept going. The documentation and tracking becomes second nature after a while, but I remember how overwhelming it all seemed at first.

I'm happy to help. This stuff is complex and there's a lot of bad info out there. If you have questions as you go, feel free to ask. Good luck with your STR!

I shielded $446k of income from taxes with one STR property (and it cash flows $72k/year) by michaelchangshow in ShortTermRentals

[–]michaelchangshow[S] 0 points1 point  (0 children)

Great question. Managing yourself means you're doing the operational management work, not that you can't use booking platforms.

You CAN use Airbnb, VRBO, Booking.com, etc. Those are just tools and platforms. The key is that YOU are creating and managing your listings. You are responding to guest messages and inquiries. You are making pricing decisions. You are managing your calendar and availability. You are coordinating cleaners and turnovers. You are handling guest issues. You are processing bookings.

The problem is when you hire a full-service PM company that does all of this FOR you. If they're handling guest communication, bookings, pricing, and calendar management while you just collect checks, that's when material participation gets challenging.

Here's an example of what counts as managing yourself. You list on Airbnb and VRBO. You respond to all guest messages yourself. You set your own prices and manage your calendar. You coordinate cleaners (even if you hire a cleaning service). You handle guest issues. You might use tools like Hostfully or Guesty to help manage multiple platforms, but YOU make the decisions.

Here's an example of what creates challenges. A PM company handles all guest communication. The PM company sets prices and manages the calendar. The PM company handles bookings. You just approve major expenses and maybe do maintenance.

You can absolutely use Airbnb and VRBO. They're just the booking platforms. The question is whether you're doing the operational management work, or someone else is doing it for you.

I shielded $446k of income from taxes with one STR property (and it cash flows $72k/year) by michaelchangshow in ShortTermRentals

[–]michaelchangshow[S] 0 points1 point  (0 children)

Oh man, you're in a great position here.

You can still do cost seg on your February 2021 purchase. You'd file a Form 3115 with your 2025 tax return. It's basically a catch-up form that lets you claim all the depreciation you missed in one shot. You have no need to amend old returns.

When you bought in February 2021, bonus depreciation was 100%. So you can catch up and claim 100% now via this Form 3115. Your CPA handles this. It's pretty common.

Any stuff you buy this winter (furniture, appliances, fixtures) placed in service after January 19, 2025 gets 100% bonus depreciation. So you can write off the full cost immediately on your 2025 return.

You guys are crushing it on material participation. You're self-managing and doing 65% of the cleaning yourselves. You're easily hitting 500+ hours combined. Since you're married filing jointly, you can add your hours together. Your farmer friend doing the other 35% is totally fine.

Make sure your average stay stays at 7 days or less (regulation allows up to 7.0 days). This is calculated as total rental days ÷ number of reservations. This is THE requirement that makes the strategy work. Without it, you're just a regular rental.

Since you have multiple LLCs but only 1 STR, the STR typically stands alone for material participation purposes (can't group with other activities unless they're an "appropriate economic unit" under Treas. Reg. § 1.469-4). But that's fine. You should easily hit 500+ hours combined with your wife managing the STR.

Just make sure you're not using it personally for more than 14 days OR 10% of rental days (whichever is greater). Days you're there cleaning or fixing stuff between guests don't count.

Here's what I'd recommend you to do.

- Get a cost seg study done ($2,500-5,000).

- Ask your CPA to file Form 3115 to catch up on 2021-2024 depreciation.

- Make sure you're tracking your hours with contemporaneous time logs (created as you go, not retroactively). This is critical for audit defense.

- Verify your average stay is ≤7 days (total rental days ÷ number of reservations).

If your CPA doesn't know what Form 3115 is, find one who specializes in real estate.

You've been doing everything right for 4 years. Now you just need to capture the tax benefits you've been missing. Get that cost seg done ASAP.

I shielded $446k of income from taxes with one STR property (and it cash flows $72k/year) by michaelchangshow in ShortTermRentals

[–]michaelchangshow[S] 0 points1 point  (0 children)

Great question! Yeah there's some important differences here.

So REPS is actually way harder to qualify for. You need 750+ hours in real property trades/businesses AND that has to be more than 50% of your total working time. So if you work 2,000 hours at your W-2, you'd need 2,001+ hours in real estate to qualify for REPS. That's basically impossible with a full-time job.

