Download the full transcript PDF.

469. Amanda Han

 [00:00:00]

Sarah Karakaian: Hello. Welcome back to another great [00:01:00] episode. My name is Sarah Karakaian.

Annette Grant: I’m Annette Grant, and together we are Thanks for Visiting.

Sarah Karakaian: Let’s start this episode like we do each and every week, and that a celebrating one of you are incredible listeners who is heading on over to strshare.com, entering in the information about your short-term rentals so that we can share you here on the podcast and on our Instagram account every Sunday.

Listener Spotlight: Roost with a View

Sarah Karakaian: Annette, who are we sharing this week?

Annette Grant: This week we are sharing at Roost with a View that’s R-O-O-S-T. Roost With a View, and this is why it is so important to tell your story. Let your guests know who you are. I am just, um, beside myself with this story and this is, um, a highlight in their Instagram profile. So please go check it out. Um, like their profile heart, their, their property. And this is why I just love meeting all of the hosts. I love having this [00:02:00] opportunity with STR share, but I wanna tell the story of Roost with a View.

So how the roost became, her name is Rena. She is a daydreamer full of dreams and not so full of action. So she’s telling us her faults, which you should be telling your short term rentals if you’re on your

Sarah Karakaian: ’cause. It makes you so relatable. Yes.

Annette Grant: So, um, she is. Oh, she is a mom of three boys, a schooly life dreamer, a web designer, and a camper.

In 20 21, 1 of her boys Finn was diagnosed with cancer. It’s one of those experiences where you realize life is short and you need to start living it. So just what Finn is doing awesome and he has finished his treatment, but after that, she decided it was time to start living and take some chances. She bought the roost in March of 2024 and have been working on it to make it a peaceful, relaxing getaway, a place people can relax.

Escape the daily hustle and regroup. The roost really calms your mind, body, and soul. And so she hopes that you go for your dreams. Maybe come stay [00:03:00] at the roost so you can relax, clear your mind, and think about your life, your dreams and hatch a plan to go get them PS in the near future. She also plans to offer free stays to the Long Island pediatric cancer patients and their families.

Rena, that’s what it’s all about. She took action on her dreams. So pumped to share her on the show. So please go ahead, give them a follow, go stay if you are in the, it’s in the Catskills, so if you’re planning a vacation or anybody in your world, send them to Roost with a View. Thanks for coming to STR Share Rena and sharing not only your property, but your story and wow, way to go. Way to take action. We are pumped for you.

Sarah Karakaian: This is what it means.

The Importance of Sharing Your Story

Sarah Karakaian: When you hear that, Simon Sinek said it, but I think a lot of people like Annette and me repeat it and I wanna make sure you understand it, which is people don’t buy what you do, they buy why you’re doing it. So there are so many short-term rentals out there to choose from, especially in the Catskills.[00:04:00]

But when you put your story out there, like Rena did. Your heart more than likely gets pulled to this family. Like, I wanna support this. Like, I wanna be a part of this story. And so that’s the why people choose to, and there’s nothing wrong with sharing that information because people wanna be a part of.

That sort of ecosystem. You know, if you’re not comfortable sharing, like that’s okay too. But this was important to Rena and I don’t know about you, but like, I’m here to support that family and be a part of their, their journey and them living out their dreams. So that’s what that means. And I think that’s why, uh, it’s not really anymore.

It’s, it’s not enough to just do the short term rental. If you can put a little bit of yourself into it, or your family or your why that you are doing it, you can really stand out from the crowd.

Interview with Tax Expert Amanda Hahn

Sarah Karakaian: So with that, let’s move on to our interview today with the incredible Amanda Hahn, who is, I feel like Annette and I are always saying we’re not CPA’s.

Disclaimer. Yeah.

But today we’re gonna, we’re talking taxes. We’re talk.

Yes. And Amanda wowed us. We saw [00:05:00] her, well, we’ve known about her for a while because she’s just very popular amongst the bigger pockets world. Uh, people who are on BiggerPockets, um, we. Saw her speak at a conference and she impressed us and she’s just the nicest and most generous person when it comes to sharing information about taxes.

Understanding Tax Strategies for Short-Term Rentals

Sarah Karakaian: So she’s a CPA and a tax strategist who specializes in helping people use real estate to save massive amounts in taxes and keep their hard-earned money. She’s the founder of Keystone CPA and she helps to educate investors on how to maximize tax write-offs. Legal entity strategies, tax efficient ways to access profit, how to use 401k money for real estate, and so much more.

And she tells you in the interview today that she grew up with real estate and she, because of that, she did wanted nothing to do with it, but of course it found her as it does. And she’s really gonna go over today tax mistakes that short-term rental hosts make. And you’ll never believe this. How a [00:06:00] lot of CPAs get it wrong too.

So this episode is so important for you to listen to. And then if you’re working with a CPA and you don’t quite feel confident that they know your full story or the tax strategies and the tax law as it pertains to you and your short term rental, you gotta give it a listen. Take some notes and make some appointments with them.

Amanda, welcome to the show. Could you tell our audience in your own words a little bit about yourself, your experience with short term rentals, and why you are the go-to expert?

Amanda Han: I feel like that kind of, um, just fell in my lap. So, um, I am actually the third generation of real estate investors in my family.

So my grandparents dabbled in real estate. Um, my, actually, my, my grandparents were pretty heavy in real estate and my parents dabbled in real estate and I sort of grew up not wanting to ever do real estate. Because my grandparents were really like hands-on landlords. I kind of grew up around that. Um, and so I went to [00:07:00] school, uh, got my license as a CPA and I ended up working for one of the big four, uh, public accounting firms.

Um, I happened to end up in the real estate group, so that’s sort of what opened my eyes to what. You know, the tax benefits, uh, could be for real estate investors. And when my husband and I started out, our journey to invest in real estate ourselves was when we started meeting sort of everyday investors.

And we came to the realization that most investors don’t understand that there are tax strategies that could be used, uh, that, you know, actually that tax savings is a thing, you know, kind of tend to think that taxes is something that just happens to us. Um, so yeah, that sort of started us on a journey to specialize in working with real estate investors.

Um, and as short term rentals became more and more popular, uh, in the last decade, we sort of just became, uh, one of the go-to people on how to use that to save on taxes. [00:08:00]

Annette Grant: You say that term, save on taxes and I mean, I’m on LinkedIn and I, and like every day it is just like, I’m just gonna say it, there are a ton of bros on LinkedIn.

