WEBVTT NOTE This file was generated by Descript 00:03:42.186 --> 00:03:45.516 So that was my excitement for the week, and I know it might 00:03:45.516 --> 00:03:47.466 not sound exciting to everyone. 00:03:47.826 --> 00:03:51.216 But it was at a tax conference, so that's pretty peak for exciting. 00:03:51.726 --> 00:03:53.226 But all of that aside. 00:03:53.796 --> 00:03:57.576 This week, the topic I want to talk to you guys about is something that 00:03:57.576 --> 00:03:59.856 there is so much misinformation on. 00:04:00.276 --> 00:04:03.996 It's something that's over simplified, and it is something that we are 00:04:03.996 --> 00:04:06.726 seeing a huge uptick in audits. 00:04:07.206 --> 00:04:12.036 So all of these things combined, there needs to be more solid 00:04:12.036 --> 00:04:13.926 information out there about this topic. 00:04:14.376 --> 00:04:18.006 I received some messages asking about it after the last podcast. 00:04:18.306 --> 00:04:21.216 I teach about this and almost every conference where I speak. 00:04:21.816 --> 00:04:25.206 Today, we are going to talk about the short-term rental loophole. 00:04:26.436 --> 00:04:29.286 As a starting point, I hate that it's called a loophole. 00:04:29.886 --> 00:04:34.446 That to me implies we're doing something like shady or kind of skirting the 00:04:34.446 --> 00:04:36.696 rules and that's not happening at all. 00:04:37.176 --> 00:04:42.576 There is just wording in the tax code that allows for a circumstance where short-term 00:04:42.576 --> 00:04:45.306 rentals can be more preferential tax wise. 00:04:45.696 --> 00:04:46.536 That's all it is. 00:04:47.586 --> 00:04:51.276 If you haven't listened to my no reps, no problem episode. 00:04:51.306 --> 00:04:52.746 I would go back and listen to that. 00:04:52.746 --> 00:04:56.376 It's going to explain a little bit more for kind of a foundation. 00:04:57.336 --> 00:04:58.806 But just as a recap. 00:04:59.466 --> 00:05:03.396 Normally long-term rentals are passive, passive income. 00:05:03.876 --> 00:05:07.386 What this means is the losses related to them. 00:05:07.896 --> 00:05:09.396 Are subject to certain limitations. 00:05:10.056 --> 00:05:13.596 Basically, if your income is under a hundred thousand dollars, you can only 00:05:13.596 --> 00:05:16.806 use $25,000 a year of passive losses. 00:05:17.496 --> 00:05:21.636 If it's over a hundred, you start to lose out on being able to 00:05:21.636 --> 00:05:25.626 use those losses against your W2 income or your business income. 00:05:26.466 --> 00:05:32.376 Once your income is above $150,000, you can no longer use any of 00:05:32.376 --> 00:05:33.966 your passive losses for the year. 00:05:34.386 --> 00:05:36.096 Against your other income types. 00:05:36.336 --> 00:05:39.876 So it won't reduce your W2 or your business income or anything else? 00:05:39.876 --> 00:05:41.886 No matter how big the loss is. 00:05:42.486 --> 00:05:46.656 So all that said a lot of investors get really frustrated with their long-term 00:05:46.656 --> 00:05:50.376 rentals, because if you put in a ton of money, if you have a bad year, whatever 00:05:50.376 --> 00:05:52.776 the case, and you generate a large loss. 00:05:53.376 --> 00:05:57.666 You may not be able to receive a benefit from it in that specific year, right? 00:05:57.666 --> 00:05:59.046 The losses never go away. 00:05:59.076 --> 00:06:00.156 It carries forward. 00:06:00.546 --> 00:06:02.466 It can offset other passive income. 00:06:02.826 --> 00:06:06.186 But if you spent a ton on your rentals and you are thinking, well, at 00:06:06.186 --> 00:06:07.956 least this will pay off at tax time. 00:06:08.586 --> 00:06:09.426 It may not. 00:06:09.456 --> 00:06:12.066 If your income is over 150,000. 00:06:12.816 --> 00:06:17.346 With that frustration point is why people are now so excited about 00:06:17.346 --> 00:06:18.906 this short-term rental loophole. 00:06:19.066 --> 00:06:21.016 Where this strategy stems from. 00:06:21.766 --> 00:06:23.866 Is code section 4 69. 00:06:23.956 --> 00:06:28.126 That is what defines what is passive, what isn't and all of the guidelines around it. 00:06:28.816 --> 00:06:33.376 In that code section, there are two ideas, two key pieces that are 00:06:33.376 --> 00:06:35.326 going to relate to today's episode. 00:06:36.136 --> 00:06:36.856 The first one. 00:06:37.306 --> 00:06:41.926 Says that for an activity to be non-passive the taxpayer needs 00:06:41.926 --> 00:06:43.966 to materially participate in it. 00:06:44.716 --> 00:06:47.836 Material participation is just a level of involvement. 00:06:48.356 --> 00:06:52.796 There are seven different tests to use to prove that you've reached that level. 00:06:53.246 --> 00:06:55.076 You only need to meet one of the seven. 00:06:55.466 --> 00:06:58.226 The most common ones relate to how many hours you've put in. 00:06:59.936 --> 00:07:01.646 Also in that code section. 00:07:02.126 --> 00:07:04.226 It defines what a passive rental is. 00:07:04.736 --> 00:07:08.336 It goes on to talk about the various types of rentals and then 00:07:08.336 --> 00:07:11.426 some kind of unique circumstances where they may not be passive. 00:07:12.476 --> 00:07:13.916 That is where it notes. 00:07:14.426 --> 00:07:19.226 That an exception to a rental being passive is if the average 00:07:19.256 --> 00:07:22.496 guest stay is seven days or less. 00:07:23.576 --> 00:07:28.046 So in a nutshell, if you have a rental property where the average 00:07:28.076 --> 00:07:29.996 length of stay is seven days or less. 00:07:30.596 --> 00:07:33.446 And if you are materially participating in it. 00:07:34.166 --> 00:07:39.596 It is by definition non-passive so there's nothing questionable to that. 00:07:39.896 --> 00:07:41.126 It is clear in the code. 00:07:42.666 --> 00:07:45.006 So that's the starting point to this loophole. 00:07:45.246 --> 00:07:48.246 We can take a rental property, meet certain criteria. 00:07:48.756 --> 00:07:50.046 Has it been on passive? 00:07:50.466 --> 00:07:54.786 And what that means is that you are no longer subject to that passive loss limit. 00:07:55.566 --> 00:07:57.486 Now, no matter how high you are in commands. 00:07:58.026 --> 00:08:02.016 You can use the losses generated from your qualifying short-term rental. 00:08:02.496 --> 00:08:03.726 So, this is huge, right? 