Avery Carl [00:00:05]:
Welcome to the Short Term Show.

Matt McFarland [00:00:08]:
The show about short term rentals and long term wealth with real property owners hosting real properties who are crushing it in the vacation and short term rental space.

Avery Carl [00:00:19]:
And here’s your host, Avery Carle. Good morning out there all you short term shoppers. It’s Avery Carle and I wanted to give you guys a quick reminder about something that I don’t think I’ve done a good enough job of keeping you aware of. So I get a lot of emails from y’ all every week and I love getting emails from you, by the way. I love talking to our listeners and a lot of them are asking for real estate agent recommendations in different markets. And what I don’t think I’ve done a good job of is making sure that you guys are aware that that the Short Term show is actually a subsidiary of the Short Term Shop, which is the largest short term rental specific real estate team brokered by exp. I have to say that or I get in trouble in the country. So we have offices in 12 of the top short term rental markets in the country and we are here to help you purchase your 1st, 2nd, 3rd or 10th short term rental.

Avery Carl [00:01:19]:
And if you buy with us in any of those markets, we have a whole back end training program where we will teach you everything you need to know about managing your short term rental remotely. Everything from setting up your Airbnb and VRBO listings, to teaching you how to use all the property management software that you’ll need, all the way down to helping you source your local boots on the ground like cleaners and handymen. And we have some awesome Facebook support communities that we want you guys to be a part of where we all share ideas and information about managing our short term rental, which short term rentals, which markets are the best, what we’re doing next, and all of that really fun stuff. So if you want to be a part of the short term shop community, if you want to buy a house with us, we really want to help you guys. So head on over to the ShortTermshop.com and click Schedule a consultation. We’ll see you there. If you invest in real estate or manage properties, you need banking that’s truly built for your business. Many traditional banks make it difficult to sync banking information across many of the personal finance platforms that we as real estate investors use every day.

Avery Carl [00:02:23]:
This is why I recommend Relay. Relay is an online banking and money management platform that’s a perfect fit for any real estate business. First, there are no account fees, no overdraft fees, and no minimum balances, which means you get to keep more money in your pocket. Relay also goes above and beyond the banking basics to help you understand precisely what you’re earning, spending and saving. You get up to 20 checking accounts to organize and allocate income for things like day to day expenses, investments or taxes. And if you have multiple investment properties set up as separate business entities, that’s no problem. Relay lets you open unlimited accounts and access everything from one single login. Best of all, Relay makes your bookkeeping speedy and meticulous by giving you ultra detailed transaction data and directly syncing it back to QuickBooks Online and Xero.

Avery Carl [00:03:14]:
The ability to have so many separate bank accounts and allocation options in my user dashboard has really transformed my personal banking experience. I will never go back. It takes 10 minutes to apply for a Relay account and you can do it online@relay fi.com the short term shop. So again, for more information and to open an account, go to relay fi.com the ShortterShop. Hey guys. Welcome back to the Short Term show. I am really excited about today’s episode. We have some of the brightest minds, if not the brightest, I don’t know, minds in the real estate tax space.

Avery Carl [00:03:50]:
Matt McFarlane and Amanda Hahn from Keystone CPAs. How’s it going y’ all?

Matt McFarland [00:03:55]:
Hello. Good morning.

Amanda Han [00:03:56]:
We are so excited to be here.

Avery Carl [00:03:58]:
I’m super excited to have y’ all. I am a huge fan. I love to tell Amanda that in public and make her feel uncomfortable. I’m a huge fan. Read both of your BiggerPockets books. I still don’t truly understand a lot of the, the tax advantages and loopholes and things when it comes to short term rentals. Which is why we have you here because there’s a lot of people out there just like me that want to better understand a lot of this stuff. So let’s start out though, at the beginning and why don’t you guys tell us a little bit about yourselves?

Amanda Han [00:04:31]:
Yeah. Well, my name is Amanda Hahn. I’m Matt McFarlane and we’re with Keystone. Our firm is called Keystone CPA and basically what our team is known for is helping real estate investors nationwide to save taxes using real estate investments. And you know, besides doing the tax planning, which is what we’re passionate about, we are also investors ourselves. So it’s, you know, we, we, we’re so blessed to have the opportunity to kind of really see the true story behind the numbers. Right. When you hear people talk about great deals and things like that, we get to, to, to see kind of how that all works and it really helps to improve our investing too.

Amanda Han [00:05:11]:
But yeah, we’re really excited to be here and kind of, you know, demystify some of the things and talk about the benefits of real estate investing for short term rentals today specifically.

Matt McFarland [00:05:22]:
Yeah, we are. For those of you don’t know, we are married to each other. So we, we talk about taxes all the time.

Amanda Han [00:05:28]:
Yeah, we’re like Avery and Luke.

Avery Carl [00:05:31]:
Yeah. Yeah. And we’ve got Bigger Pockets conference coming up and I think I heard you say on the last one that it is a tax write off for people to come buy you a beer, right?

Amanda Han [00:05:39]:
Oh, yes, of course.

Matt McFarland [00:05:40]:
You’re two. Two or three.

Amanda Han [00:05:44]:
I mean, in fact, you know, if you’re going to any confere, any real estate conference, I mean, from the time you leave your house to the time you go back to your house. Right. Everything should be charged on your business credit card or your LLC credit card because those are all tax deductible items.

Avery Carl [00:05:59]:
Good to know. All right, so let’s, let’s get into the, the real estate side of things. The short term rental side of things specifically. So let’s start at the very beginning. For people who may not have been obsessing over this for the past few years like I have, what are the tax benefits when it comes to investing in short term rent?