Oh, if you have a giant W2, like buy a short term rental, it can reduce your taxes, you know, by, you know, 50%. But in general, like, I, that’s noisy to me because I think it’s, it’s um, overblown. They’re over promising and under-delivering on what those savings could be. I just don’t even listen to it anymore.

So why should, why should we all care about taxes and specifically short-term rental taxes make me care at a higher level than just the noise that I am hearing via social media.

Amanda Han: Yeah. That’s interesting because I totally understand what you’re saying. I feel like the short term rental has become kind of the buzz buzzword, right?

For tax [00:09:00] savings. Um, and part of it is a little bit overplayed, but to take a step back and say, okay, why do we care about taxes at all because I think most people think taxes is something that sort of just happens to us. We hate it, but we kinda have to deal with it, sort of. It is what it is. Only super rich people can avoid taxes.

Um, but when you really think about it, there’s only one set of the tax code, right? It’s the same code. There’s not like different law. So the law is exactly the same. Um, but the difference is that if you’re someone who understands how to use it to your benefit. Then you can pay less tax. And why is paying less taxes important?

Well, studies show that Americans lose more money to taxes than we do on food, clothing, and housing combined.

Annette Grant: Wow.

Amanda Han: So I think people tend to think like. Like if you’re someone who makes $500,000, they’re probably doing pretty well, um, you know, have a lot of cash to invest. But the reality is the people who make $500,000 or more, if they don’t have the [00:10:00] right strategies, they probably end up netting a similar amount of income than somebody who maybe just owns rental properties making $200,000.

Mm. And so that’s why it’s really, really important for us to. You know, to really care about this thing that nobody likes to talk about, which is, you know, taxes and, and, um, I think one of my passions is really just letting people know that there are things you can do to control your taxes. It’s not just something that happens to you.

Um, if you do the right things during the year, it’s definitely possible to save on tax. And short-term rental is one of the very few ways that works for virtually everyone to reduce their taxes.

Sarah Karakaian: Why is that, Amanda? Like, is there a reason why our, you know, like the, the, the IRS, the tax system, like actually favors short term rentals?

Or why are, and why is there a loophole? Like what is it about short term rentals that is so special?

Amanda Han: I honestly feel like it’s a [00:11:00] mistake. Um, and that’s why I actually call it a loophole. I don’t think that was the intention of the tax law.

Sarah Karakaian: Yeah. Okay.

Amanda Han: Um, so if we have time for a little bit of history.

Sarah Karakaian: Yes.

Amanda Han: So before. Many years ago, if you invested in, in, in real estate or, you know, I mean, even today when you invest in rental real estate, not only do we get to take write offs against our income like a business owner, right, our car expenses, home office, um, education, things like that. Um, not only do we get to write those off, but we also get to take what’s called depreciation.

Um, and that’s, you know, basically we get to write off the purchase price of our building over time. And so when you put together all these different write offs and depreciation, oftentimes what happens is you, you have a property that cash flows pretty well, but for tax purposes, you actually show a loss.

So the question becomes, well, what happens with that tax loss? Can I use it to offset taxes from my rental income? And then can I also use it to offset taxes from, let’s say, [00:12:00] my W2 job if I’m still working full-time? Mm-hmm. Um, and the reason the short-term rental is called a loophole is because if we’re talking about traditional real estate investments, like a long-term rental, um, and that could be a single family, multi-family, commercial real estate, usually they’re long-term tenants.

Um. Most people cannot use these tax losses against their W2 income unless they, or they’re married to a real estate professional. Um, and there’s a, a, you know, a handful of rules of like, how do you become a real estate professional for tax purposes? One of which is though you have to have more time in real estate than your job.

Mm. And so you can see that it’s very difficult for somebody who works full-time, 2000 hours at least, to have more than 2000 hours in their long-term rentals and be able to kind of. Create real estate loss and offset W2 income. Um, and so again, the, the reason the short-term rental is called a loophole is because when you invest in short-term rentals, IRS actually does not need you to become a real estate professional.

Um, in other words, you don’t have to quit your [00:13:00] job. You don’t have to have more time in real estate than your job. You could potentially use the losses against W2 income, as long as you meet material participation hours.

Sarah Karakaian: Okay. So material participation hours and a real estate professional are two different things.

They’re two different concepts.

Amanda Han: They’re two different concepts. They’re somewhat interrelated. But if we’re talking specifically about short term rentals, um, the one thing to remember is we don’t care about real estate professional status at all. You only care about material participation hours. And this is a mistake area that, um, we see not just investors get confusion on, but also CPAs, um, and even the IRS.

Because it sort of makes no sense. Right? Kinda like why is, why is short-term rentals different? Mm-hmm. Why is there such a loophole? There’s really no rhyme or reason. That’s just kind of, it is what it is. Um, until maybe one day they close up the loophole.

Annette Grant: Right. That’s what I was gonna say. It’s you led in with, [00:14:00] it might be, you know, more

largely a mistake like that probably just wasn’t a sector of real estate when the tax code was being written that maybe there was pause there of real estate professional versus material time. So essentially thinking these could change over time, like this loophole might, um, adjust if people aren’t taking you know, advantage of it. But I wanna ask some questions that I still am trying to understand myself. So you are saying, um, you know, those losses from your property, if it’s cash flowing well, well, if it’s cash flowing well, how are there losses? Is it the depreciation? Because that doesn’t make sense to me while I’m cash flowing, I’m doing well. How do I have losses?

Amanda Han: Yeah, and that’s a common misconception for people. When we talk about loss, we’re only talking about tax loss, right? So we’re never investing on a poor performing property just to get the tax benefit. And so, um, yes, the losses [00:15:00] are two main things. One is making sure you maximize your write offs.

I think investors are always good at writing off interest, property taxes, management fees, but what a lot of people, um, overlook are some of these overhead costs. Like, um, the business use of your personal car, right? Mm-hmm. We’re not, not just driving to the property, but driving to real estate meetups, driving to meet with your CPA, your attorney, all those different things, okay?

Um, you know, your home office, uh, joining real estate masterminds, buying real estate books. Um, so all those things are kind of like expenses you have anyways, but now we’re just kind of turning them from personal costs into legitimate business write-offs. So yes, your property’s still cash flowing. For tax purposes.