00:08:03.726 --> 00:08:05.616 This is incredibly exciting for people. 00:08:06.096 --> 00:08:07.176 And it gets better. 00:08:08.406 --> 00:08:09.846 The next piece to this. 00:08:10.716 --> 00:08:14.046 Is that you can pair this with a cost segregation study. 00:08:14.436 --> 00:08:16.506 This is typically the other part of the loophole. 00:08:17.646 --> 00:08:19.686 What a cost segregation study does. 00:08:20.226 --> 00:08:23.856 Is, it allows an engineer to look over your property. 00:08:24.216 --> 00:08:29.526 And instead of depreciating, just one building across 27 and a half or 39 years, 00:08:29.916 --> 00:08:33.996 what a study does is allows them to break out all of the pieces of a building. 00:08:34.356 --> 00:08:36.246 And it's actually the more correct way. 00:08:36.696 --> 00:08:37.896 To report depreciation. 00:08:37.896 --> 00:08:40.266 You're not just buying one specific thing. 00:08:40.726 --> 00:08:42.526 A building is made up of multiple things. 00:08:43.036 --> 00:08:45.736 So what the study does is breaks all of those things apart. 00:08:46.216 --> 00:08:47.506 The reason this matters. 00:08:48.166 --> 00:08:53.506 Is that on average, about 30% of the value of a building that you buy. 00:08:54.256 --> 00:08:58.756 Is of shorter life assets, things that we don't expect to actually last that entire 00:08:58.756 --> 00:09:01.366 life, that 27 and a half or 39 year life. 00:09:01.816 --> 00:09:06.806 Things like appliances flooring certain electrical components, window 00:09:06.806 --> 00:09:10.316 coverings, all kinds of things that are going to have a life of either 00:09:10.346 --> 00:09:12.866 five, seven or 15 years instead. 00:09:13.886 --> 00:09:18.796 This allows you to have a larger write-off per year, So with this study, you're, 00:09:18.796 --> 00:09:21.106 front-loading a lot of your depreciation. 00:09:21.106 --> 00:09:22.666 You're taking it in those first years. 00:09:23.086 --> 00:09:24.706 On those shorter life assets. 00:09:26.266 --> 00:09:29.836 The second part to that is anything with a life. 00:09:30.166 --> 00:09:33.346 Of 20 years or less qualifies for bonus depreciation. 00:09:34.246 --> 00:09:38.446 This is something that basically says you can deduct a big chunk of your purchase. 00:09:39.076 --> 00:09:40.816 All in the year, it's put in service. 00:09:41.506 --> 00:09:44.326 It applies to anything with life of 20 years or less. 00:09:44.416 --> 00:09:48.436 And the amount you could take is going to depend on the year that 00:09:48.436 --> 00:09:49.786 that asset was put in service. 00:09:50.386 --> 00:09:53.926 So from 2017, through 2022, it was a hundred percent. 00:09:54.526 --> 00:09:57.406 So if you put your rental and service during those years, 00:09:57.836 --> 00:09:59.546 Now you do a cost segregation this year. 00:09:59.546 --> 00:10:02.366 You would still get 100% it's based on the year. 00:10:02.366 --> 00:10:03.356 It goes in service. 00:10:04.046 --> 00:10:06.746 For 2023 that dropped down to 80%. 00:10:06.746 --> 00:10:12.296 So you could write off 80% of the purchase price that first year for 2024 drop to 60. 00:10:12.746 --> 00:10:14.816 And it's set to continue phasing out. 00:10:15.146 --> 00:10:17.846 But my guess is that that will change. 00:10:17.926 --> 00:10:20.536 So the components we have to this strategy so far. 00:10:21.646 --> 00:10:24.856 Are you make sure your average guest stay is seven days or less. 00:10:25.456 --> 00:10:27.556 You materially participate in the property. 00:10:28.306 --> 00:10:32.326 You do a cost segregation study, which allows you to take a chunk 00:10:32.326 --> 00:10:35.746 of the cost of the building, move it all into shorter lives, giving 00:10:35.746 --> 00:10:37.336 you a higher annual write-off. 00:10:37.966 --> 00:10:40.336 And then you can accelerate that even farther. 00:10:40.846 --> 00:10:43.696 By using bonus depreciation that will let you then take 00:10:44.116 --> 00:10:45.646 a huge chunk of that expense. 00:10:45.646 --> 00:10:46.936 And the very first year. 00:10:47.236 --> 00:10:49.156 So all of these things combined. 00:10:49.666 --> 00:10:54.196 Give us a really unique opportunity to strategically create a large 00:10:54.196 --> 00:10:55.966 amount of deductible loss. 00:10:56.356 --> 00:10:57.886 In a year when it's needed. 00:10:58.126 --> 00:11:00.406 So that can be tremendous for tax planning. 00:11:02.396 --> 00:11:04.886 when it comes to this short-term rental loophole. 00:11:05.576 --> 00:11:07.226 It's an annual test. 00:11:07.826 --> 00:11:12.416 So for that calculation for the average guest stay. 00:11:12.866 --> 00:11:15.116 That is looked at on a calendar year basis. 00:11:15.146 --> 00:11:15.926 It is annual. 00:11:16.586 --> 00:11:21.866 For the test of seeing if you materially participated, that is based on that year. 00:11:21.926 --> 00:11:23.096 It's an annual test. 00:11:24.026 --> 00:11:27.146 This allows a short-term rental to be somewhat of a chameleon. 00:11:27.176 --> 00:11:30.956 We can shift the way it is taxed by intentionally passing 00:11:30.956 --> 00:11:32.516 or failing these tests. 00:11:34.266 --> 00:11:37.236 The way we figure out the average guest stay. 00:11:37.746 --> 00:11:41.556 It's going to take the, all of the days it was rented during the year. 00:11:42.096 --> 00:11:45.636 And divide it by the number of independent, separate guests 00:11:45.636 --> 00:11:46.866 that stayed at the property. 00:11:47.316 --> 00:11:48.636 So it's just an average. 00:11:48.996 --> 00:11:51.546 So you can have some that are more than seven days, as long 00:11:51.546 --> 00:11:52.716 as you have some that are less. 00:11:52.716 --> 00:11:54.636 And the average stay is under seven. 00:11:55.956 --> 00:11:57.066 A common mistake. 00:11:57.096 --> 00:11:58.146 I see with this. 00:11:58.776 --> 00:12:01.176 Is that because this is an annual test. 00:12:01.926 --> 00:12:06.216 If you have a longterm rental that you are converting to short term. 00:12:06.996 --> 00:12:10.116 That longterm stay is going to be part of your average. 00:12:10.696 --> 00:12:14.086 that's going to throw your average much higher than seven days. 00:12:14.806 --> 00:12:19.066 So if you have a longterm rental that you are considering switching to short-term. 00:12:19.456 --> 00:12:23.566 You are going to want to do that as close to the start of the year as possible 00:12:23.776 --> 00:12:27.916 The way the code is written, we need to prove an average of seven days or less. 00:12:28.816 --> 00:12:31.336 You need two or more stays. 