Amanda Han [00:06:19]:
Well, I mean, so, so short term rental, when it comes to deductions and things like that, really short term rentals are no different than long term rentals from the perspective that you can write off all of your real estate expenses. We just talked about maybe going to like a Bigger Pockets conference, but again, there’s lots of different conferences or events or, you know, you might have even bought a great book to read that Avery wrote on short term rental investing. Right. So all, anything that basically you’re spending money on that is helping improve or with your current short term rental property are all going to be tax deductible items. And this is true, you know, regardless of whether you have a legal entity or if you’re just, you know, got your first short term rental in your personal name.

Matt McFarland [00:07:03]:
And you know, as, you know, Avery, obviously with short term rentals, what we’re seeing a lot is higher cash flow. Right. You know, that’s, that’s the benefit of investing in short term rentals. And so for tax purposes, you know, like long term rentals. But maybe even more important for short term rentals is how do we find ways to offset that cash flow with tax deductions? So we’ve got, you know, kind of the, those, you know, making sure you’re capturing all your expenses, the, you know, the conferences, your meals, your auto and travel expenses. But then just like long term rentals, we want to look at other ways to maximize deductions. Like through maximizing depreciation, you can, you can take advantage of cost segregation studies for your short term rentals, you know, looking for ways to offset all that, that positive cash flows. So, you know, at the very least, we’ve got where you got money in our pocket, but we’re not paying any taxes on it.

Avery Carl [00:07:53]:
Okay, so I have so many questions.

Amanda Han [00:07:58]:
From this first 30 seconds.

Avery Carl [00:07:59]:
Yep, yep. I, I always do. Every time I get Amanda on the phone, I’m like, wait a minute, explain this to me again. So, first question, let’s, let’s talk about cost seg. And depreciation. So let’s give a definition of that. First of all, what is, what’s a cost segregation study?

Amanda Han [00:08:17]:
Yeah, Well, I think we’ll start with depreciation first.

Matt McFarland [00:08:19]:
Yeah, I mean, I think depreciation, the easiest way to look at it is kind of like, we call it like a, a paper expense. Right. You know, when you pay for mortgage, insurance, property taxes, insurance, you know, that’s money out of your pocket. But depreciation, we call it a paper expense because the IRS gives you the ability to write off a part of your purchase price of your property over time. Now, you know, you could have paid for that property all in cash, obviously, but as a lot of investors do, they get loans and they use leverage. And so maybe you’re putting 20% down and getting a loan for 80%. So you buy a property for $300,000, your depreciation calculation starts at 300. Now, you have to break out building versus land, obviously, but, but it starts at 300, doesn’t start at whatever your 20% down payment was.

Matt McFarland [00:09:02]:
And so the IRS is giving you this paper expense every year, you know, as if the property is wearing down. You know, it’s normal wear and tear. You get to, you know, quote unquote, depreciate the property over time. So that’s why we, well, we love. From a tax perspective, it’s a paper write off.

Amanda Han [00:09:16]:
Yeah. But, you know, I mean, cost segregation is basically like the next step. Above that, it’s saying, okay, we’re not going to, you know, write off the building slowly over the next, you know, 27 or 39 years. We want to write off as much as possible now because, you know, I mean, from an investor’s perspective. I want to save taxes today so I can get more cash in my pocket and I can buy more properties, right? Why wait 27 years to slowly get the tax savings? And so cost segregation is basically what the IRS allows you to do, is you have like an engineer who goes and looks at the property and then breaks out the components. So it’s not just, hey, I have a $500,000 building, but that building is made up of different components like specialty plumbing or drywall or, you know, piping systems. And so for those different things, then your cpa, your tax preparer can take faster depreciations. So we might be writing off, you know, 100% of part of that building.

Amanda Han [00:10:10]:
So that’s where when you hear investors tell stories about like, oh, you know, I made $300,000 of income last year and I paid no taxes. A lot of times they’re talking about these types of strategies and not like, hey, I actually spent $300,000 in expenses operating my rental, which is not what you want.

Avery Carl [00:10:31]:
So you kind of hit on this. But let’s, let’s pull this out a little bit further. Why would somebody choose to write off all of that depreciation upfront the first year as opposed to a little bit every year?

Amanda Han [00:10:43]:
Well, I mean, part of that comes down to personal preference. But again, most investors want to do that because they want the cash savings today. So as an example, you know, if I have income and I’m normally paying overall, let’s say, you know, $50,000 in taxes, right? But this year, if I use this strategy, instead of paying $50,000, maybe I’m getting an $80,000 refund, right? So I have a huge swing. And so now with my $80,000 refund, it could be a down payment on, you know, a 2, 3, $400,000 property. If it’s another short term rental, it’ll create cash flow and all that versus if I didn’t use that strategy. And I’m just taking slowly over time, you know, maybe I get a couple thousand dollar refund. There’s not much I can do in terms of investment. So it’s really looking at the time value of money.

Amanda Han [00:11:31]:
You know, how can I get more cash back today and grow that rather than, like you said, having to wait over the next, you know, 27 years.

Avery Carl [00:11:40]:
Gotcha. So I can get it all back right now and go buy more property rather than just a little bit here and there for the next 27 years. That makes a lot of sense. So is there anything about claiming this Depreciation this year versus moving forward over the next few years.

Amanda Han [00:11:58]:
Yeah, yeah.

Matt McFarland [00:12:00]:
I mean, there’s, there’s a couple of things to think about. You know, one of the things right now is they we have, or the tax code right now has what’s called bonus depreciation. So when you do a cost segregation study, one of the things you’re doing is you’re breaking out, as man was mentioning, you’re breaking out the building in a smaller components, what we call five or 15 year assets. The benefit of that is that, you know, in addition to depreciative for quicker time, the benefit of that is right now we have 100 bonus depreciation. So those 5 and 15 year assets can be written off 100 of the first year that you put the property in service. So that’s a huge, that can be a huge swing in terms of, you know, kind of supercharging your appreciation, if you will.