Now you have all these added write-offs that are bringing down the taxable income. Um, and of course the depreciation is the big one, right? With depreciation. Um, you can not only depreciate the property, but we also are depreciating the, all the furniture, all of the supplies, [00:16:00] the pelotons, the TVs that you’re putting into your Airbnbs.

Um, and so those are what creates oftentimes the tax loss that we’re talking about.

Annette Grant: When you are mentioning real estate books, the personal car, uh, you know, real Estate Masterminds, do those have to, if the, the IRS is looking at this, do those purchases need to take place on the short term rental business like that card, or can it be on your personal, or is there a division that it should happen? Should happen on?

Amanda Han: That’s a great question. What we typically recommend is if you own your real estate and LLC, you know, for liability protection purposes, then we want those charges to happen in the LLCs bank account or credit card. Okay. Um, it helps from a, you know, liability protection perspective and also for taxes, it’s cleaner.

Okay. Um, now we do have investors who maybe don’t have an LLC mm-hmm. Or they’re just not as good as using it, so they’re. Putting some of those expenses on a [00:17:00] personal card, that’s fine too. What the IRS will look for if you’re audited, is they wanna make sure you’re able to prove those expenses, have business purposes, right?

So yes, I mean, if you join a Real estate Mastermind, it’s pretty clear it’s for real estate. I mean, people might love, you guys wanna hang out, but the main purpose of that is for real estate, right? And I’ll say alternatively, just because you have an LLC for your rentals, you can’t just, you know, go to the spa with your friends and put it on the LLC card and call it a write off.

We, at the heart of it, it’s about establishing the business purpose of whatever expense we’re talking about.

Annette Grant: We, um, meet with hosts every day, all, you know, all day long, and. One of the hardest parts of being a host is keeping the bank account separate. I mean, every host we talk to, they have receipts from whether they’re co-mingling accidentally ’cause they go to Costco or heck, Sarah and I do it like we’re on an Amazon account.

Oh, we were on the [00:18:00] wrong Amazon account. We put it on our personal, we forgot to put it on the property. What happened? I mean, it just seems like no matter what guardrails we put in place, there are. Expenses that are being mingled, co-mingled. How, what do you talk to your, how do you, um, your clients. What’s the discussion?

What’s the like, keeping those things separate or a lot of times it’s like, oh my gosh, we just needed to get stuff done and I needed to get that contractor a check or cash, so I just pulled it outta my personal account. What happens when you feel so overwhelmed you don’t even know where to start?

Because it started as a personal home and then it went to a short-term rental, or you know, all the things just get co-mingled and it’s very common. I think every host listening can feel that pain of like, I don’t even know what’s what. What do you advise your clients on how to clean that up or, you know, move forward after they feel like they’ve kind of dug themselves this like expense hole that they don’t know how to like, get out of, of, of making sure they’re in the right buckets.

Amanda Han: Yeah. I mean, it’s, [00:19:00] it’s never too late to start. Um, and I’ll tell you the, I think the reason people co-mingle, like you said, I’m just, there’s a contractor I need to pay ’em today. Here’s my personal checkbook. Uh, I would say that the majority of the reason these co-mingling occur is because your accounts are not properly funded.

Okay? Mm. So, mania, I have an LLC account. There’s $500 in there. I need to pay an invoice for 1200. There’s no money there if I’m paying it here. But if my LLC account is always well funded, like I always have a cushion of $5,000 from my personal into that account, I replenish it. When it goes beyond 4,000, then you are less likely to have these kinds of issues happen.

’cause there’s always money in that account. Mm-hmm. Right. Um, and I think it’s, it’s just a matter of. Setting up the systems so that there’s enough funds in there. Um, you mentioned Costco. That’s a common one. Like even for me too. So, um, like for me, I have like a really [00:20:00] tiny wallet and my wallet is a personal card and a business card.

So even at Costco, I have two transactions for checkout. If it’s for the office or work stuff, I use one card and my next transaction is my own card. Um, Amazon. So my little trick is my, you know, in Amazon you have a default card. Like we have just the same account, but you pay with different cards. Mm-hmm.

My default card is my business card. ’cause I always wanna remind myself like, is this something business? And if it’s not business, then you know you manually put it on the personal card. So just little things like that. I mean, what works for one investor might not work for another, but I would say at a baseline, make sure you have a different bank account for your investment properties.

Separate from personal, even if you don’t have an LLC. Right. I would have Amanda Han’s personal account, and just Amanda Hahn real Estate that I’ll call it. Mm-hmm. And try to use that because that makes things so much easier. For you. Bookkeeping time. Tax time. You don’t have to go through thousands of transactions to pick out what’s [00:21:00] business, what’s personal.

Annette Grant: And I know that just because I say we, we chat with hosts all the time. There’s so there’s a lot of hosts out there right now. They’ve already booked, you know, they tons of reservations for this year. Maybe they’ve had guests, they’ve already been brought and, and they have, it’s, it’s a, it’s a personal account.

So do you think just like they have to draw the line in the sand. Open up the business account and start fund it and then just start fresh. Like you gotta just, it doesn’t matter if it’s the middle of the year, after the first quarter, just start. Correct. Like, it’s okay. Like, you know, I feel like, yeah, a lot of people want it to be this like beginning of the year.

I know all the charges. So as a cpa, what would you like your client? Just like, Hey, as soon as, as soon as they can, what would you like to see them do? Yeah. To triage.

Amanda Han: I just feel like, yeah, sooner rather than later. Because you know, if we, again, if we’re spending on the personal bank account, you’re paying all sorts of things going through if you have kids, you know, there’s just lots of stuff.

Um, so if [00:22:00] even starting today, you have a new bank account for your real estate. Well, bookkeeping is much, much simpler between now and even the end of the year. Right, because we have that bank statement we’re gonna pull, we know what the deposits are, income or money I funded, and then the expenses are all business expense.

Why? Because when I spent the money, I have already designated that to be paid from this specific account.

Material Participation vs. Real Estate Professional Status

Sarah Karakaian: I wanna go back to the difference between being a real estate qualifying to be a real estate professional versus the material participation. So we need to understand the difference between the two of them as short-term rental investors.

So what, what, what are those differences?

Amanda Han: Well, so I would say first and foremost, if our audience is only investing in short term rentals, okay, then we don’t even need to talk about real estate professional status because that’s not relevant.

Sarah Karakaian: Okay.

Amanda Han: And, um, you know, I was mentioning earlier that actually this is probably one of the most common tax mistake areas I see even from CPAs.

