Ep. 46 | Long-Term Rental Tax Reporting
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Speaker 2:Hey, everyone. Welcome back to Teaching Tax with a podcast, episode 46 today. We're gonna take a look at long term rental tax reporting. So those LTRs for you REIs. We love our acronyms here.
Speaker 2:LTR, long term rental, REIs, real estate investors. So whether you're new to the game or you've been in it for a while, you probably take something from this episode that Chris and myself are gonna run through here shortly. So before that, let's take a moment, thank our sponsor.
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Speaker 3:You can look in our show notes or email us at hello@teachingtaxflow.com.
Speaker 2:Welcome back to the Teaching Tax Full podcast, everybody. I am John Tchaikovsky, one of the cohosts here. As always, my other smarter, better looking cohost, Chris Pacquero, is here with me. How are you, man?
Speaker 4:I am awesome. How are you doing today, Johnny t?
Speaker 2:I'm doing great. And, you know, we we're just got back from another conference as always. I love these things. I love the aftermath of them, and I love being them being there, obviously. And, you know, I got asked a lot.
Speaker 2:You know, we banter back and forth. It was by the way, it was great to see people there that say, hey. I recognize your voices. You guys must be on that podcast. They didn't have anything bad to say or at least didn't say it to our face.
Speaker 2:So I appreciate you guys that did not do that. But, you know, we were trying to figure out how long we've known each other for, and it's about twenty three, twenty four years ish. So, you know, I'm gonna throw out a a corny dad joke here. Right? So, Chris, whether you like it or not, we're in a long term relationship.
Speaker 2:So the episode today is long term rental properties.
Speaker 4:Wow. You like that one, I'm impressed. I like it. And it's yeah. It has been fun because we've had we went to a national conference, for tax professionals, and we went to a the state of Michigan's Michigan Association of CPA Small Firm Practitioner Conference.
Speaker 4:And, John, I gotta give you credit. In both conferences, at both conferences, people people came up to me and said, where's all that other guys really? He's I like him too. He's he's good. And I'm like, he's actually here, because we, you know, you do a lot of we do a lot of due diligence.
Speaker 4:We we have another podcast we do specifically for tax professionals called the Mr. R Show, and and it's got it's much different than this because it's it has to comply and and it's almost an hour long for continuing education, but we, we're always looking for other guests and and just really immersing ourself in our industry. So, yeah, it was great. And, you know, you're you're a legend in the accounting community.
Speaker 2:Oh, man. Oh, man. That's I don't know if that's a good thing or a bad thing, which, by the way, out of everybody we've met, nobody was wearing a pocket protector. Let's just be clear about that. So if anybody thinks that accountants are all dorks, it is not the case.
Speaker 2:It is not the case. So let's talk about these long term rental properties. Right? So let's for those of you that are familiar with it or maybe you're very familiar with it, you don't even really know the definition you've been in this long term relationship so long. Chris, let's start with that.
Speaker 2:So let's define by IRS standards or IRS definitions what an LTR or a long term rental property is.
Speaker 4:Well, the thing to remember when it comes to determining if you have a short term rental or long term rental is what is the tenant stay look like? Now those of you listening that are in the real estate world or REIs, we know that there's something called a midterm rental, which is typically a furnished property renting from one month to over one month, but less than a year. A lot of times you'll have traveling nurses or, people people, unfortunately, there with the with the loved one, for a hospital stay or some treatment. But there's no such thing as, like, a midterm rental in the tax code. So this is get your get your IRS publications out.
Speaker 4:Go to five twenty seven if you wanna follow along in your textbooks. Or you can maybe be real easy. Just log in to teaching tax law and watch watch our mini lesson on this, which is for complimentary as a as a basic, person, basic subscriber. But to answer your question, under IRS publication five twenty seven, a long term rental property has two attributes. And I'm quoting, any dwelling where rental income is paid for the use or occupation of property, and does not meet the short term rental definition under treasury regulation section four sixty nine one t e three.
Speaker 4:Sounds like a Star Wars character, c three. It does actually. And so bottom line is, if you have a rental Yeah. If if you have a dwelling, doesn't have to be a home. Could be a condominium.