00:12:31.876 --> 00:12:36.816 This was recently reaffirmed through a ruling that is exactly what they said. 00:12:36.816 --> 00:12:41.106 We can not figure out an average of something unless we have at least two. 00:12:41.526 --> 00:12:45.336 So if you buy a rental property that you are going to put in 00:12:45.336 --> 00:12:46.986 service as a short-term rental. 00:12:47.496 --> 00:12:49.926 You need to both put the property in service. 00:12:50.616 --> 00:12:55.506 And have at least two fair market value, independent stays 00:12:55.896 --> 00:12:57.606 before the end of the year. 00:12:59.536 --> 00:13:03.106 These are the two biggest mistakes I see, or things that people kind of 00:13:03.106 --> 00:13:07.456 didn't expect to happen when it comes to putting a short-term rental in service 00:13:07.456 --> 00:13:09.796 and getting to use this strategy. 00:13:11.186 --> 00:13:14.336 One of the pushback items that I will hear from people. 00:13:14.906 --> 00:13:18.566 Is that they don't want to manage a short-term rental. 00:13:18.686 --> 00:13:20.066 It's more work, right? 00:13:20.096 --> 00:13:21.566 They can often be more work. 00:13:21.566 --> 00:13:22.526 There's more turnover. 00:13:22.526 --> 00:13:23.846 You have to deal with furnishing. 00:13:24.176 --> 00:13:26.396 You're dealing with a lot more people throughout the year. 00:13:26.996 --> 00:13:29.096 And if you want to materially participate. 00:13:29.876 --> 00:13:32.636 That is going to be close to impossible to do. 00:13:33.086 --> 00:13:34.496 If you have property management. 00:13:35.006 --> 00:13:39.296 What this means in real world terms is that you need to manage that 00:13:39.296 --> 00:13:41.396 short-term rental for the year. 00:13:41.396 --> 00:13:43.466 You are wanting to implement this strategy. 00:13:44.336 --> 00:13:48.416 Additionally, you are going to have to be mindful. 00:13:48.926 --> 00:13:51.656 Of how much time is spent on it by anyone else? 00:13:52.646 --> 00:13:54.866 I mentioned earlier, there are seven different rules 00:13:54.866 --> 00:13:56.546 for material participation. 00:13:56.996 --> 00:13:59.936 The two most common rules that we see taxpayers use. 00:14:00.416 --> 00:14:03.686 Are at least 500 hours during the year on the activity. 00:14:04.316 --> 00:14:06.446 If you don't hit that 500 hours. 00:14:06.986 --> 00:14:10.466 The other rule that is commonly used, says that you have spent 00:14:10.466 --> 00:14:11.876 at least a hundred hours. 00:14:12.386 --> 00:14:14.846 But it was also more time than anyone else. 00:14:15.596 --> 00:14:20.876 So what this means is that not only do you have to track your time and be able 00:14:20.876 --> 00:14:22.736 to prove you spent a hundred hours. 00:14:23.306 --> 00:14:27.446 You also have to track the time of your house cleaner. 00:14:27.816 --> 00:14:30.896 if you have a co-host You now need to track the time of 00:14:30.956 --> 00:14:32.366 anyone who was spending us. 00:14:32.606 --> 00:14:34.706 Stanzel amount of time on your property. 00:14:35.126 --> 00:14:38.516 So that you can prove they are not spending more time than you are. 00:14:40.676 --> 00:14:43.166 I actually just heard about someone who is going through an 00:14:43.166 --> 00:14:45.566 audit specifically on this topic. 00:14:45.956 --> 00:14:47.366 And that is the hangup. 00:14:47.876 --> 00:14:50.936 The taxpayer is able to prove they spent at least a hundred hours. 00:14:51.506 --> 00:14:55.196 But on a short-term rental, if you have guests switching weekly. 00:14:55.466 --> 00:14:58.166 Your cleaner spends quite a bit of time at the property. 00:14:58.526 --> 00:15:02.216 So they are having a very hard time proving that the cleaner did not 00:15:02.216 --> 00:15:06.086 spend more time on the property than the taxpayer did, and they 00:15:06.086 --> 00:15:07.886 didn't track the cleaner's time. 00:15:08.216 --> 00:15:12.566 So they're now going through and trying to reconstruct that time using, you know, the 00:15:12.566 --> 00:15:15.866 camera dates on it and the key pad log-in. 00:15:16.256 --> 00:15:20.576 And trying to reconstruct it and hopefully prove that the taxpayer had more time. 00:15:21.176 --> 00:15:26.816 I actually spent a few hours on a phone call with a friend of mine who 00:15:26.816 --> 00:15:28.676 is also a real estate tax strategist. 00:15:29.186 --> 00:15:34.856 And what we are both seeing is an increase in audits related to this 00:15:35.336 --> 00:15:37.736 and that it tends to be related to. 00:15:38.396 --> 00:15:41.786 Proving the time and proving those cost segregations. 00:15:42.536 --> 00:15:45.686 So it doesn't make the strategy any riskier, as long 00:15:45.686 --> 00:15:47.186 as you're doing it correctly. 00:15:47.726 --> 00:15:48.746 You will be good. 00:15:48.826 --> 00:15:53.206 So all of that said it doesn't make this a risky strategy. 00:15:53.446 --> 00:15:55.546 It doesn't make it something you shouldn't consider. 00:15:56.086 --> 00:15:59.596 It just means that what you're hearing on social media, where all you are 00:15:59.626 --> 00:16:04.276 told is by a short-term rental average day of seven days and materially 00:16:04.276 --> 00:16:06.796 participate, you can take all your losses. 00:16:07.456 --> 00:16:08.596 There's more to it. 00:16:09.016 --> 00:16:12.496 And now that it's being looked out a little more closely, you 00:16:12.496 --> 00:16:15.766 want to make sure you are crossing your T's and dotting your I's. 00:16:16.336 --> 00:16:19.966 The checklist of things you are going to want to do to make sure that you do 00:16:19.966 --> 00:16:21.526 not get it handed to you in an audit. 00:16:22.156 --> 00:16:25.996 You're going to want to make sure that you can prove an average 00:16:26.026 --> 00:16:28.036 guest stay of seven days or less. 00:16:28.546 --> 00:16:32.296 By having at least two qualifying stays before the end of the year. 00:16:32.986 --> 00:16:35.896 If you have your friends stay there and they're not paying you for it. 00:16:37.226 --> 00:16:38.516 The other big thing. 00:16:38.876 --> 00:16:41.606 Is proving your material participation. 