So here’s a tip for our audience. Okay? [00:23:00] If you invest in short term rentals and you talk to your CPA and they tell you, oh, you’re not gonna get a benefit. Because you’re not a real estate professional, that is the number one warning sign. You’re working with the wrong person. Okay? Okay. So if, again, if you invest in short-term rentals and your CPA says anything about real estate professional, then they don’t understand the short-term rental loophole because the loophole is that you don’t need to be, right.

So if I don’t, if that’s not a requirement, why are we even talking about it?

Sarah Karakaian: Okay. Mm-hmm. Great. So what is material participation then?

Amanda Han: Yes. So we only care about material participation. So material participation. There’s a couple ways to, uh, qualify. There’s actually seven ways we’ll share the top three because the other ones, you know, virtually nobody really qualifies.

So, um, material participation though, I’ll, I’ll give you the hours requirements and then I’ll kind of define what those mean. Okay. So the first one is you and if you’re married, a spouse combined have at least 500 hours on your short term rentals. Okay, so you, and if you’re married, both of [00:24:00] you have 500 hours on the short-term rentals.

Then you’ve met material participation, which means create rental losses, offset W2 business, all types of income. If you don’t have 500 hours, another way to qualify is if you have at least a hundred hours on the short-term rentals and nobody else has more time than you. So that would be like my cleaning crew had 80 hours.

I had 120. Great. I’ve met material participation. Now keep in mind it is you against, um, all other, like each other individual. So you always, you also have to compare your time against like the gardener, against the contractor, against, you know, each other person.

Annette Grant: Hmm.

Amanda Han: Um, so, and then the third way to potentially qualify is you have any number of hours, but your hours are more than everyone else combined.

So in this scenario, we’re adding up the hours of cleaning crew, gardener, landscaper, uh, contractor. If they total 30 and you had 60, then you also met material participation. So any [00:25:00] one of those three allows you to then use rental losses against all types of income.

Annette Grant: What if I have I hired a property manager, but I’m still spending time, um, on my property.

Could I still qualify for the material participation? Is that a red flag to the IRS? Like, wait, why do you have a property manager and you’re getting material participation?

Amanda Han: Yeah, it certainly, um, would be subject to more questioning if you’re audited, right? Because if a property manager is doing a lot of this stuff, the question becomes what is it that you are doing?

Okay. Um, but I would say it does not mean because you have a property manager, you cannot meet material participation. You just wanna be smart about what are they doing versus what are you doing. Um, I think it’s important to define like. What are these hours? Right? Right. What, what counts as hours? What does not count as hours?

Um, so for material participation, uh, the hours that the IRS looks [00:26:00] for is things that you’re doing that impact the day-to-day operations of your short-term rental. And so what would not count would be learning about how to invest, um, looking for properties, deal analysis, right? Those kinds of things.

Going to a conference, ’cause those don’t really, don’t impact directly the day-to-day operations. Um, things that do count is you setting up your property, staging it, furnishing it, handling guest inquiries, coordinating contractors. Cleaning crew, you cleaning it, um, all those things are, you know, that impact the day-to-day operations, uh, are what is material participation hours.

Sarah Karakaian: How do you recommend short-term rental hosts track these hours so that should they get audited, they’re like, oh, here’s my proof that I have 500 hours. Is it like a spreadsheet with, or is a Google calendar where you say, like, working on my STR, like how, how do you see that being most successful?

Amanda Han: There are specific things you need to [00:27:00] track.

So you need to track the date, the number of hours, which property is it for, and what the task is. Um, and the methodology itself is pretty flexible. I always tell people it’s whatever methodology works for you. Hmm. You know, because unlike bookkeeping, right, you have a bookkeeper. Track your books, but hours are typically tracked by you.

I, I rarely have clients who have somebody else track their hours and, um, so it’s gotta be something that works for you. Um, you know, a lot of our clients, we, we give them like an Excel. So they put into Google Sheet, pick it up on their phone. Uh, one of our clients actually created an app to track it. It’s called Reps Tracker, REPS Tracker.

Sarah Karakaian: Okay.

Amanda Han: Um. So that’s like a really cool one that tracks long-term and short-term rental separately. It’s like there’s two different modules. Right. Cool. Because they’re two different things. Yeah. And so, um, yeah, calendar is fine as well. Calendar’s a little bit harder. Just, I mean, it depends how you use it.

Mm-hmm. But you, you just wanna make sure you have those, um, you know, property. Address, time, date, [00:28:00] how many hours you spent on this.

Sarah Karakaian: If you have more than one property, do you have to meet 500 hours per property to take off the loss from that property, or is it holistically?

Amanda Han: Yeah. That’s a great question. And um, so typically the default rule is you have to meet material participation for each property.

However, we can make what’s called a grouping election. So grouping election then allows you to tell the IS, Hey, I’ve got five short term rentals. I’m grouping them together for hours purposes. Right. Just for hours. I’m not combining them in real life. Mm-hmm. For hours purposes, I wanna group them together to meet material participation hours.

Hmm. And so this works really well for a lot of our clients who maybe. Don’t always invest locally, right? Mm-hmm. So let’s say it’s somebody in Arizona who has a bunch of rentals, um, in Florida. And so what you could do is your Florida short-term rentals could be fully property manager managed. I don’t do anything with them at all, but if I have one property that’s local or close enough where I can self-manage [00:29:00] now as long as I have 500 hours, I group everything together.

I do accelerated depreciation. Now I can use all of the losses against my W2 income.

Sarah Karakaian: And then to qualify for material participation, do you have to own a certain percentage of the LLC or the entity that it’s in? So like let’s say you own 50% of a property, but then someone you’re not married to owns the other 50%.

Do you still have the 500 hours to qualify to offset?

Amanda Han: Um, so in a partnership scenario, um, that works fine. So let’s say you and I are partners in an LLC and we decide to, you know, I mean, I wanna use the loophole, you also wanna use the loophole. Um, as long as we are separately going after the 500 hours requirement, that should be fine.

There’s typically no issues around that. The issue typically comes in if we’re trying to use one of the other requirements. So remember, 500 is just one of them, right? I can also try to use the 100 and more time than anyone else, but you can see logically that doesn’t make sense. Like, I cannot have more than you and you also have [00:30:00] more than me, right?