Speaker 4:It could be a container that people live in. It could be a tent. It could be a camper. But if it's a dwelling where rental income is paid for the user occupation of the property, and it does not meet the short term rental property definition, under the, treasury regulation section four sixty nine.
Speaker 2:And so in comparison to so so STRs is another term that we threw out through a good bit. So short term rentals. So, obviously, we're talking to long terms. But for comparison purposes, what defines a short term?
Speaker 4:Right. A short term rental is a property that meets one of two qualifications. The first qualification in the much more prominent one, I'd say 98% of the time, the average tenant's stay is seven days or less. So a lot of times, those are referred to as vacation rental properties. So seven days or less average stay is a short term rental property.
Speaker 4:Now that and that's for a calendar year. So sometimes, you might have a short term rental property, but for a given tax year, it's not considered a short term rental property. I'll give you a personal example. One of our properties in Panama City Beach, Florida, we've we've used it as a short term rental property. Short tenant stays.
Speaker 4:There there's some there's some tax advantages to that that go beyond the scope of this particular podcast, but definitely jump into our community to ask about those. And, but we we had an offer, where someone wanted to rent it all of, February and all of March. And, my wife and I thought about it and we said, sure. Yeah. We'll do that.
Speaker 4:Now even though the property, its intent is that it's a short term rental property, for the year of 2024, which is when the book the bookings already occurred, it's gonna not gonna be a short term rental property because I'm not gonna meet the average tenant stay of seven days or less. I'm gonna be a long term rental property that year. And that's something to remember that the classification of property is a year by year, window. So either your average tenant stay seven days or less, or the average tenant stay is thirty days or less and significant personal services are provided. Now leave it to the IRS to make things muddy.
Speaker 4:Right? You might be saying, what's a significant personal service? The IRS defines that as either cleaning, changing linens, transportation, meals, tours, outings. Bottom line are hotel like services. In general, you're gonna have a a you're gonna meet that thirty day or less qualification for the short term rental and have significant personal services if you run an Airbnb.
Speaker 4:If you or let's say you own a, you know, we've got I I have a friend of mine that I just talked to who lives down in Destin, Florida. They're looking at a piece of property where they build their primary residence, and they would build six build six cabins on the property for vacation rentals. This is gonna be a the reason they're doing it is they wanna focus on, having clergy or or kinda almost like a religious retreat. Regardless of the reason, those units, the person might stay more than a week. Right?
Speaker 4:Maybe they're down there for twenty one days, fourteen days for, to help out. But since they'd be providing significant services, meaning they're the ones actually doing the changing the linens, they're the ones cooking meals for the people, they're the ones that are checking people in, then they would qualify for short term rental under that thirty day rule. But that's very rare when you look at all of the short term rental properties out there. If 2% of them meet that, that's that's high. So if you're reeling one of those, you're a long term rental property, and most rental properties are long term rental properties.
Speaker 2:And then reeling back into the long term side. Right? So you hit a couple really good points there that I I really wanna, we'll say, bring them back to the bring them back to the forefront or or bring them up to speed. So one of them is being that, you know, you did mention Airbnb and and Vrbo. Right?
Speaker 2:Like, there there are a lot of rentals on there that are and I've seen some that really allow a minimum stay of seven days or thirty days. So it's really their choosing by by by their choosing. They, for whatever reasons, wanna more like or more or less, I should say, be considered a long term. Again, for whatever reasons. Maybe it's just for the ease of their lives or maybe they only have a month in there they wanna gone for.
Speaker 2:But then also too. Right? Somebody can, I'm gonna imagine, kind of bounce back and forth even so say you have a property, and and I'm I'm asking this. I know the answer because, Chris, as you know and, actually, my first primary residence, it was a condo. Right?
Speaker 2:So I lived in it and ended up moving out of it. It's funny that I I just actually did a podcast on this with one of our partners, out in California. I was not in California at the time. But we had a great a great conversation around this about how really that property morphs into multiple things. Right?
Speaker 2:So it started off as my residence, turned into a short term rental on Airbnb, long story up. Maybe if it comes out the same time, I'll put a link to that podcast in this one if you guys will listen to it. It's a crazy story. But then went to a long term, then went back to a short term, and then we sold it. So it was a very, let's call it a dynamic piece of piece of real estate.