00:16:42.116 --> 00:16:46.586 That means you are going to want to track all of your time spent on that property. 00:16:47.276 --> 00:16:51.416 And ideally prove that you spent at least 500 hours on it during the year. 00:16:52.136 --> 00:16:54.506 If you really can't hit 500 hours. 00:16:55.016 --> 00:16:57.356 You are going to want to also track. 00:16:57.656 --> 00:17:02.096 The time of anyone else who is working on or involved with that property. 00:17:02.666 --> 00:17:06.086 Another caveat to this is with material participation. 00:17:06.656 --> 00:17:08.996 You can not include investor hours. 00:17:09.476 --> 00:17:13.316 So the time you spend looking at financials, writing checks, kind 00:17:13.316 --> 00:17:17.396 of the in-office unrelated to the direct day to day of the property. 00:17:17.906 --> 00:17:18.776 Those don't count. 00:17:18.876 --> 00:17:22.866 So really make sure that you're documenting all of this accurately 00:17:23.226 --> 00:17:25.476 and on a continuous, ongoing basis. 00:17:26.076 --> 00:17:33.546 Because I will say after reading hundreds of court cases, Any case related to ours. 00:17:33.936 --> 00:17:37.386 Whether that's material participation or real estate professional. 00:17:37.746 --> 00:17:40.896 There's a couple things where it always gets thrown out in court. 00:17:41.556 --> 00:17:43.386 The first one is not having a log. 00:17:43.656 --> 00:17:46.566 If you have no log whatsoever, you can't prove anything. 00:17:46.566 --> 00:17:48.936 That's obviously going to shoot you in the foot. 00:17:50.076 --> 00:17:51.696 The second, most common thing. 00:17:52.206 --> 00:17:53.406 Is if you have a log. 00:17:54.366 --> 00:17:59.826 But it seems wrong or like you falsified or that it's just not super believable. 00:18:00.096 --> 00:18:02.076 It's kind of like once they've determined. 00:18:02.376 --> 00:18:04.236 One part of it isn't reliable. 00:18:04.656 --> 00:18:06.126 The whole rest is thrown out. 00:18:06.546 --> 00:18:09.276 So you want to make sure that you not only have a log. 00:18:09.846 --> 00:18:13.356 But that it is sensible and accurate and ongoing. 00:18:13.776 --> 00:18:17.766 You want to make sure that if you are going to say that you qualify to 00:18:17.766 --> 00:18:19.926 write off a hundred thousand dollars. 00:18:20.796 --> 00:18:24.816 That you are willing to take the extra 15 minutes a month to prove that. 00:18:25.176 --> 00:18:26.796 So it is a great strategy. 00:18:27.216 --> 00:18:32.166 It is a fantastic way to create a large loss in a specified year. 00:18:33.036 --> 00:18:34.236 A lot of people. 00:18:34.746 --> 00:18:35.886 We'll by default. 00:18:36.696 --> 00:18:41.526 Do a cost segregation study and qualify the property is non-passive 00:18:41.916 --> 00:18:43.176 in the year they acquire it. 00:18:43.986 --> 00:18:46.206 And that may be the best of your to do it. 00:18:46.236 --> 00:18:48.456 It's the easiest from a reporting standpoint. 00:18:49.056 --> 00:18:52.146 Because when you do a cost segregation study, we can just set 00:18:52.146 --> 00:18:54.216 up depreciation with those amounts. 00:18:55.236 --> 00:18:55.986 However. 00:18:56.976 --> 00:19:00.486 From a tax planning standpoint, it might not always be what's best for you. 00:19:01.176 --> 00:19:03.456 If the year you put that property in service. 00:19:03.846 --> 00:19:06.846 And it qualifies for a non-passive short-term rental. 00:19:07.476 --> 00:19:10.236 If in that year, your income is much lower than, you know, 00:19:10.236 --> 00:19:11.676 what's going to be the next year. 00:19:12.276 --> 00:19:15.666 You might want to wait until the following year to do a cost segregation study. 00:19:16.236 --> 00:19:19.086 And then in that following year, you will have to materially 00:19:19.086 --> 00:19:22.656 participate and have that average guest stay of seven days or less. 00:19:23.466 --> 00:19:28.776 If you can have a much larger benefit from the same amount of deductible loss. 00:19:29.646 --> 00:19:31.506 Then you might want to save it for that year. 00:19:32.076 --> 00:19:34.416 When you do a cost segregation study. 00:19:35.466 --> 00:19:37.566 You can do it at any point. 00:19:37.926 --> 00:19:40.086 It does not have to be during the year. 00:19:40.086 --> 00:19:41.766 The property is placed in service. 00:19:42.366 --> 00:19:44.316 And you can do it in any later year. 00:19:44.856 --> 00:19:49.266 The longer it's been the less benefit it has because you're chipping 00:19:49.266 --> 00:19:51.096 away at that depreciation already. 00:19:51.456 --> 00:19:54.366 So if it's 20 years in, you don't have a lot left. 00:19:54.696 --> 00:19:56.646 But if it's your two or your three. 00:19:57.336 --> 00:20:00.966 Absolutely look at which of those years will that large 00:20:00.966 --> 00:20:02.856 amount of lost most benefit you? 00:20:03.216 --> 00:20:04.746 It might not be the current year. 00:20:05.616 --> 00:20:07.716 If you wait and do it in a later year. 00:20:08.136 --> 00:20:12.486 For taxes, you need to include form 31 15 with your tax return. 00:20:13.296 --> 00:20:16.086 The reason we can pick the year we take the loss. 00:20:16.566 --> 00:20:21.246 Is that if you are changing depreciation, You don't go back and amend. 00:20:21.636 --> 00:20:25.476 So if you put a property in service in 2020, and this year 00:20:25.476 --> 00:20:26.976 you do a cost segregation. 00:20:27.366 --> 00:20:30.486 You don't go back and amend those past few years tax returns. 00:20:31.386 --> 00:20:37.296 You file form 31 15 with your current near return, and you are allowed 00:20:37.296 --> 00:20:41.436 to take the loss adjustment that depreciation adjustment for the expense. 00:20:41.976 --> 00:20:43.146 In the current year. 00:20:44.016 --> 00:20:48.006 So even if the property was put in service several years ago, You can 00:20:48.006 --> 00:20:50.226 do a cost segregation study now. 00:20:50.766 --> 00:20:53.856 And you would get the write off on the current year tax return. 00:20:54.756 --> 00:20:58.086 The deadline for doing a cost segregation study and having 00:20:58.086 --> 00:21:00.246 it included on a tax return. 00:21:00.726 --> 00:21:03.156 It's just the filing deadline for that tax year. 00:21:04.026 --> 00:21:09.876 So you would just need to complete the study by April 15th or October 15th. 00:21:09.906 --> 00:21:11.256 If you file an extension. 