So in the partnership scenarios, I think the facts that we see most often is we’re in a deal together. I spend a little bit of time. You spend more time. Um, but it’s where, like I use the 100 hours on this one, but maybe you have 500 across your other short term rental. Mm-hmm. So that could work as well.

Annette Grant: Can accelerated depreciation ever work against you? Let’s say you buy a short term rental, you’d use a decel, um, the, um, accelerated depreciation and you sell it in 24 months. Like, are there repercussions for over leveraging these tax loopholes and then. You’re having to pay it because you accelerated too fast

Sarah Karakaian: and maybe you share Amanda, to someone who doesn’t know what that means.

Like what, what is accelerated depreciation? Yeah. How is it different than regular depreciation? And then answer and ask the question.

Amanda Han: Yeah. Um, I love it. So. Um, the tax code allows us to take depreciation and it’s, uh, basically the, it’s under the premise that your building is gonna have wear and tear over time.

[00:31:00] So my $500,000 building is not always gonna be like fully there.

Understanding Depreciation for Short-Term Rentals

Amanda Han: I mean, in reality it is, but wear and tear. So you’re allowed to write it off. Um, usually for short term rentals, you write off over 39 years. And so every year you take the building purchase price divide by 39. That’s the amount of paper write off that you get to take every year.

Accelerated Depreciation and Cost Segregation

Amanda Han: Um, now what the tax law also allows us to do is to say, well, this whole thing, the structure is not just a building, right? I can go in and analyze or break out what makes up that $500,000 building. So breaking it out into specialty plumbing, uh, specialty electrical cabinets, certain types of flooring. And when they break out those components, then your CPA can help you calculate faster depreciation because those have, you know, wear and tear long mill much faster than 39 years.

So if it’s five years, then I’m, instead of writing it off over 39, I can write it off a lot faster. And that’s where you see people who [00:32:00] say, well, I bought a $500,000 building and my first year write off is like 150,000. Mm-hmm. Mm-hmm. So it’s because they, they’ve accelerated a lot of it. Um. I think people tend to hear the narrative, kind of like what you were saying earlier, um, Annette, about, you know, just like I save 50% in taxes.

And what investors will do is they’ll go out and just do a cost segregation study. Mm-hmm. Like, pay someone, let’s get it done. Great.

Material Participation and Passive Losses

Amanda Han: The issue is if you do it too early and you do it in a year where you can’t actually use it, for example, you did any material participation, you just heard this big write off and went out and did it.

What happens is that the loss. Actually gets trapped is what we call passive losses. Okay? And we do see this somewhat frequently. Um, so you create this $150,000 loss, you cannot use it against W2 because you’re not a ma, you know, material participating, and you think, well, next year I’ll just materially participate.[00:33:00]

Well, guess what? That one 50 is trapped. It is always and forever a passive loss. The fact that you meet the hours the following year, that doesn’t change anything in the past, right? We don’t change history, so that gets trapped.

Strategic Tax Planning for Real Estate Investors

Amanda Han: So what I always tell people is before you get a cost segregation study, step one is to figure out can I actually use it, right?

Mm-hmm. Do I meet material participation? If yes. Then let’s see, what’s the benefit of a cost segregation study? Um, those are kind of the steps. And I think something you mentioned, like if I’m gonna sell the property, um, in a year or two or in six months, do I do a cost segregation study? The answer is, it depends.

It depends on a lot of different things like what’s your tax rate next year? What else is going on next year? What is the tax law next year? Um, to then decide whether it makes sense for me to take a big write off this year and potentially pay taxes on that next year if I’m not going to 10 31 exchange.

Annette Grant: Right.

Long-Term Implications of Depreciation

Annette Grant: And what if you accelerate all the depreciation and your, your material participation is there and so [00:34:00] you’re like, okay, I’m taking 150 this year, 150. 150. And after those three years, what happens to the. To that tax loophole, you don’t have any of the accelerated depreciation anymore? Mm-hmm. Like, does the depreciation go away?

Like how, how is it like, did you use it all up in those first three years and then I, I don’t know about everyone else, but you wanna be earning more money year over year, whether it’s in your W2 or on your property, so it’s like, are you just compounding that tax liability after you’ve accelerated this depreciation so fast?

What happens?

Amanda Han: Yeah. Well, the first thing is, um. Even with cost segregation, there is always still depreciation over the next 39 years because it’s not possible to say there’s no building. Okay. Okay. Um, and that’s why on a 500,000 building, it’s never a $500,000 write off. Right. Because they’re still building.

We’re just trying to take, in my example, if we took 150,000 immediately, [00:35:00] there’s still 300,000 roughly that you’re gonna depreciate over the rest of the, the ownership of the pool. 30. Um, it’s just lower than if you had waited evenly over 39 years. So most investors, you still will get a good amount of depreciation year after year.

Um, but yes, what we typically see is, you know, if you are continuing to cash flow. Most people will continue to build their portfolio, right? So that’s buying more properties. And so you’ll have the newer properties to then offset the W2 income for that specific year. Um, I, I kind of tend to tell, uh, clients it’s sort of an addiction that it’s kind of like the first time somebody gets a big refund check or ends up not having to pay taxes.

They’re like, wow, this is amazing. I’m gonna take my taxes saved. I’m gonna put a down payment on another rental property. Um, and then after a couple years, it’s like, wow, you know, you come to a year where like, well, I didn’t really wanna buy this year, and you have to pay the tax. And it’s like, [00:36:00] ouch. You know?

Now I remember what it was like to pay taxes. Mm-hmm. So it becomes a, an addiction. Healthier and healthy. I don’t know. You have to be the judge of that.

Annette Grant: Well, right. ’cause you’re saying that and I’m like, well, then you’re just putting obviously more properties, more liability, more, you know, it’s like, it’s this.

You have to think about what the future, like, what you really want your future to, to look like. Are you continuing to build this portfolio because that’s not gonna come without its own, um, issues. Pressure, you know, other things. It’s like chasing. Sarah and I, we actually talk about this a lot of, like, we do feel like people are always kind of chasing these like tax loopholes or these breaks and it’s like, well wit at some point, like.

When does it, like the buck stops here at some point in time, like either you are going to, I don’t know, sell your portfolio and then have the tax event there. It’s like kind of choosing when you’ll have that taxable event, right? Is that what like ends up happening

Tax Strategies for Short-Term and Midterm Rentals

Amanda Han: and I think it’s just taking [00:37:00] a, like if we’re talking about like a very long-term, uh, look, right?