Amanda Han [00:12:35]:
Yeah, I mean, so I, you know, what we’re seeing. So this year still 100%. Right. In 2022, in 2023, it starts to phase down. So instead of having 100% bonus, you’ll then have 80% bonus, you know, still a good amount. Right. Any bonus depreciation is good, but 80% is not as good as 100. So what we’re seeing, you know, as adv is a lot of clients are trying to aggressively buy more real estate this year and putting it into service before the end of the year because then they’ll get to take advantage of that 100%.

Amanda Han [00:13:12]:
Right. So same property, if I close this year, it is in Service, I get 100 bonus if I wait to place it in service, you know, 2023 or beyond, then in 2023, you’re using 80%. So, you know, a somewhat significant difference.

Avery Carl [00:13:27]:
So what you’re saying is that maybe people better bang a few investments through before the end of this year to be able to capitalize on that 100%?

Amanda Han [00:13:36]:
Yeah, yeah. I mean, of course you still have to make sure it’s the right property. You know, it kind of meets your investment criteria. But yes, we have a lot of.

Matt McFarland [00:13:42]:
You know, got to be put in service, obviously.

Amanda Han [00:13:44]:
But yeah, we’re having a lot of people who are just aggressively buying real estate. I mean, you know, besides the tax benefit. Right. With inflation and, you know, just people are wanting to put more money in hard assets like that. So that’s where we’re, you know, we’re still seeing a lot of people know, aggressively acquiring for the rest of this year.

Avery Carl [00:14:02]:
I probably need to get on that. I’m tired. Y. I am tired, but I need to. We probably need to buy a few more things before the end of the year ourselves.

Matt McFarland [00:14:12]:
I mean, Aerosmith concerts will do that too, you know.

Avery Carl [00:14:14]:
I know, I know. It was so good though. I’m going, actually going back again. So I went, guys, to Vegas for a work thing just for like a quick 24 hours last week. And Aerosmith happened to be playing part of their residency the night I was there. So I was like, I’m gonna go to this. And it was so good that Luke’s birthday is December 5th. We’re going back and I got the same pit tickets and we’re also going to see ZZ Top the night before.

Avery Carl [00:14:39]:
So we’re just gonna, gonna go real quick for two days. That good? Yeah.

Amanda Han [00:14:43]:
How fun. How fun. Well, so, so Avery, you gotta, you know, you have to. You’re gonna be on that train of buying more real estate then before December when you go back to Vegas. Yeah.

Avery Carl [00:14:56]:
Yeah. And I meant I’m not tired like today. I’m tired in my life.

Amanda Han [00:15:01]:
Yeah.

Avery Carl [00:15:02]:
Busy. Busy here.

Amanda Han [00:15:03]:
Yeah. But I mean, I think, you know, that’s part of the beauty of like what you guys do too at the short term rental shop. Right. Is helping people to acquire the real estate and not have that become like a full time job for them. Right. Some of these are like turnkey and you have the systems in place. And I think, you know, for us as tax advisors, I’m sure we’ll get into this a lot more. But short term rental investing is such a great loophole for people who are still working a W2 job and wanted to, and really want to have cash flow but significantly reduce taxes.

Amanda Han [00:15:34]:
Because if you have long term rental properties and you know, both you and a spouse are working full time, it’s very difficult to use those, you know, those, those tax strategy losses to offset W2 income. But with short term rental investing, it’s a lot easier to do that just, you know, with kind of the loophole in the tax law. So. But you know, we’re always trying to convince clients to say, hey, you should get into short term rentals because you’ll save so much in taxes. But I think the first thing they tell us is, oh, no, I can’t. It’s going to take so much time, it’s going to become a job. So, you know, we love talking to your audience because we don’t have to convince them they are already doing short term rentals. You know, that, that Hurdle is already eliminated.

Avery Carl [00:16:16]:
Totally. Well, so I have another question. Kind of still kind of related to the bonus depreciation and cost seg. So I’ve seen a lot of people recently who are kind of pivoting from short term rentals into other things that still have a short term rental component like hotel, motel, investing and glamping and tiny homes and like tree houses and unique stays they’re calling them. So if you’re buying something like a piece of land that you’re going to put glamping tents on or you’re going to have tiny homes on wheels or things like that, are you still able to get these tax benefits of buying a single family home or like a hotel?

Matt McFarland [00:16:54]:
For sure. I mean a lot of, a lot of the, a lot of the deductions, you know, and depreciation strategies can, can work the same. It’s just a matter of, you know, comes down to kind of, you know, what’s their income, what’s the typical rental period for something, you know, whatever they’re doing. Right. And then, you know, figure out what strategy works in their situation.

Amanda Han [00:17:13]:
Yeah, but I mean, depreciation definitely works for those, you know, tiny homes. Right. It’s still structure, you know, glamping. You know, I’m just envisioning like one of those really nice tents. They’re probably even faster depreciation than a building. Right. So it’s. Yeah, it’s probably even better than the traditional hotels.

Amanda Han [00:17:34]:
You know, hotels are, you know, hotel, motel stuff is. It’s pretty similar in terms of just like the building itself. So yeah, I mean we are seeing a lot of those variations too. It’s funny you mentioned the glamping because I’m hearing a lot more buzz about that from clients too.

Avery Carl [00:17:46]:
Next question. Let’s talk about real estate professional status. What’s real estate professional status?