Speaker 2:It was an unintentional investment to to add to things. But is that do you see that kind of being the case a lot, or is that really just a a rarity that something kind of transforms year to year and bounces between those between a long term and a short term?
Speaker 4:Yeah. In I mean, in general, there there could be several reasons why something bounces between long and short. One could just be government regulation. You know, sometimes the there's the STR, what we call short term rental, rules change, the licensing changes. Sometimes you have people running a short term rental that that, is against the condo association and and or the homeowners association, and you and you get napped, quite frankly.
Speaker 4:So there's some there's that. There so there's the there's the the kind of like the yoga Almost put it into a light. Inside. Then you also have the something to consider that in depending on what state you live in, there you've gotta consider squatter's rights. Right?
Speaker 4:If if you have someone in your property for a certain amount of time, they might not and, again, this would be a great question, when we get Jeff Hampton from STR Law Guys back on the podcast to talk about that. But what it you know, can you evict somebody? The tax planning side can work real well. There's something called the short term rental loophole, which we're we're gonna be touching on. And again, not to keep talking about our defeating taxes private Facebook group or all these other these other spots, to get the information from us, but we're gonna be touching on those.
Speaker 4:So you've got the regulatory, I would say, reasons. You've got the, risk mitigation reasons you might bounce bounce back and forth. And like you mentioned, you've got the time constraint reasons. Running a short term rental property is is is time consuming. Mhmm.
Speaker 4:And, and then you also have the overall you you gotta look at the financial thing. What makes sense financially? You know, especially, like, ours, one of the houses of in Panama City Beach, I could see us running it to Snowbirds, especially if we have a great experience. We happen to know the people at least one of the people running it going down there personally. A lot of times, snowbirds like to go to the same home and property, and it's a for us, when you net it out, you have to look at the occupancy percentage on those short term rentals.
Speaker 4:We've already taken advantage of a lot of those tax benefits. So it could be someone it could be part it could be your short term rental, part of the year long term rental. In general, though, from an IRS perspective, it's gonna be a long term rental property.
Speaker 2:And then a couple questions for you. It's almost a twofold, but we can answer them one at a time. So say somebody was looking to get into real estate investing. They're, like, right out of the gate. They've never done it before.
Speaker 2:They have let's not even say they have the savings. Say they're using was it OPM, they call it? Other people's money for investment purposes. So let's let's consider that you're talking to somebody that just came up to you, say, at a conference and said, hey, Chris. Glad I caught you here in the hallway.
Speaker 2:I you're the real estate guy. I heard, I wanna get into it. What should I do? Would you lead them again from a tax perspective? Would you lead them down the long term rental path maybe for a first investment opportunity, or would you say, hey.
Speaker 2:Maybe look at short term. And and as you mentioned too, I mean, there's a lot of things involved. I mean, there's a lot more, we'll say long term commitment, but there's a lot more involvement, should say, in the short term unless you are your property management company, whole another whole other thing. So what would you guide them, either long term or short term as it comes to taxes? But then also too, the second part of that question would be, you know, as somebody builds a portfolio.
Speaker 2:Right? So say they have a couple long terms or have a couple short term rentals. Would you suggest to them that they stay with whatever track they're going on, whether it's all long terms or stay within shorts or or how does that blend together? Base I mean, is it a fifty fifty split? Say, hey.
Speaker 2:You have fit more than 50% of your properties. Is this Or is it property by property as far as for the for the IRS? So those two questions.
Speaker 4:Right. So I'm gonna take away the tax part of it because there are more tax benefits immediately for short term rentals. But there's definitely advantages to long term rentals as well. So to strip away the tax benefit, I would say that you have to look at their experience, their opportunity cost, how much time they could put into something, and it would come down just like we talked about in teaching tax flow. Diagnose a client someone's tax situation using marginal tax rate, prescribe the tax strategy.
Speaker 4:So my advice to someone would be, well, what's your goal? How much time do you have to put into this? How much how much resources do you have to put into this? How bankable are you? You know, because a lot of times, it's a catch 22 because to expand your portfolio, you'll need to apply for loans.
Speaker 4:There's a limited amount of, Fannie and Freddie loans that you can take out on yourself. I believe it's 10. I can't remember. Brenna Carles has helped us out a ton from the mortgage shop on understanding some of those rules. But under because it'd be like, yeah.