Mm-hmm. Because most investors, at least the ones that we work with, um, if you’ve built your wealth on real estate. Even eventually when you sell, most people will still have it parked in real estate. It just might not be something you’re actively involved in. It might be something more passive, it might be a hundred percent managed by someone else.

Mm-hmm. But we have very few clients who decide, gosh, I built this whole portfolio and now in retirement I’m just gonna sell it and go a hundred percent into stocks or crypto. Mm-hmm. It’s just kind of like, that’s what people know they’re comfortable with. Um, and so. Uh, you know, more going from more active in active real estate in your working years to more passive real estate in your retirement years, and then ultimately passing it off to the next generation.

Mm-hmm. So when you do that, you get step up, you know, step up basis. So you don’t, so nobody pays mm-hmm. Kind of the recapture taxes in an ideal world. But of course, there’s always times when it’s like, yeah, I gotta sell this property, so [00:38:00] we’ll deal with the taxes. It, you know, kind of, it is what it is. Um.

So, yeah, that’s what we typically see. But, you know, and, and short term rental specifically too, a lot of our clients use it. Um. More so as like a one or two specific strategy. So we, uh, was just talking to a client a couple days ago that had a business exit. So they sold their business to private equity for a lot of money.

So for them, we planned a couple years ago for them to start acquiring short-term rentals. They didn’t have time to do any material participation, but we wanted enough in their portfolio so that when their business was sold, that was the year they exited. They have time to manage their short-term rentals.

Get a bunch of losses to offset that huge tax liability on the business sale. Now, are they gonna continue doing that now that you know, are they just gonna do it for the one year? That’s still up in the year. Right.

Sarah Karakaian: Interesting. That’s what, which is why it’s so important to work with A CPA who understands, and [00:39:00] Amanda too, that their CPA, even if they understand short term rentals and real estate, the client understands that you need to share with your CPAA holistic picture.

About your life and like what you plan to do, because that’s where that strategy comes in. Had they not shared with their CPA that they plan on having this. Um, the sale of the business where all this cash flow is gonna come in and thinking ahead like that, they might not have had the time to be strategic because I think a lot of us talk about the here and now, and we don’t really talk about the future planning with our CPA, maybe the CPA isn’t asking.

But what do you say to that, to anyone who’s listening who doesn’t have that kind of relationship with their CPA, we’re like, well, I’m supposed to tell ’em like all the things I’m dreaming and hoping for in the next. And how far ahead do you, do you share that information with your CPA?

Amanda Han: Yeah. It’s funny because, I dunno, I always tell people like when the, the real way to save on taxes, like it is not when you’re filing your taxes for last year. Mm-hmm. That’s what people tend to think. Like I’m even a CPA, um, uh, real [00:40:00] tax planning actually happens outside of that time, right? Because it’s forward looking. Um, and it’s not super scary. It’s not. Real tax planning is not just like me grilling someone about their numbers.

Um, it’s really just very conversational, you know, like, well what’s, you know, like what I always start with like, what’s going on? ’cause I just want you to free flow what is going on? ’cause then people talk about the most, you know, unexpected things like, well I’m Portugal. And, um, and so it’s in those like just conversations that your tax person can help you.

Curate, what are some of the potential opportunity areas or what are some of the like, Hey, did you know that if you were to do this thing, you’re planning that you would actually owe a bunch of taxes? So we’re talking about it now before you do it so that you can save. Um, but I think that’s the ideal, right?

The ideal is just a casual conversation where your CPA can kind of get into your head on what you want to do this year, next year, and however. [00:41:00] Far ahead, you know, that you can communicate to them, um, and then the strategies will come as a result of what you plan to do. But I think what most people actually do in their tax planning, if they actually do it, uh, is it’s actually a q and a.

So they’ll listen to, you know, like a podcast like this. They’ll write down all the stuff. They’ll call their CPA, meet with them and be like. You know, should I do a co segregation? Um, what is material participation? And just, and that’s okay. That’s better than not, than not doing it at all. But just understand that’s simply a q and a where you are bringing questions and they’re answering questions.

There’s not a lot of like forward planning. It’s still just very restricted to, here’s my questions. Please answer them.

Sarah Karakaian: Right.

Common Tax Mistakes and Legal Entities

Sarah Karakaian: What are some of the ta other tax mistakes you see short term rental. Investors making. Are there any others that we haven’t covered? [00:42:00]

Amanda Han: I think we, you know, we kind of talked about not maximizing write offs, right?

Just not understanding what we can write off, not tracking it, separating it correctly. Um, understanding the short-term rental loophole, and I don’t, I don’t know that I would’ve call that an investor mistake. It’s probably more of a CPA mistake, right? ’cause investors don’t really know. Yeah. Um, but I think if US in short-term rentals, you for sure want to track your hours.

If you’re anywhere close. To one of these three potential loopholes that we were talking about. Um, I think those are kind of the, the more common ones that, um, some of the more common ones we see. Oh, another one we didn’t really talk about legal entities this super common, but I do see it from time to time, um, that for some reason investors tend to think short term rentals is like.

An active business. So I’ve seen people, whether they did it themselves or CPA, advise incorrectly to hold the rental property in a corporation like an S-Corp rather [00:43:00] than an LLC. So, um, really important to understand that short-term rentals are still just rental property, and we never wanna hold the rental real estate in corporations.

So your short-term rental should be in an LLC personal name, but not in an S corporation. If you, um, if you do co-hosting, uh, or you manage other people’s properties, then maybe, you know, like the management income could go into an S-corp, but the property, the title of the property, have it remain in an LLC.

Sarah Karakaian: What about, there’s a lot of conversations around midterm rentals. Amanda, I always joke with our audience that like they’re not, I don’t think they’re the easy button. They’re still, they, they take a lot of work to get the right person in there. Um. But even though it’s furnished, that does not make it a short-term rental, correct?

Amanda Han: Yes. So, um, short-term rental for tax purposes is a property where the [00:44:00] average guest stay is seven days or less. Okay. So that’s it. That’s the only thing we care about. We don’t care if it’s on Airbnb or, you know, you direct listing. Um, and so it, we sometimes see property where it’s a midterm for part of the year.

Then it’s very short term for the rest of the year. Mm-hmm. So as long as the average guests stay seven days or less, then you can use the short-term rental tax loophole. I think the question I get all the time is, well, can midterm rental investors use the short-term rental loophole? Um, generally not.