Amanda Han [00:17:54]:
Yeah, it’s. So we were, you know, I was saying, just saying how we always encourage our clients to consider short term rental. Right. As part of their portfolio. And the reason for that is because for taxpayers who make over $150,000 that are investing in long term rentals, typically they’re not able to use any rental losses to offset taxes from their W2 income. And that, you know, becomes a hurdle. Right. You have a, you know, husband and wife who’s maybe a physician or something and they’re, you know, building real estate bunch of long term in their portfolio.

Amanda Han [00:18:29]:
And yes, we might be creating a bunch of write offs and depreciation and getting them, you know, tax free cash flow. But ultimately you know, they want that 50, 100, $200,000 refund, right. Against their W2 income. And, and they’re not really able to do that unless if one of them qualifies as a real estate professional.

Matt McFarland [00:18:47]:
Yeah. Now remember, when we’re talking about tax losses, we’re, we’re hopefully not meaning that you’re losing money like, you know, from a cash flow perspective where to talk about, you know, maximizing depreciation, maybe using so much depreciation, you’ve created a loss on paper. Now for a real estate professional, that’s going to apply to those people who are investing in long term rentals. So it’s a matter of, you know, there’s a couple tests, but it’s, you know, if they spend more than 750 hours a year in real estate, they spend more time in real estate than their other job or jobs they might have. And if they materially participate in their long term rentals, if they meet three, all three of those criteria, then they can use their long term rental losses to offset other income, W2 interest, dividends, business income, whatever it might be, you know, to save taxes. Now that’s, that’s the benefit for those long term investors if they can qualify as a real estate professional.

Amanda Han [00:19:35]:
Yeah, but yeah, I think, you know, out of those three things, right. 750 hours in real estate, more time in real estate than your job. And the material participation, the hardest one we typically see for people to meet is more time in real estate than your job. Right. Because sure, 750 hours in real estate might not be a lot if you own a bunch of long term rentals, but you know, if you’re working full time, 2,000 hours a year, that means you need more than 2,000 to be a real estate professional. So again, that’s the reason that, that is oftentimes the biggest limitation in long term rental investors. Which leads us to why short term rental is so great. Because if you invest in short term rental properties, you don’t have to be a real estate professional at all.

Amanda Han [00:20:16]:
You know, like we don’t care how many hours you’re working at your job, you know, as a doctor, as whatever, it doesn’t matter anymore. All we care about is how many hours you’re spending in your short term rentals. And if you can have an hour, enough hours in your short term rentals, then the short term rental losses will offset W2 income. So you know, that’s that loophole that makes short term rentals so attractive from a tax perspective.

Avery Carl [00:20:42]:
Okay, so let’s for the dumb people in the back, which means me. Let’s break that down a little bit. So what is the difference? Because I see a lot of investors come to us and they’re like, I’ve got to get rep status, I’ve got to get rep status. And I’m like, I don’t, I’m not a cpa, but I don’t think you’re going to get that. So what is the difference between rep status and that? Material participation.

Amanda Han [00:21:03]:
Yeah. Yeah. And you know, it’s so funny you say that because there’s such misconception, you know, not just with investors, but I think also within the CPA community that a lot of CPAs don’t understand that there’s a difference between short term and long term rentals and how it’s treated for tax purposes. And that’s why you’re having investors ask you those questions. But I think the easiest way to explain it is that if you’re investing in short term rentals and your short term rentals have losses, don’t worry about rep status. It’s just like you said, Avery, you don’t need to have rep status at all. Right? We don’t care about any of those three rules that Matt talked about. All you have to do is meet material participation hours for the short term rentals.

Amanda Han [00:21:44]:
So when they say, hey, I need to meet rep status, you just tell them, no, you don’t need to. Right. We just need to meet material participation. And then Matt can talk about like what that means.

Matt McFarland [00:21:53]:
Yeah. So for short term rentals, the easiest way to meet material participation is that you spend at least 500 material participation hours, the right type of hours on your short term rentals during the year. Now this could be one short term rental. This could be 3, 5, 10, whatever. You can combine them, combine them to meet the test. So that’s the easy, and the easiest way to look at it is kind of like I like describe. You have to kind of have your boots on the ground doing a lot of the, a lot of the, you know, self managing. Maybe you’re working, you know, you’re kind of acting your own GC when you’re doing a remodel, you know, getting the property up and running for that first year.

Matt McFarland [00:22:30]:
It’s got to be more than sitting back and collecting a check from, you know, Verbo or Airbnb or something. You know, you got to be kind of, you got to be kind of dealing with, you know, you know, somebody can, you can use one of those platforms a Book, obviously, but you want to do a lot of the self managing yourself is probably easy way to look at it.

Amanda Han [00:22:46]:
Yeah. So there’s three different ways to qualify for material participation. You just have to meet one of those three. So Matt talked about the most common one, which is 500 hours, right. So Avery has, you know, four rental, four short term rentals. Looking at all her hours in the four properties, does she have 500 hours? If yes, she’s met material participation. What does that mean? That means if you do cost segregation and you pay your daughters, you know, to help in the real estate, now you have a loss, you can use it to offset other income like W2s or 1099. Okay, now the other way.

Amanda Han [00:23:22]:
Remember we said there’s three, right? So first is 500. The next one is if you don’t have 500 hours. You can also meet the requirement if you have at least 100 hours in your short term rentals and nobody else has more time than you. So in that example, it’s like, okay, avery spent maybe 200 hours or 250 hours in all her short term rentals. And then you look at who else is spending time there, like your cleaning crew, right. Maybe they’ve only spent 100 hours and you have a, you know, a gardening crew and they’re only spending, you know, 60 hours. Then you’ve met that other alternative, which is you have at least a hundred, nobody else has more time than you.