00:21:11.826 --> 00:21:16.536 So there's a great planning opportunity here to choose when you use that loss. 00:21:17.046 --> 00:21:21.756 And to figure out if the ease of doing it first year is actually worth it. 00:21:22.116 --> 00:21:24.216 Or if it's worth it to save it for a later year. 00:21:24.876 --> 00:21:26.556 Again, you don't go back and amend. 00:21:27.006 --> 00:21:29.586 We can't go backwards and amend appreciation. 00:21:29.616 --> 00:21:34.116 The only time that that's an option is if only one year has been filed. 00:21:34.776 --> 00:21:38.226 So, for example, if you're listening to this right now and 00:21:38.256 --> 00:21:41.076 you already filed your 2023 taxes. 00:21:41.586 --> 00:21:44.076 And you had a new property in 2023. 00:21:44.556 --> 00:21:46.716 If you did a cost segregation study. 00:21:47.436 --> 00:21:51.666 At this point, you would have the choice of either amending 20, 00:21:51.666 --> 00:21:55.506 23 and changing the depreciation because it's only been one year. 00:21:56.226 --> 00:21:57.816 The way depreciation works. 00:21:58.416 --> 00:22:01.326 Is, if you have reported a method, if you've sort of said, 00:22:01.326 --> 00:22:02.436 this is how we're doing it. 00:22:02.826 --> 00:22:05.886 The way you establish that method is by doing it two or more years, 00:22:05.886 --> 00:22:07.206 you have established a pattern. 00:22:07.476 --> 00:22:09.366 You've set that this is what you're doing. 00:22:09.366 --> 00:22:10.356 You didn't change your mind. 00:22:10.836 --> 00:22:14.226 If it's only been one year, they don't consider that set yet. 00:22:14.706 --> 00:22:20.226 So, if you had a new rental in 2023, you could go back and amend 23 to add the 00:22:20.226 --> 00:22:22.326 cost segregation study two that year. 00:22:22.866 --> 00:22:24.576 If it would have more benefit to you. 00:22:25.146 --> 00:22:29.676 Otherwise for years, 20, 24 and forward, you could do a cost 00:22:29.676 --> 00:22:31.926 segregation study in any of those years. 00:22:32.356 --> 00:22:36.406 You would take the expense adjustment in the current year's tax return. 00:22:36.676 --> 00:22:41.116 You would file 31 15 and you would have what's called a 4 81 a. 00:22:41.146 --> 00:22:42.796 Adjustment on schedule E. 00:22:43.276 --> 00:22:46.936 So you have a lot of planning opportunity with short-term rentals. 00:22:47.536 --> 00:22:51.576 This is why Hearing about the short-term rental loophole has become incredibly 00:22:51.576 --> 00:22:54.786 popular and it's a fantastic tax strategy. 00:22:55.296 --> 00:22:59.136 I love this and I implement this with a lot of my clients. 00:23:00.006 --> 00:23:02.946 All I'm here to tell you is make sure you're doing it correctly. 00:23:02.976 --> 00:23:06.126 You just don't want to kind of skirt the edges and do the high risk 00:23:06.156 --> 00:23:08.136 things because it's not worth it. 00:23:08.196 --> 00:23:08.496 Right. 00:23:08.526 --> 00:23:11.046 Why open up an audit for no reason? 00:23:11.436 --> 00:23:14.376 Like I mentioned earlier because it's a year to year test. 00:23:15.066 --> 00:23:18.156 Even if you're someone who's sitting there thinking, this sounds great, Natalie, but 00:23:18.216 --> 00:23:20.046 I don't have time to manage a property. 00:23:20.436 --> 00:23:21.606 I don't want to deal with that. 00:23:21.666 --> 00:23:23.586 All of my properties are fully managed. 00:23:23.586 --> 00:23:24.576 I'm hands-off. 00:23:24.876 --> 00:23:27.606 That is what I have always been taught to do as an investor 00:23:27.816 --> 00:23:29.466 is it's not worth my time. 00:23:30.006 --> 00:23:30.936 I understand that. 00:23:31.746 --> 00:23:33.186 It's a year to year test. 00:23:34.356 --> 00:23:37.206 If you had the potential to take. 00:23:37.686 --> 00:23:40.536 A hundred thousand dollar loss on your taxes this year. 00:23:41.106 --> 00:23:45.276 Do you think you could deal with managing a property for one month? 00:23:46.026 --> 00:23:49.296 Could you try to buy a property to use as a short-term rental? 00:23:49.866 --> 00:23:52.986 For only the month of December of this year. 00:23:53.436 --> 00:23:58.386 Making sure that you put in the hours, making sure that the average stay there's 00:23:58.416 --> 00:24:01.026 at least two that are seven days or less. 00:24:02.046 --> 00:24:04.896 At the end of the year, that test resets. 00:24:05.616 --> 00:24:11.286 So even if you buy your property late in the year, As long as you can meet that 00:24:11.286 --> 00:24:13.596 100 hours and more time than anyone else. 00:24:14.076 --> 00:24:15.546 Or that 500 hours. 00:24:15.996 --> 00:24:19.716 And you can prove two or more stays with an average of seven days or less. 00:24:20.346 --> 00:24:24.006 You can have that rental qualified as non-passive for that year. 00:24:24.876 --> 00:24:26.256 Then January 1st. 00:24:26.736 --> 00:24:30.396 If you want to change it over to a longterm rental where you want to hand 00:24:30.396 --> 00:24:34.446 it off to be fully property manage where you're not involved anymore. 00:24:34.866 --> 00:24:35.646 That's fine. 00:24:36.186 --> 00:24:39.936 This strategy allows us to take a decent amount of loss, 00:24:40.296 --> 00:24:41.706 typically in a single year. 00:24:42.036 --> 00:24:43.086 That's what we're doing. 00:24:43.866 --> 00:24:46.176 If you don't need that large loss in one year. 00:24:46.866 --> 00:24:49.116 So you are not using bonus depreciation. 00:24:49.116 --> 00:24:50.076 You just say, you know what. 00:24:50.556 --> 00:24:57.246 I do like the idea of taking 30% of the cost of this building and having it across 00:24:57.276 --> 00:24:59.616 these first five, seven and 15 years. 00:25:00.096 --> 00:25:02.226 I never keep properties longer than 10 years. 00:25:02.226 --> 00:25:03.576 So that really lines up. 00:25:03.906 --> 00:25:07.176 That works well for me, that's going to get me to an amount of tax. 00:25:07.176 --> 00:25:07.956 I'm happy with. 00:25:08.646 --> 00:25:12.366 Then you would need to keep it non passive for all of those years. 00:25:12.446 --> 00:25:16.316 And then if you switch it back to passive the next year, there's no clawback. 00:25:16.976 --> 00:25:21.686 So if it is non-passive and you take a huge loss in one year. 00:25:22.286 --> 00:25:25.586 And literally the next year, a month later, you say, actually, we're 00:25:25.586 --> 00:25:26.786 going to sign a year long lease. 