Right, because midterm, typically they’re 30 days or more. I mean, you’re trying to get to even more than 30 days. So typically they’re not part of the short term rental loophole.

Sarah Karakaian: Is there any other strategy tax wise where midterm rentals would win out? Over short term or is it simply You’re nodding. Yeah.

What do you, what do you think to that?

Amanda Han: Sure. Well, um, you know, like anything in taxes, there’s not a one size fits all. Mm-hmm. I know we just spend all of our time talking about how amazing short term rentals are and the loophole. Um, we actually [00:45:00] have clients, we advise against having it as a short term. So, so mainly just meaning if you do short term.

I want the average guest to stay to be longer than seven days. Um, who is that good for Somebody who’s a real estate professional? Mm-hmm. So if you are a real estate professional because you own a bunch of long-term rentals, you already self-manage your rentals, then it’s easier if your short-term rentals are treated like long-term rentals, right?

With average guest stay of seven days or more. Because then you don’t need to separately meet material participation for this one property. You can group it together with all of your long-term rentals. You already naturally can use all the losses.

Sarah Karakaian: I love that.

Amanda Han: And the, the midterm rental, like is it better to have a midterm rental?

That would be a good example as well. Like maybe I’ll operate as a midterm ’cause it’s all part of real estate professional bucket.

Sarah Karakaian: Perfect. Any other questions Annette? I mean so many, but

Annette Grant: yeah. What if you, what if you filed your taxes and you’re like, wait, I had material. [00:46:00] Participation. I didn’t take advantage like I should have.

Can you do an amended tax? Like or, Hey, I was working like maybe there’s someone out there, they had this conversation with their CPA.

Tax Planning Conversations with Your CPA

Annette Grant: The CPA was like, well, you’re not a real estate professional. They kind of just, it happens, you know, like, alright, fine, check the box. Turned it in and now they’re like listening to this and it’s like, holy smokes.

I told them, I was like, I should have been able to, uh, use this tax loophole. How can we go back? I feel like a lot of people think like taxes are final and that’s it. What if we wanna go back and see if we could have been taking advantage of some things that we haven’t been taking advantage of over the past couple of years?

Amanda Han: Is it possible it’s possible to go back? Yeah, it is possible to do back, to go back. Um, but it involves a, a much deeper level of analysis. Um, I’ll tell you why. The reasons are, um, if you go back first and foremost, [00:47:00] there’s potentially higher audit risk. Okay. Because when you go back, you’re gonna do an amended return.

You have to tell IRS, why am I amending? What changed? So you’re actually prompting them to tell them, like, this is something that changed. Okay. Um, and especially if the amendment is to, I. If the amendment is to actually claim a large refund, that’s an even higher audit risk. ’cause now they’re gonna let you check, right?

Um, there are certain things in the tax world we can amend for and certain things that we can’t even like for cost segregation, right? Because one of the benefits of, of maybe amending is, gosh, I didn’t do accelerated depreciation. I’m gonna do that, and real estate professional or short term loophole and do all that.

Um, but there are certain things, uh, certain types of assets. Where we cannot go back and amend for the cost segregation. So those little things like that’s more technical, like, should I do it? How much benefit am I gonna get?

Annette Grant: Sure.

Amanda Han: The good news though, is you can always catch up on a go forward basis. So meaning this is the first time you ever heard [00:48:00] about it.

Gosh, I always knew I qualify, but I only took regular depreciation. Well before you file this year’s taxes. What you can do is you can claim material participation. If you didn’t do accelerate depreciation, you can catch up for what you didn’t do in the past and do it all on this coming tax return. Okay?

So it’s just a matter of weighing when we work with clients who kind of missed out on those things, we have to help them weigh out. Is it better to amend or is it better to just catch it up on going forward? Um, what’s kind of the cost benefit of each of those decisions?

Annette Grant: Okay, so it’s not all lost. Can you give us, um, you know, I had talked about what, what I see, um, all over LinkedIn.

Like, can you give us what is an average? Like what is a good, you know, obviously no names I think, but what is a very common, um. Strategy that you see that hey, they, they have a W2 and they’re making X, you know, is it a couple? Is it normally a couple? Is it like, what’s, can you give us a [00:49:00] scenario of this tax saving when they purchased, they have the material, um, participation.

What have you seen? Save some savings. What do you, nor, you know, if you can give us an example. Very common. Oh,

Cost Segregation and Bonus Depreciation

Amanda Han: um, yeah, I mean. Every year is a little bit different. We didn’t talk about bonus depreciation, but um, currently we have, uh, 40% bonus depreciation. So what that means is like when you take accelerated depreciation, not only are you doing it faster, but we add this layer of bonus depreciation on top of it to make it like even faster.

Um, and, uh, there are talks right now of bringing back a hundred percent bonus depreciation to 2025. Whether that comes back or not is anyone’s guess, but let’s assume, well, we can talk about two scenarios. Let’s assume that there is no, you know, we just keep the current law. Um, so I was just talking to a cost segregation firm yesterday actually.

So right now if it’s like a hundred thousand dollars [00:50:00] building, um. Generally you’re expecting about $20,000 in first year depreciation on the high end. So you know, as you scale up, the higher the property building, you can kind of use those same ratio at roughly 20%. Okay. Um, back when we had a hundred percent bonus depreciation, um, those were maybe 30%, roughly, so on a hundred thousand dollars property, maybe 30,000 in first year depreciation, and you kind of go up from there.

Now keep in mind, this is just the building. For short term rental investors, it’s more than just buying the property, right? So it’s all the furniture and all that that’s eligible for depreciation as well. So, and then, you know, those numbers, you just kind of multiply it by whatever tax rate that person is in.

So if they’re in a, you know, if it’s a hundred thousand dollars write off, they’re in a 37% tax bracket and that’s 37,000 in taxes saved. So it’s kind of a, a, a really high level rule of thumb to figure out how much savings can you get from a property.

Annette Grant: Okay. Do you have to do the cost [00:51:00] segregation though to have the accelerated and bonus depreciation?

Amanda Han: You don’t. So, um, you can take accelerated. So let’s say you’re somebody who, um, you bought a short-term rental and you’re rehabbing it yourself. So you, like you did all of the new cabinets and all that. You already know the cost of this, the plumbing and all that. Um, your CPA could just. Take faster depreciation ’cause they already know what it is.