Speaker 4:I'd love to quit my job. I'm single and and buy a bunch of rental properties. So problem is, if you don't have employment, then you're not going to get financed on these properties. So, it would come down to how much you know, what their goal is. Is this a long term hold?
Speaker 4:Is this a, and what what's, you know, short is it, is it something you're gonna manage? Is it how much cash do you have? What's your expectation? Because a lot of times when you're dealing with a short term rental property, you've got to, furnish it. Right?
Speaker 4:And and that get that's something out of you can't really finance that, so that's gonna be coming out of your pocket. Now some of them, you do buy furnished. We've purchased short term rentals furnished, and, one of them was turnkey. One of them was two of them had to be gutted pretty much and and and really re well, one was a a pretty big pretty big lipstick, and the other one was a full gut job. So it just depends on the on the situation.
Speaker 4:You know? So, obviously, if it's your first rental property, you probably wanna, you know, you probably wanna take it easy and maybe be a little bit more hands off. So what I'm seeing is people people jumping into maybe a a property that they're they're you know, it depends on what they're looking for, but they're they might be a little more hands off. So in It's pretty bankability. Ties into oh, I'm sorry?
Speaker 2:No. Sip. So, basically, what you're saying there is, obviously, the bankability side of
Speaker 4:it, but also what their comfort level is. Right? Absolutely. That's that's very important. And, you know, so one thing, like and I'll give you an example.
Speaker 4:One one thing that gets confusing to people and we're gonna be we talk about this in the in the in the defeating taxes group is what happens if I convert my primary residence? I move. I've got a low interest rate. I really don't need to sell the property. Should I convert it to a rental property?
Speaker 4:And then and then a lot of times, you know, there's some pluses and minuses to that, although, you know, sometimes there might be an emotional attachment to that property, and that that happens also with with these short term rentals. But one of the things that that I wanna talk about is where to report this long term rental. Not only so so if you're listening to this and you're you purchased your first rental property or or you're not sure how you report this activity on your tax return, you're not alone. You know, there are tax professionals out there that have been in business for a long time, that have never had a client with a rental property. And we get them, you know, in our private consulting practice, like, what am I doing with this thing?
Speaker 4:So I wanna run through. There's a great guidance chart that's in the teaching tax flow course on this subject, but I wanna just talk through that with with with the the listeners because how you own the property really affects how you report it on your tax return. So
Speaker 2:I'm gonna assume own the property, like like, we hear a lot of or anybody that's ever looked for financing for a property, you might hear, oh, we we allow you to close at an LLC. So, like, that's an example of one. So it's it's the dynamic of that. So walk us through a couple of those maybe as as far as for how somebody could somebody could, quote unquote, or not quote unquote.
Speaker 4:Yeah. I'll walk through all of them, Johnny t, because it's gonna be Let's do it. Straight forward. So if you own the property personally, let's say you're let's assume you're just a single person or you could be you could be married. If you own a long term rental property personally, you're just you're gonna report it on what's called a schedule e.
Speaker 4:I'm sure we'll put a link in the show notes, one of John's favorite terms. And that schedule e just gets attached to your personal tax return. There's no separate, form to file. It's just a separate schedule that gets attached to your personal tax return. And if you remember the the episode about all not all income is taxed the same, the nice part about long term rental income is you're paying tax on your net income after your depreciation deduction.
Speaker 4:Make sure you're taking the depreciation deduction, and it's not subject to self employment tax. So it's tax settling your marginal tax rate. And most of the time, you don't even have taxable income from this. One of the rules of teaching tax flow, cash flow does not equal tax flow, so you might have a positive cash flow of some $500 and not pay pay tax on that. So that's if you own it personally, you're gonna put it on a schedule e.
Speaker 4:If you're a single member LLC John, what's a
Speaker 2:single member LLC? A disregarded entity.
Speaker 4:You know what? You didn't know that at the beginning of this podcast about a year ago, did you?
Speaker 2:I didn't. It's, it's kinda like, we call osmosis. Like, you just kinda learn Yeah. So first,
Speaker 4:a member LLC, same reporting as owned personally. Schedule e slapping on your personal tax return. If you are a multimember LLC or a partnership, that's a in that case, if the the the rental property is owned by a multi member LLC or a partnership, you will attach a form eighty eight twenty five to your annual form ten sixty five. So multi member LLC and partnerships file a partnership tax return. That partnership tax return issues a k one to all of its owners or members, and the actual entity itself pays no income tax on the federal level, you would as a if you own a portion of that LLC, you would report that in your personal return.