Matt McFarland [00:23:59]:
Now, obviously on that one, that, that first one, the 500 hours, you just have to know what your own hours are. That test and another one she’s going to mention is you have to have, you know, if you get audited, you have to have an ability to show that. Yeah, where did I get 100 hours for the cleaning crew? Where did I get 50 hours for the gardening crew? So you, you know, it’s a little more work on your part, right, because you have to have an idea of what other people are spending on your property.

Amanda Han [00:24:21]:
Yeah. And then the third way to qualify is you have any hours at all. There’s no minimum, but your hours are more than everybody else combined. So in that example, let’s say Avery has spent, you know, 60 hours on her short term rental. Let’s say you have one property, right? You spent 60 hours and you added up the cleaning crew, the gardeners, the manager or whatever, and combined they had fewer hours than you. So any of those things, three will allow you to use short term rental losses against W2. And remember, we didn’t mention anything about Reps status or hours worked. Right.

Amanda Han [00:24:58]:
Because it’s not part of the conversation at all.

Avery Carl [00:25:01]:
So I have a question that I saw around this. I saw an investor post somewhere recently that their agent was showing them new construction homes. They’re finished. So not pre construction, new construction. And she did not want to buy one of those this year because the builder would have had more hours on that house because he built it than she would have. Is that I was like, I think that might be a little ridiculous, but I’m not sure. Let me ask Amanda. So I would imagine it’s once they own it, right?

Matt McFarland [00:25:32]:
Yeah, yeah, yeah, yeah. The clock starts once you own the property, not before that.

Amanda Han [00:25:36]:
I think it’ll be a different story. If it’s kind of like she bought the land, you know, she or he bought the land and she hired someone to build it, then yes. Right. They had more hours than you. But in that scenario, if the builder is done, you take, I mean we have no control over what a previous owner spend. Right. Whether it’s a previous landlord or whoever. But yeah, it’s at the time you start owning the real estate.

Amanda Han [00:25:57]:
And you know, I mean, now that we are kind of in the last quarter of the year. What, what. One of the strategies is that if you close on something fairly close to year end, it might be very easy for you to meet one of those requirements. Let’s say the 100 hours or 50, you know, you know, or more than everyone else. Because what happens a lot is let’s say you close on something and you’re going to be the one furnishing it, right? You’re going to furnish it, you’re going to get it all up and ready and you put it as a service. If you’re just doing kind of the self management for, you know, X number of months between now and year end and maybe a little bit into next year too, they’ll be very easy for you to have more time than anybody or everybody else. Right. So that is a loophole that some of our clients look at as we get closer to year end and they’re just aggressively racking up hours for their short term rentals.

Avery Carl [00:26:46]:
Okay, so that makes sense. So like if I’m buying something like a beach property and I’m closing in December and there’s probably not going to be any rentals, but I’m going to go ahead and get it up on Airbnb and VRBO anyway. So I’ve spent all the time furnishing it. You know, I’ve spent however many Hours getting the listing set up. But maybe we only have one stay before the end of the year. So the cleaner’s only in there once. Well, that’s really easy that I’ve spent more hours, so I did not realize the strategy. Okay.

Amanda Han [00:27:10]:
Right.

Matt McFarland [00:27:10]:
Yeah, well, the other thing with that too is that, you know, especially as you get towards your end, you can almost control how much, how long the stay is. Right. So we want it to be a short term rental. So we want it to be, you know, seven days or less. And so you can kind of, you know, if it’s one stay and it’s five days. Well, you obviously have a short term rental.

Amanda Han [00:27:29]:
Right. Like, yeah, you can clean it yourself too if you want. Right. Just for those one or two, have Luke clean it.

Avery Carl [00:27:34]:
I mean, for that matter, he would love that.

Amanda Han [00:27:38]:
Yeah, that’s what happens when he doesn’t show up. Right. For the podcast. We give him tasks.

Avery Carl [00:27:42]:
Yep, yep. We’re, we’ll, I’ll send him a text.

Amanda Han [00:27:47]:
But I mean, you know, this is something that a lot of, you know, and we’re not saying, okay, just, man, you know, just kind of do this yourself. And then, you know, immediately, January 1st, you kind of let everything go. Right. I mean, I guess technically you, you might be able to do it because it is a year by year determination in terms of hours. But for, you know, for best practice, we do recommend, you know, you kind of at least stay on and somewhat active for a couple months right into next year. But it doesn’t mean that it has to become your job. You know, you don’t always have to self manage this and every single property. You are just doing it on the properties in the first year where you are getting all that depreciation and the benefits.

Amanda Han [00:28:24]:
You know, I mean, with short term rentals, whether you’re buying it furnished or you’re furnishing it, a lot of those items are eligible for bonus depreciation. Right. Like the, you know, the pool table and the kayaks and the peloton that’s in there, those are all things eligible for bonus. And so if we’re writing it all off in the first year, let’s say 2022 next year, what’s going to happen is we’re going to have a lot of cash flow. We’ve already used all the depreciation previously. So it’s not as important for me to, you know, self manage or materially participate anymore. Right. Because I already took all my benefit in the first year.

Matt McFarland [00:28:58]:
Yeah. So the strategy that next year is just continue Buying more. More short term rentals, right?

Amanda Han [00:29:02]:
Yeah.

Avery Carl [00:29:03]:
Then do it again.

Matt McFarland [00:29:03]:
Yeah, do it over again.

Avery Carl [00:29:06]:
Awesome. Okay, y’ all, y’ all, this is. So I learned something. Even though Amanda has to repeat the same things to me over and over again, I do learn something new every single time I talk to her.