You spent the money on it. Um, cost segregation generally is for the acquisition side. The building itself. You bought the building. Unless you’re an engineer, you probably don’t know what the components are and you can’t assign a value. So that’s what it’s, got it. Yeah.

Sarah Karakaian: Alright.

Final Thoughts and Resources

Sarah Karakaian: Amanda, if someone is loving this conversation and they wanna learn more about you, what services are you offering?

Can they reach out to you? What, what does that look like?

Amanda Han: Yes. Um, my company is called Keystone cpa, so you can go to keystone cpa.com. We have a lot of great, uh, free information on there. We actually created a tool, it’s a [00:52:00] tax risk assessment. Um, and because when we teach all over the US, people are always asking us like, how do I know if I’m overpaying in taxes?

I heard you speak, I’m kind of anxious now. I don’t even know if I’m overpaying. And so. The tax risk assessment is a self-assessment with a handful of questions. You answer those and you get a score at the end of it. And if you did well, you score high. That’s good, but you feel a bit better. Like I’ve covered all the areas that Amanda says I should have talked about.

And if you score low, that’s okay too. You can print out your results and when you meet with your tax person, you can show it to them and say, Hey, here are all the things I said no to. Maybe that’s a starting point. Mm-hmm. You know, to like, we can, can we chat through some of these? Things. Um, so you can check that out on my website.

And, um, best place to find me if you are looking for daily tax tips, probably Instagram as Amanda Han CPA, and also have a YouTube channel for those of you who really wanna dive in deeper.

Annette Grant: Onto tax strategies. [00:53:00] Absolutely. And I think it’s, um, it’s one of those things that’s, like you said, daily tax tips. I encourage, follow Amanda ’cause you never know which one’s actually gonna stick or like light, that light bulb off and it might, taxes might not be your thing, but it’s like just having that. Okay. I know I’m probably following the wrong people on LinkedIn, but have the positive side of like, where can I like use this? What can I understand?

The fact and it, it doesn’t have to be this all or nothing. I think that’s what we think about when we think about our numbers and taxes. It’s like either I understand it or I don’t, and that’s not where we’re at. It’s like, how can you just get a little bit better? You know, this year and then the next year and the next year.

I think that’s a lot of people throw their hands up of like, oh, I don’t like taxes, I don’t like numbers. It’s like, well just start to learn just a little bit better, can make a really big difference. Um, especially most of the people listening to the show, I hope are long-term investors. And so if it, if they didn’t get the win this year, they can get that win next year.

Um, so please, yeah, give Amanda, give Amanda that follow so you [00:54:00] can get those daily tax tips For sure.

Amanda Han: I think a question I get asked a lot is like. When do I know if I should do tax planning? You know, is it like, do I have to make, do I, how many properties should I own before I do tax planning? Or how much income should I be making?

And it’s really not about that. Um, you know, you could be someone making a million dollars a year in your W2 if you are just gonna spend it all on personal things, there’s probably no tax planning for you, right? Let’s be honest. You’re just spending it. Um, but if you’re making, if you’re someone making a hundred thousand dollars and this is your first short term rental, then there’s absolutely things that could be done to save on taxes.

So it’s, it’s more about your plan on wealth building. Mm-hmm. And is that something you plan to do, or is it, um, you know, you’re just kind of status quo on the, in the spending mode that determines who is a candidate for tax planning.

Annette Grant: My last question before I wrap up is in, when you’re talking with a CPA Amanda, these conversations, these strategy, ’cause you gotta, [00:55:00] you gotta have the conversations to see if you even wanna look, you know, work with them.

Should you ch like are there consulting, should there be fees associated with this? I know as the consumer, it’s like once you kind of have that initial meeting, you kind of feel locked in because they’ve spent this time. How should we be interviewing the right person? Like are, you know, should they be charging us for that strategy?

What, what does that look like?

Amanda Han: Well, I think every CPA firm operates a little bit differently. Mm-hmm. Um, so it just kind of depends. I, I, I, I do always tell people. You know, you get what you pay for. So if it’s a free consulting, you’re probably not getting much true value. Right. Okay. Um, so I mean, using us as an example, when we do tax planning with clients, um, it’s always after they pay.

Because before we meet with them, we look at all of their tax returns from the past. We look at their financial profile. We wanna know like, what, what do you have going on? Where are your stocks? How much, what? Where’s your retirement account? How much do you have in it? Um, because [00:56:00] only when we get an idea.

On our end on what’s already happened, can we then be helpful in talking about what’s coming up, right? The future planning of it. But not all firms work the same. But I will say if you are looking for true assistance, you do want them to have a base knowledge on what’s already going on, right? Spend the time ahead of time to to understand about your holdings and your activities. Mm-hmm.

Annette Grant: Great. No, that’s great. I think, I think that’s something too, everyone gets a little bit hesitant to, to pay for the services that they don’t understand. And it’s like, you gotta, you gotta pay to play. I like that. You get what you pay for. So, um, Sarah and I just went through that ourselves too with some, with some, um, accounting help.

It’s like, look, we weren’t, what were we paying? You know? It’s like we were getting what we were paying for. So be ready, Amanda. This was awesome.

Sarah Karakaian: So good. Amanda, thank you so much. Is there anything else you wanna share before we sign off?

Amanda Han: Um, no, [00:57:00] I do think, um, 2025 is gonna be an interesting year for real estate investors.

Um, you know, like I said, there’s talk from the administration of bringing back a hundred percent bonus depreciation, which could be huge, um, for real estate. And so just making sure to keep an eye on those things or at least have your CPA keep an eye on those things and be ready to take advantage, you know, if it does get passed.

Sarah Karakaian: I love that you can, or you can follow Amanda Han on Instagram and I’m sure she’ll keep us abreast as well, so you can trust, but verify your CPA. Uh, all right, so we will put all of Amanda’s information in the show notes. Check her out. You’ve been so generous with your time, Amanda. We also actually have a YouTube video that where Amanda kind of made sure the information we shared was accurate and we shared, um, her, uh, some of her opt-ins there as well, so you can get to know the, the tax benefits of short-term rentals a little bit deeper with, um, a printoff. So Amanda, thank you so much for your time and expertise. And with that, I am Sarah Karakaian. [00:58:00]

Annette Grant: I’m Annette Grant. And together we are. Thanks for visiting. For visiting.

Sarah Karakaian: Talk to you next time.