00:25:26.816 --> 00:25:28.256 This will be a passive rental again. 00:25:28.766 --> 00:25:30.116 You don't have to pay anything back. 00:25:30.536 --> 00:25:32.066 There's no reprimand. 00:25:32.096 --> 00:25:35.966 There's no provision that says, oh, well, since you didn't keep 00:25:35.966 --> 00:25:38.876 it short term for at least this amount of time, it doesn't qualify. 00:25:39.356 --> 00:25:40.616 It's an annual test. 00:25:41.396 --> 00:25:45.026 The last item that I will touch on related to short-term rentals. 00:25:46.046 --> 00:25:47.426 Is the depreciable life. 00:25:48.236 --> 00:25:50.576 So this catches a lot of people off guard. 00:25:51.236 --> 00:25:56.396 Like I said, we get to depreciate property at either 27 and a half years. 00:25:56.396 --> 00:25:57.476 If it's residential. 00:25:57.896 --> 00:26:02.246 Or 39 years, if it's non-residential now tax terms. 00:26:02.816 --> 00:26:05.996 Are almost always going to be different than lending terms. 00:26:06.296 --> 00:26:10.076 So a lot of people are going to look at a single family house and say 00:26:10.106 --> 00:26:12.536 that is residential all day long. 00:26:13.106 --> 00:26:14.846 For taxes, it may or may not be. 00:26:15.596 --> 00:26:20.306 If you have a single family house, but you are using it to run a business out of you 00:26:20.306 --> 00:26:21.866 run a hair salon in the whole property. 00:26:22.346 --> 00:26:25.466 That is a commercial use of the property for tax purposes. 00:26:26.396 --> 00:26:28.526 Because a short-term rental. 00:26:29.336 --> 00:26:33.446 Does not meet the defining factor of a rental property. 00:26:34.226 --> 00:26:39.746 It falls out of the standard depreciation life for being a residential rental. 00:26:40.266 --> 00:26:42.876 Residential rental would be 27 and a half years. 00:26:43.596 --> 00:26:45.516 And again, there's an exception in the code. 00:26:46.146 --> 00:26:47.316 In 1 68. 00:26:47.616 --> 00:26:51.456 There's a note that this excludes properties that are basically 00:26:51.456 --> 00:26:53.136 used on a transient basis. 00:26:53.436 --> 00:26:56.796 So this is going to apply to hotels and motels and things like that. 00:26:57.246 --> 00:27:00.936 And transient basis is typically looked at as under 30 days. 00:27:01.446 --> 00:27:05.886 So if you are meeting the seven day or less criteria, your property is definitely 00:27:05.886 --> 00:27:07.836 being used on a transient basis. 00:27:08.316 --> 00:27:11.766 And your depreciable life is going to be 39 years. 00:27:12.336 --> 00:27:14.286 If you have a valid short-term rental. 00:27:14.796 --> 00:27:18.396 It is treated as a commercial property for depreciation. 00:27:18.846 --> 00:27:22.716 Because we have pulled it out of the defining factors for being residential. 00:27:23.736 --> 00:27:24.666 That being said. 00:27:25.206 --> 00:27:30.216 There's even more unique opportunity here for depreciation, because some 00:27:30.216 --> 00:27:34.446 of renovations, depending on when you buy, if it's in service, what kind 00:27:34.446 --> 00:27:35.856 of the timing of how this happens? 00:27:36.306 --> 00:27:38.286 You might have qualified improvement property. 00:27:38.736 --> 00:27:43.086 That is also 15 years, which also allows bonus depreciation. 00:27:43.896 --> 00:27:47.766 If you have a property that switches between long-term and short-term. 00:27:48.366 --> 00:27:50.976 Your depreciable life is going to switch with it. 00:27:51.996 --> 00:27:55.806 If you had it as a long-term rental for years and you were depreciating 00:27:55.806 --> 00:27:57.606 it over 27 and a half years. 00:27:58.206 --> 00:28:00.276 But for this year, you switch it to short-term. 00:28:00.906 --> 00:28:02.676 You will only change the life. 00:28:03.126 --> 00:28:05.196 2 39 years from this point forward. 00:28:06.106 --> 00:28:07.966 something that gets asked pretty often. 00:28:08.326 --> 00:28:09.736 Is if I am changing. 00:28:10.036 --> 00:28:11.686 From long-term to short-term. 00:28:12.526 --> 00:28:15.226 Do I need to file form 31 15, Natalie. 00:28:15.226 --> 00:28:20.056 You just told me if we try to change depreciation after two or more 00:28:20.056 --> 00:28:22.066 years, I have to file this form. 00:28:23.746 --> 00:28:25.006 That is true. 00:28:25.066 --> 00:28:28.036 If what is changing is the method of depreciation. 00:28:28.456 --> 00:28:33.256 If it's the same activity, but we want to change the way we are depreciating it. 00:28:33.826 --> 00:28:36.166 Then we have to file a 31 15. 00:28:37.036 --> 00:28:41.176 If the actual activity is what changes, the method of depreciation 00:28:41.206 --> 00:28:42.736 is allowed to change with it. 00:28:43.516 --> 00:28:47.776 Similarly, if you have a primary home that you're living in. 00:28:48.196 --> 00:28:49.546 You don't get to depreciate it. 00:28:49.576 --> 00:28:51.676 It's personal, not a business asset. 00:28:51.706 --> 00:28:52.696 No depreciation. 00:28:53.056 --> 00:28:57.106 However, as soon as you switch it over to being a rental property, Now you 00:28:57.106 --> 00:29:00.496 do get to depreciate it because now it is a qualifying business asset. 00:29:01.006 --> 00:29:03.016 The activity is what changes. 00:29:03.106 --> 00:29:06.106 So the amount or how you'd appreciate it. 00:29:06.886 --> 00:29:08.116 Changes to match up. 00:29:08.776 --> 00:29:13.066 So when we switched from a long-term rental that has 27 and a half years. 00:29:13.426 --> 00:29:16.936 To a short-term that has 39 or vice versa. 00:29:17.626 --> 00:29:19.276 The life is allowed to change with it. 00:29:19.366 --> 00:29:22.366 You just changed the depreciable life from that point forward. 00:29:22.666 --> 00:29:23.776 And you recast it. 00:29:23.866 --> 00:29:26.146 You do not need a 31 15. 00:29:26.626 --> 00:29:28.366 If you are switching back and forth. 00:29:28.636 --> 00:29:31.066 From long-term to short-term rental. 00:29:32.226 --> 00:29:35.016 And one quick mention on mid-term rentals. 00:29:36.406 --> 00:29:39.916 There is another circumstance where rentals can be non-passive 00:29:39.976 --> 00:29:41.146 and kind of the same. 00:29:41.536 --> 00:29:42.586 Area of the code. 00:29:43.276 --> 00:29:46.636 And that is if the stay the average guest stay is 30 days or less. 00:29:47.146 --> 00:29:49.546 And you provide significant personal services. 