Amanda Han [00:29:16]:
Yeah, it’s funny, someone’s telling me, like, you have to hear something at least seven times before you really, you know, kind of get it.

Avery Carl [00:29:26]:
I just. My brain is not numbers. That’s just. It’s not how it works. But y’ all do a great job of explaining it, so. All right, I’m going to change gears a little bit here. So let’s talk about LLC or entities. So what are some mistakes that you guys see on the tax end with people creating legal entities? What should they avoid?

Amanda Han [00:29:48]:
I mean, I think, you know, how.

Matt McFarland [00:29:49]:
Long do we have?

Avery Carl [00:29:50]:
Yeah, as long as you need. I’m sure everybody will. Will listen intently. As long as it takes.

Amanda Han [00:29:55]:
The most common mistake I think is, you know, people have this assumption you have to have legal entities to take deductions. Right. So, you know, we were talking about depreciation, but, you know, oftentimes, you know, writing off your BPCON tickets, or you’re, you know, writing off a new car that you’re using for your real estate. They think they need an entity for it, but, you know, you don’t. Right. You, if you own rental real estate, your expenses always offset the rental income for tax purposes, regardless of whether you have an entity or not. So that’s the first mistake. I think the second mistake is, you know, Avery, you and I have talked about this before offline, just, just maybe having too many entities and not factoring in the cost of the entity.

Amanda Han [00:30:37]:
Right. So having an attorney format, having a CPA file tax returns for it. And depending on what states you’re in, there’s very high state fees. Like California, where we are and you know, Tennessee, where a lot of the investors are. Right. Just the franchise tax, franchise fee. So being proactive and finding out the ways to kind of get the benefits with the least number of entities. Right.

Amanda Han [00:31:02]:
Which reduces your cost.

Matt McFarland [00:31:04]:
I think another kind of, another big mistake we see is just as a general rule, when you’re looking at using entities, the one you want to avoid is, from a tax perspective, is to avoid using an S corporation to own long term appreciating assets. So, you know, appreciating assets could be a short term rental, could be a long term rental, but hard assets that you’re expecting to go up in Value. We don’t want to own those in an S corporation. Now you could own it in, you know, an llc. That’s a disregarded entity. You could own an LLC in a partnership for asset protection. But there can be problems from a tax perspective using S corporations to own appreciating assets.

Amanda Han [00:31:39]:
So in other words, don’t ever hold title to your short term rental in an S Corporation or C Corporations. No corporations for ownership. Now, you know, we do have investors who are like, hey, I don’t want people to, you know, I want to. I have a cute name and maybe it’s called the short term rental shop. And that’s, you know, that’s what I want people to pay, pay me for my short term rentals. And that’s perfectly fine. You know, that’s kind of where you might have a S Corp or just a different entity where you’re earning the income.

Matt McFarland [00:32:07]:
But in terms of active income, like an operating business, right?

Amanda Han [00:32:09]:
Yeah, but in terms of like the real estate itself, right. Who holds title to the real estate? It would not be in any kind of corporation. Right. Generally speaking.

Avery Carl [00:32:19]:
Good to know. I did not know that. Okay, so let’s talk about some more mistakes. Not to be negative, but I have a few questions around. When people are getting second home loans and they’re trying to meet these qualifications to, for it to be a true second home, like staying there for 14 days a year and all that. Now I personally am more of a. If you’re running spreadsheets, if you’re looking at potential tax benefits, then just go ahead and get an investment loan and don’t be in the gray area on the second home. But a lot of people do it anyway.

Avery Carl [00:32:53]:
We’re not talking about me, we’re talking about what I see other people do. So I’m out of loans anyway. Yeah, I’m out of conventional loans anyway. But what I’m trying to get, as I don’t want people to get in trouble, I’m hoping that you can dispel some things here. So if somebody is getting a second home loan and then they’re, they want to do this material participation, can you really do that, like from an audit? I’m sure you can. You can do anything you want, but you just might get. Get in trouble later. Right.

Avery Carl [00:33:20]:
So in terms of not getting in trouble on an audit, does getting a second home loan and treating it as a second home loan in the eyes of Fannie and Freddie conflict at all with this material participation and all of those benefits?

Amanda Han [00:33:36]:
Yeah, that’s a great Question we see one, you know, we see that all the time too in our clients. So you know, the easiest way I would answer it is there, there’s two different things are, we’re talking about two different things. One is the, on the loan side. The other is the tax, tax side. From the tax perspective, the IRS wants you to report things based on the facts. And what I mean by that is if you say this is a first, a primary home loan or second home loan, but you have been renting it out, right? We have rental income, we have rental expenses. Then for tax purposes you’re reporting it as a rental, right. So you’re taking depreciation.

Amanda Han [00:34:10]:
I mean all that is exactly the same. The IRS is not going to say, oh, because this was a second home loan, that you don’t have to pay taxes on the rental income, right. You don’t have to report it. So it is different from that perspective. When we do a return, irrespective of whether it’s a second home loan or investment loan, we are looking at the number of days was rented. Did you meet material participation and that’s how it’s going to be reported.

Matt McFarland [00:34:35]:
On the flip side, obviously Fannie and Freddie may have an issue with if it’s a second home loan and you’ve been reporting it as a rental property or tax return. But that’s a little out of our purview per se.

Amanda Han [00:34:45]:
Yeah, but I think like you said the 14 day lot of different lenders have different requirements, right. Some are like, okay, you have to be there for X number of, you know, a month or 14 days or whatever it is that. So, so that’s fine. You might be able to meet those roles and then also have it be a short term rental and have material participation. Right. And I don’t know, I’ve never, I’ve not heard of Fannie talking about you can’t have X number of hours on the, on the rental. So, so I think again that’s not something they care about. Just like, like the type of the loan is not something we care about.