Speaker 4:Cool. Same thing. Pay tax on your net income, depreciation deduction, and you're not paying self employment tax on. So that form eighty eight twenty five is goes on your ten sixty five or partnership tax return. Remember, if you buy property in a multi member LLC or in a partnership, there will be significant additional tax reporting because you're gonna have to file that partnership tax return.
Speaker 4:Now I'm gonna stay on that form eighty eight twenty five. If you have the gall to own a property in an s corporation, one of, my my friends that's a, very prominent c real estate, tax professional in the real estate world. She has a she's got a t shirt. I think it says something like never don't talk to me if you've put your property in an s corp or something really funny and witty that I I'm sent me the link. I'm gonna order some off Etsy or something.
Speaker 4:But if you, for some reason, have a property, a rental property, long term rental property in an s corp, you still you also file that form eighty eight twenty five that goes on your s corporation tax return, and the s corp, you know, issues you a k one. And the bottom line is it's the it's you know, we know from our s corporation podcast that it's a hybrid entity. The s corp does not pay tax on that property, and and you get the k one. So multi member LLC, partnership s corp, you're gonna fill out fill out a form eighty eight twenty five, very similar to Schedule e. Make sure you take the depreciation deduction and attach that to your partnership tax return.
Speaker 4:And, John, I'm gonna wrap the show up with c corp. Very rare that it makes sense to own a long term rental property in a c corporation. Now c corps do not differentiate between passive income and and and, active income. So at a c corporation, you're simply gonna slap your rental income on line six of the c corp, and then whatever deductions you have, you're going to take those deductions between lines twelve and twenty six. So if you have mortgages or just property taxes, be sure to take depreciation.
Speaker 4:A lot of times with a c corporation, c corps typically are more apt to rent out equipment, not rental proper like like real estate, but it is there are rare circumstances where a c corporation would earn a long term rental property. And if that's the case, all of that gets reported on a form eleven twenty, which is a corporate tax return. You and if you are the only owner of a c corp and you have rental income, you would not pay any tax personally on that. The corporation itself would pay tax on the net income if there was any.
Speaker 2:Awesome. Awesome. Well, great information. Thank you everybody for committing a short period of time to a long term relationship. So we we appreciate you.
Speaker 2:As promised too, we'll we'll drop those links in here for you for a quick reference. You can go directly to these documents. It'll make life a little bit easier, maybe help you navigate through some questions you may have. As always, you have those questions, shoot them over. We're happy to answer them for you.
Speaker 2:And as always, we'll see you next week. Hey, everybody. Thank you as always for joining us here on the podcast. Hopefully, this was a great topic as we always like to hope they all are. But even if you were familiar with this topic, hopefully, you learned something.
Speaker 2:For those LTRs, REIs, again, you know, we love our acronyms. But hopefully, you got some good information from here. I mean, anybody that's been doing this for a while, you kind of get comfortable with maybe the way you've done things a little bit, but there may be some better ways to do it. Not saying anything's done the wrong way, but there might be some other opportunities out there. So again, this is just kind of our basic topic or a basic discussion around this.
Speaker 2:Obviously, there's tons of strategies that real estate investors can take advantage of whether it's on the short term rental side or the long term rental side. Feel like in this episode, we did a pretty good job of comparing the two of them. If you're not familiar with them. So as always, look at the show notes below. We put some resource links in there for you.
Speaker 2:Click on those, check them out, send us any questions you have. We would love to hear them. So again, as I said last episode, hang tight. Great topics coming down the pipeline. We'll see you soon.
Speaker 3:Does not constitute an offer of securities. Offerings can only be made through an offering memorandum, and you should carefully examine the risk factors and other information contained in the memorandum. The content provided is for educational purposes only. We encourage you to seek personalized investment advice from your financial professional. For all tax and legal advice, please consult your CPA or attorney.
Speaker 3:Investment advisory services are offered through Cabin Advisors, a registered investment advisor. Securities are offered through Cabin Securities, a registered broker dealer.