00:29:50.296 --> 00:29:51.646 Now here's the hangup. 00:29:52.396 --> 00:29:54.316 Significant personal services. 00:29:55.156 --> 00:29:58.726 Is part of code 4 69, which lets us say passive or non-passive 00:29:59.386 --> 00:30:02.746 however, the definition of significant personal services. 00:30:03.376 --> 00:30:07.816 Is almost identical to the definition of substantial services. 00:30:08.266 --> 00:30:13.816 Which is what determines if a property is subject to self-employment tax. 00:30:14.506 --> 00:30:19.936 So if you are doing a 30 day or less rental, And you are providing. 00:30:20.596 --> 00:30:24.226 Significant personal services slash substantial services. 00:30:24.556 --> 00:30:26.746 There's almost exact overlap. 00:30:27.226 --> 00:30:31.696 These are going to be services to improve the experience of 00:30:31.696 --> 00:30:33.226 the guests during their stay. 00:30:33.796 --> 00:30:35.116 So think of a hotel. 00:30:36.166 --> 00:30:39.166 This does not include services provided in between stays. 00:30:39.646 --> 00:30:41.146 Cleaning in between guests. 00:30:41.596 --> 00:30:44.086 Does not subject a property to self-employment tax. 00:30:44.686 --> 00:30:50.386 Providing items does not subject a property to self-employment tax providing. 00:30:50.956 --> 00:30:52.276 Supplies onsite. 00:30:52.306 --> 00:30:55.756 If you provide some coffee, pods or toilet paper that does not subject 00:30:55.786 --> 00:30:57.766 a property to self-employment tax. 00:30:58.726 --> 00:31:03.076 The only thing that is going to convert your property from being non 00:31:03.076 --> 00:31:07.396 passive, which is still reported on schedule E most short-term rentals. 00:31:07.576 --> 00:31:09.826 Go on schedule E 98%. 00:31:09.826 --> 00:31:10.366 I would say. 00:31:10.906 --> 00:31:12.526 Non-passive on schedule E. 00:31:13.576 --> 00:31:16.756 The only time it moves over to schedule C is if it is 00:31:16.756 --> 00:31:18.286 subject to self-employment tax. 00:31:18.916 --> 00:31:22.936 And the only time a rental is subject to that self-employment tax is if you 00:31:22.936 --> 00:31:27.676 are providing those substantial services or those significant personal services. 00:31:28.336 --> 00:31:31.516 These are going to be services during the guests stay. 00:31:32.056 --> 00:31:33.406 Not things outside of it. 00:31:33.886 --> 00:31:37.216 So if you have a maid who comes in and cleans the unit every day, 00:31:37.216 --> 00:31:38.626 while the guest is staying there. 00:31:39.106 --> 00:31:42.196 If you offer a room service where you'll deliver food to their room. 00:31:42.526 --> 00:31:45.856 If you offer a hotel shuttle where you will pick them up from the airport 00:31:45.856 --> 00:31:47.146 and bring them to your property. 00:31:47.606 --> 00:31:51.536 If you provide any kind of lessons onsite, you do fishing lessons or hiking 00:31:51.536 --> 00:31:53.036 or swimming or anything like that. 00:31:53.666 --> 00:31:58.706 If a verb is occurring, it has to be a verb during the time the 00:31:58.706 --> 00:32:00.116 guest is renting the property. 00:32:00.166 --> 00:32:02.596 it has to be something of a pretty substantial value. 00:32:02.926 --> 00:32:07.156 And it has to be occurring while the guest is there and to increase their experience. 00:32:07.636 --> 00:32:10.816 So this is another one of those really common misconception points. 00:32:11.356 --> 00:32:16.756 And this is where I see it being taught incorrectly on the professional side. 00:32:17.326 --> 00:32:20.956 There's a fair amount of tax educators who get mixed up on this and want you to 00:32:20.956 --> 00:32:26.236 put the short term rentals on schedule C because they believe providing anything 00:32:26.236 --> 00:32:28.576 is a service and that's not the case. 00:32:29.236 --> 00:32:33.436 If it is not happening while the guest is legally entitled to the unit, if 00:32:33.436 --> 00:32:36.316 it is not increasing their experience while they are staying in the unit, 00:32:36.646 --> 00:32:39.736 if you are not doing something with a verb, while that unit is rented. 00:32:40.546 --> 00:32:45.406 It still stays on schedule E and it is still non-passive very rarely do I 00:32:45.406 --> 00:32:49.846 see a rental with services at a high enough level to move, to schedule C 00:32:49.846 --> 00:32:51.946 and be subject to self-employment tax. 00:32:52.636 --> 00:32:58.336 The same thing falls into place with the 30 day or less acception to being passive. 00:32:59.056 --> 00:33:02.776 If you're saying my property is rented for 30 days or less. 00:33:03.166 --> 00:33:06.406 And I'm providing significant personal services. 00:33:06.766 --> 00:33:09.796 So it is non-passive and I can use my losses. 00:33:10.366 --> 00:33:11.356 That is true. 00:33:12.196 --> 00:33:13.396 But you will now. 00:33:13.666 --> 00:33:14.716 Almost always. 00:33:15.196 --> 00:33:19.546 Have to move it to schedule C and also pay self-employment tax on any income. 00:33:20.056 --> 00:33:24.076 So be cautious there because it's a little bit of a double-edged sword. 00:33:25.276 --> 00:33:25.906 Now. 00:33:26.416 --> 00:33:29.296 One of the last notes that I'll kind of leave off on with this. 00:33:30.016 --> 00:33:30.556 Is. 00:33:31.156 --> 00:33:36.466 What is the downside to having the rental on schedule C if that's 00:33:36.466 --> 00:33:39.046 what you've been doing, I've heard this from a lot of people. 00:33:39.046 --> 00:33:42.406 We didn't know we were putting it on schedule C, but it turns 00:33:42.406 --> 00:33:43.626 out it shouldn't have been there. 00:33:43.626 --> 00:33:45.006 It's just non, passive. 00:33:45.546 --> 00:33:49.926 And non-passive is not the same as subject to self-employment tax. 00:33:50.466 --> 00:33:53.496 And only activities that are subject to self-employment tax. 00:33:53.526 --> 00:33:57.876 Go on, schedule C there's a couple exceptions there specifically stated. 00:33:58.326 --> 00:33:59.196 This isn't one of them. 00:33:59.856 --> 00:34:02.736 So if a property has been on, see incorrectly, 00:34:03.186 --> 00:34:05.046 If you had income on that property. 00:34:05.376 --> 00:34:07.116 And you were paying self-employment tax. 00:34:07.416 --> 00:34:09.876 You didn't have to that wasn't qualified. 