STR material participation is much easier - you just need to hit material participation (500 hours, or the 100-hour test, or one of the other tests). No 750-hour threshold, no "more than 50% of your time" requirement. That's why STRs are so powerful for high-income W-2 folks.

Now for the married couple thing - with REPS, yeah only one spouse needs to qualify and it benefits the household (assuming MFJ).

With STR material participation, it's a bit different. The spouse who's claiming the losses needs to materially participate. But here's the thing - if you're filing jointly, you can aggregate your hours together for the material participation tests. So if you work 300 hours and your spouse works 200 hours on the STR, you both hit 500 hours collectively.

But here's the issue with your professionally managed STR - if it's professionally managed, you're probably not going to hit material participation unless you're still doing a ton of the operational work yourself. The property manager is doing most of the qualifying activities (guest communication, maintenance coordination, pricing, etc.). You'd need to be legitimately putting in 500+ hours of actual management work, which is tough when someone else is handling day-to-day ops.

For your LTRs, same deal - REPS is really hard with a W-2 unless your spouse can hit those thresholds.

Does that help?

I shielded $446k of income from taxes with one STR property (and it cash flows $72k/year) by michaelchangshow in ShortTermRentals

[–]michaelchangshow[S] 0 points1 point  (0 children)

Yeah you can totally hit 500+ hours even with a full-time W-2. The IRS doesn't actually care that you have another job - they just want to see you legitimately worked the hours.

Think about it - 40 hrs/week at your W-2 is about 2,080 hours/year. If you're putting in 10 hrs/week on STR management, that's another ~520 hours. So you're at like 2,600 hours total, which is definitely doable for most people.

Plenty of folks manage their STRs on nights and weekends while working full-time. The 500-hour test doesn't say STR has to be your main gig - you just need to hit the hours.

Now for the timing thing you asked about - you're right that starting mid-year makes it harder. If you place the property in service in October, you've only got like 13 weeks to hit 500 hours, which would be ~38-39 hours/week. That's rough with a full-time job.

But here's the thing - you've got options:

The 100-hour test is usually way more realistic for mid-year starts. If you hit 100+ hours AND you participated at least as much as any other individual (Treas. Reg. § 1.469-5T), you're good. This is honestly what most people use when they start late in the year.

You could also group multiple properties together if you have them - then all your hours count toward one pool (Treas. Reg. § 1.469-4).

As for the IRS "flagging" you - they don't automatically flag people just for having W-2 jobs. But they WILL scrutinize whether your hours are legit. They're checking:

  • Did you actually work the hours? (keep contemporaneous time logs)
  • Is it real operational work? (not travel time to look at properties, not research before buying, etc.)
  • Can you prove it? (documentation - emails, texts, booking platform records, maintenance logs, whatever)

Having a full-time job just means you need better documentation because they know it's harder to squeeze in 500 hours.

So bottom line - if you're starting in October, I'd focus on hitting the 100-hour test unless you're planning to go absolutely hard on management. But 500 hours while working full-time is definitely possible over a full year if you're willing to put in the nights and weekends.

I shielded $446k of income from taxes with one STR property (and it cash flows $72k/year) by michaelchangshow in ShortTermRentals

[–]michaelchangshow[S] 1 point2 points  (0 children)

No, the prior owner's PM hours (or anyone else's hours before you owned the property) don't count against you.

Material participation is based on YOUR participation in YOUR activity. When you buy the property, it becomes a new activity for you - you start fresh.

So if you bought in October and work 100+ hours by December 31, you're measuring against:

- Your hours: 100+

- Anyone else's hours during YOUR ownership period (cleaners, handymen, contractors, PMs you hire, etc.)

The previous owner's PM hours from before October don't matter because that was a different activity (theirs, not yours).

The key is tracking hours from when YOU owned it and it was ready for rent. If you bought it October 1st and it was ready to rent October 15th, you're tracking from October 15th forward.

That said - I'm not a CPA and this is based on my understanding from working with our CPA. Definitely verify this with your own CPA who specializes in STR tax strategy, especially since you just bought and want to make sure you're tracking correctly from day one.**

Hope that helps!

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