Amanda Han [00:35:18]:
But I do want to bring up something that’s very important. It is a huge, you know, kind of misstep for short term rental investors that maybe they’re not aware of which is limitations on losses when you have a, what we consider a mixed use property. So let’s say for example, I have a vacation home by the beach. I bought, I’m gonna rent it out. But personally I’m also staying there a lot. Right. Whether it’s because I Just want to or because my loan requires me to. You have to be careful because if you’re personal personal stay becomes more significant, then your losses start to get limited.

Amanda Han [00:35:54]:
And so, you know, kind of the easiest way to, to consider that is your personal stay should be less than 10% of your rental days. So my short term rental was rented out for 300 days this year. Personal use, I want it to be less than 30 days. Okay, 10%. Right. Of 300. And the reason is because if personal use exceeds 10%, then it becomes a mixed use property. And so if I could still use expenses to offset the rental income, but my losses are going to become limited.

Amanda Han [00:36:24]:
So the IR says, you know, this is also kind of like a personal home. So you’re not going to use all the losses as business losses.

Matt McFarland [00:36:31]:
Meaning, like that strategy we talked about earlier, we’re using losses to offset your W2 income, your other income. You wouldn’t be able to necessarily do that with a mixed use home if your personal use was, was too high.

Amanda Han [00:36:41]:
Mm. And so from a planning perspective, it is something again, you know, because we’re closer to year end or even the first year. I tell clients, we do have clients who are like, oh, I bought this short term rental, it’s by the ski area. We’re going to go there all the time. But I tell people don’t use it a lot the first year. You know, be under that 10%. You can always use it a ton in year two or three or four or five. Right.

Amanda Han [00:37:03]:
Because we already took all the benefit. But in the initial year or in the year that you want to use the benefit, you want to limit personal use to less than 10%.

Avery Carl [00:37:12]:
I did not know that. That’s good to know because I know a lot of people are like, man, this because buying short term rentals, especially in vacation markets is really fun because you’re like, oh yeah, you’re like, I can go to this place and do this and that and hang out for X amount of time when the kids are out of school and do all this stuff. But you do have to be careful with that if you are trying to take those, those tax benefits. So that’s a really good point that I had not thought about.

Amanda Han [00:37:32]:
Yeah. And you can, we know we’re not saying you cannot do it. Right. It’s just when you, you want to be strategic about when you do it and what year you’re doing it. So you can get the best of all worlds. You know, you can get all the tax benefits this year. You know, just don’t use it as much this year and then next year doesn’t matter. Right.

Amanda Han [00:37:49]:
You can use it a lot as a second home or your vacation home for the summertime.

Avery Carl [00:37:53]:
Okay, well, that’s good to know.

Amanda Han [00:37:56]:
You know what was really interesting, Avery? So I think, you know, this is our first time on the podcast, right. And it was funny because, you know, I was like, Matt and I were talking like, oh, I, you know, if we had a podcast, I would have you on my podcast task, but we don’t have one. And so that’s how we started talking because, you know, for us, we work with investor clients on, you know, how to use real estate to save taxes and all and grow wealth. And the start of our conversation was actually that we had a client who was in his mid-30s, three kids, medical professional. And when he came to us, you know, he, he was ready to stop working or at least stop working full time. And, and I just thought it was such an amazing story about, you know, his journey. He only started investing in rentals like three years ago and you know, in those, in the Tennessee properties that he got from you guys in the short term rental shop. And he, you know, now he has, you know, handful of rentals.

Amanda Han [00:38:52]:
His net worth I think is over $5 million. He has, his cash flow is, you know, roughly equating to what he used to earn after taxes. I just thought it was really amazing that he’s, you know, that you guys help someone like that. You know, there’s no experience in real estate and just for him to have such financial independence now and you know, to be with his girls and you know, at the same time not really paying taxes on the rental properties that he has with, you know, all the strategies that we’ve talked about before. So, you know, Matt and I were just talking about like, wow, that’s so amazing for someone at such a young age to reach financial freedom while working full time.

Avery Carl [00:39:33]:
Oh, that’s such an awesome story. I don’t know which client you’re talking about, but now I’m going to try and figure it out because that’s, that’s my favorite thing to hear is when people, you know, maybe they’ve haven’t bought a short term rental with us in a while or something, you know, they’ve gone on with their life and to hear that they’re, that it’s brought them success and that’s, I love hearing those stories. So thank you for sharing.

Amanda Han [00:39:54]:
Yeah, I mean, that’s just one of many stories though. This one just kind of stood out to me because I think, you know, just in kind of looking at the, the, the profile of it. But we have a lot of clients who’ve invested, you know, with you guys that’s just seen like such great cash flow and appreciation and it’s really transformational, you know, like in terms of their life and the trajectory of where they were going to be able to, you know, just be smart about money. Right. Not be like this guy. Tell me like, yeah, the other, you know, my, my co workers and stuff just focused on working and not really thinking about building wealth and so.

Avery Carl [00:40:30]:
Well, we hope we can provide just enough value for like just to be a tiny little stepstone for, for some people on their way to, to financial independence. So hopefully that’s been the case for some of you out there. So I feel like this short term rental tax thing could be an entire podcast or course in and of itself. So do you guys have anything like that coming down the pipe?