00:34:09.876 --> 00:34:13.086 You did not need to pay that extra 15.3% tax. 00:34:13.896 --> 00:34:15.546 The other bigger concern I have. 00:34:16.506 --> 00:34:20.166 Is because this was taught so heavily for a few years, because there was this 00:34:20.226 --> 00:34:21.846 misconception that it should go on. 00:34:21.846 --> 00:34:23.016 See most of the time. 00:34:23.766 --> 00:34:28.686 If it didn't really qualify to be on schedule C if what you just had was 00:34:28.686 --> 00:34:33.156 a non-passive short-term rental that should stay on schedule E you weren't 00:34:33.156 --> 00:34:35.346 doing any kind of substantial services. 00:34:36.696 --> 00:34:40.566 If you use that schedule C income to fund a retirement account. 00:34:41.196 --> 00:34:42.666 It wasn't valid. 00:34:43.176 --> 00:34:46.986 You are only allowed to fund retirement accounts with earned income. 00:34:47.556 --> 00:34:52.986 And rentals, even if non-passive are not earned income, it has 00:34:52.986 --> 00:34:55.356 to be income paid out of income. 00:34:55.356 --> 00:34:58.596 That is subject to payroll tax self-employment tax. 00:34:59.106 --> 00:35:02.916 So if you incorrectly had a short-term rental on schedule C. 00:35:03.606 --> 00:35:06.546 Take a look at this review, your prior returns. 00:35:06.906 --> 00:35:10.056 And see what the big picture impact was. 00:35:10.566 --> 00:35:12.426 Did you pay tax for no reason? 00:35:13.026 --> 00:35:16.116 Did you fund a retirement account when it really didn't qualify for 00:35:16.116 --> 00:35:21.366 you to fund it and talk to your tax professional about sort of the risks 00:35:21.486 --> 00:35:26.016 of what has happened or the potential benefits of amending to fix it? 00:35:26.436 --> 00:35:28.716 Or the risks of not amending to fix it. 00:35:29.316 --> 00:35:32.466 And find out what the correct steps would be to correct it 00:35:32.466 --> 00:35:33.906 and move it over to schedule II. 00:35:33.936 --> 00:35:34.956 If that is the case. 00:35:36.096 --> 00:35:38.466 So that is everything I have for you guys. 00:35:39.006 --> 00:35:41.616 I know that this is a lot of information. 00:35:41.886 --> 00:35:42.786 There is. 00:35:43.116 --> 00:35:49.206 Like I said a lot of nuance around this loophole that is often over simplified. 00:35:49.596 --> 00:35:53.406 And I just want to make sure that even if you get this great tax advantage 00:35:53.436 --> 00:35:57.546 today, It doesn't end up coming back to bite you four or five years from now. 00:35:57.596 --> 00:36:00.056 So that's my summary for you guys. 00:36:00.086 --> 00:36:01.946 I hope that you found this helpful. 00:36:02.406 --> 00:36:06.006 one final run-through of what you should shouldn't be doing for your short-term 00:36:06.006 --> 00:36:08.256 rental and what this loophole means. 00:36:09.336 --> 00:36:13.046 If you rent the property for an average stay of seven days or less. 00:36:13.646 --> 00:36:17.486 And if you materially participate, it becomes non-passive. 00:36:18.026 --> 00:36:22.736 This means losses at creates can be deducted against your other income types 00:36:22.976 --> 00:36:25.076 and you don't have that standard limit. 00:36:25.676 --> 00:36:29.276 The only limit you can run into is an excess business loss limit. 00:36:30.486 --> 00:36:31.296 Step two. 00:36:31.806 --> 00:36:35.256 Is that you do a cost segregation study, which pushes a large 00:36:35.256 --> 00:36:39.276 amount of your depreciation expense into those first years. 00:36:39.846 --> 00:36:42.696 And that gives you a much higher write-off in each of those years. 00:36:43.326 --> 00:36:47.256 You can take this even farther by applying bonus depreciation, 00:36:47.556 --> 00:36:50.076 which will give you a large amount. 00:36:50.466 --> 00:36:53.586 In the first year, between 160%. 00:36:54.216 --> 00:36:57.456 Depending on what year the property went into service. 00:36:58.716 --> 00:37:00.366 And then kind of the last note to this. 00:37:01.236 --> 00:37:02.496 Is make sure you are. 00:37:02.556 --> 00:37:05.316 Dotting your I's and crossing your T's. 00:37:05.796 --> 00:37:06.966 Track your hours. 00:37:07.386 --> 00:37:10.896 Track your cleaners hours, make sure you're not fluffing up your 00:37:10.896 --> 00:37:13.146 hours or using investment hours. 00:37:13.656 --> 00:37:18.906 And make sure that if you are doing a cost segregation study, Unless you 00:37:18.906 --> 00:37:24.186 absolutely have to pay for a full study, go to an actual cost segregation from. 00:37:24.876 --> 00:37:27.606 Typically I recommend to avoid the DIY version. 00:37:27.996 --> 00:37:32.406 Whenever possible a lot less accurate, you're going to get a lower result 00:37:32.466 --> 00:37:34.536 and they're a much higher audit risk. 00:37:34.566 --> 00:37:35.976 We've even seen them disallowed. 00:37:36.336 --> 00:37:38.616 So that is my recap for you guys. 00:37:39.336 --> 00:37:41.016 Fantastic tax strategy. 00:37:41.286 --> 00:37:42.786 Absolutely worth looking at. 00:37:43.146 --> 00:37:45.396 Make sure you look at it with some foresight. 00:37:45.426 --> 00:37:46.896 Look at the next few years. 00:37:47.286 --> 00:37:50.826 When to implement it, how it's going to benefit you the time you 00:37:50.826 --> 00:37:54.786 transition and make sure that you are putting everything in place. 00:37:55.296 --> 00:37:58.656 So that if this has ever looked at, if you ever have to prove that you 00:37:58.716 --> 00:38:02.136 absolutely deserved that hundred thousand dollar expense, that 00:38:02.136 --> 00:38:03.636 you got to write off this year. 00:38:04.326 --> 00:38:07.566 That they have no reason to question it or try to take it away. 00:38:08.016 --> 00:38:10.716 So I hope you guys found this helpful. 00:38:10.766 --> 00:38:14.906 If you have any additional questions, You can find me on social media. 00:38:15.206 --> 00:38:18.446 I'm R E tax strategist on Instagram. 00:38:18.746 --> 00:38:21.446 And you can find me at Natalie Claudy on Facebook. 00:38:21.796 --> 00:38:25.246 Additionally, please like share and subscribe. 00:38:25.326 --> 00:38:29.796 And reach out with any other topics that you want to hear on a future episode. 00:38:30.126 --> 00:38:30.996 Thanks for listening. 00:38:31.026 --> 00:38:32.946 And I will chat with you guys next week.