Amanda Han [00:40:55]:
You know, it’s so funny because Ivory, who’s our, you know, client relations coordinator, she keeps telling me you have to have a short term rental course. You have to do something because there’s such demand for it. You know, there’s, people are coming to us saying, hey, I’m interested in short term rentals only and I don’t care about real estate. Professional. What can I do? So yes, we just are putting together a short term rental master class. It’s going to be a two day event. We haven’t, we don’t have two day event. Yeah, today event.

Amanda Han [00:41:26]:
And we don’t have the exact dates yet. But if anyone who’s interested, who are like, oh my gosh, I love these strategies, but I need to know more, right? Like tell me more about material participation. Tell me more about how do I track my hours, how do I prove those hours, how do I maximize my depreciation? Those are the kind of things that we’ll be covering. And we’re going to have a lot of Q and A because I feel like the Q and A part is where, you know, we kind of get a feel for what people’s questions are. So if you’re anyone’s interested, you can check it out and join our waitlist. Our website is keystonecpa.com str so right now it’s hidden on our website because we just put it together. So keystonecpa.com str and you’ll be able to see more information on that.

Avery Carl [00:42:08]:
Awesome. I’m gonna go sign up.

Matt McFarland [00:42:11]:
You’re gonna be one of the speakers what are you talking about?

Amanda Han [00:42:13]:
I know, I know. I’m gonna have you speak about how to do it and not have a job.

Matt McFarland [00:42:20]:
Module 2 is with Avery Carle.

Avery Carl [00:42:24]:
I would be happy to. You just tell me what you need. So thank you guys so much for coming on. We’re to the last three questions of the show. We ask everyone. First one is, what advice would you give 20 year old Matt and Amanda?

Amanda Han [00:42:40]:
Oh, man, I’m sure you probably hear this. I mean, for me, you probably hear this all the time. I think invest earlier. You know, we started fairly early, I think in our late 20s. In our late 20s. But you know, we have clients who are starting earlier than that, you know, like in their, you know, early, early 20s. So. Yeah, earlier and be just being more comfortable and scaling a little bit faster.

Amanda Han [00:43:02]:
That’s, that’s why, you know, in hindsight, that’s what I would done.

Matt McFarland [00:43:05]:
Yeah, I’d say be, be proactive, you know, not, not just, you know, starting the best, but proactive. Everything you do. Right. Just kind of seek out what you’re wanting to do and go get it.

Avery Carl [00:43:14]:
You know, great advice. And we do hear the, the getting started earlier. I mean, I think everybody says that it’s, it’s just a fact. Everybody wishes they would have started earlier. Along those same lines, what advice would you have for a new investor who’s interested in just getting started today?

Amanda Han [00:43:33]:
Someone new getting started today? I think one thing I would say is, is being focused on what you want to do in real estate. You know, when we work with newer investors, people come and say, oh, I want to do short term rentals, I want to do mobile homes. I want to maybe wholesale. And you really want to at least starting out, focus in on something. What is it that you want to do? And you get really good at it. Right? Like for you, Avery, you guys are like short term rentals and you get really good. You become the expert in it. Because we all have limited time, right.

Amanda Han [00:44:01]:
And how much we can dedicate to real estate. We have jobs, we might have kids. And so you don’t want to be looking at all the shiny objects, you know, early on, try to find out what you want to do and spend the time so you can scale that particular type of asset class.

Matt McFarland [00:44:15]:
I think for me, I’d say build a team. So, you know, find, find different people that have different skill sets that are you. You’re not good at because you don’t need to learn how to do everything yourself. And you know, build that team, talk to colleagues, talk to Other investors in your area find out what’s who they’re working with that they like and you know, kind of go from there.

Avery Carl [00:44:33]:
Also great advice. And last one, I want to see if y’ all have the same answer or different answer for this. What is your favorite book that has impacted your mindset?

Amanda Han [00:44:43]:
Are we saying at the same time? No.

Avery Carl [00:44:46]:
There you go.

Amanda Han [00:44:48]:
Oh man, I have so many favorite books, but the current one, my current favorite is who not how by Dan Sullivan. I think that’s kind of along the lines of what Matt was talking about. You know, I think as an entrepreneur and investor, I historically I’ve always just like, hey, I can do it, I want to do it myself. But that book talks about finding the hoops to do it for you. Like you don’t have to know how to do taxes, you don’t have to know how to do short term rentals yourself, but you find people like us or Avery and, and, and that way you leverage the skills of other people. So it’s about who can help you do it, not how is Amanda going to do it herself?

Matt McFarland [00:45:23]:
I think for me I’m going to go to a numbers book so because I’m a numbers person. But if, if somebody’s out there that you know, wants to kind of wet the, wet the financial juices if you will, and see what the, the wealth impact could be of building real estate. The one that I remember was the Complete Guide to Apartment Investing by Steve Burgess, I believe his name is. And there’s so many spreadsheets on there and showing what forced appreciation can do for your wealth building of buying, rehabbing, selling, renting, all that good stuff. It was, it, it was eye opening for sure.

Amanda Han [00:45:57]:
For the spreadsheet people.

Matt McFarland [00:45:58]:
People, yes, for the nerdy people.

Avery Carl [00:46:03]:
Awesome. Well guys, thanks so much for coming. If all the listeners want to find out more about you, follow you etc. Where can they do that?

Amanda Han [00:46:11]:
Yeah, our website is the best place to find us. Keystonecpa.com so you can find, you know, information about our upcoming short term rental master class Tax Masterclass. And also we have a free tax tools that free downloadable tax tools where actually one of our ebooks is on how to create massive tax savings through short term rentals. So it’s for free on our website. You, you know, you guys can download it if you want more tax strategies.

Matt McFarland [00:46:38]:
Yeah. Thanks so much for having us, Avery.

Avery Carl [00:46:39]:
Yeah, thank you so much for.