Ryan Carriere, co-host of the Tax Smart REI podcast and a Real Estate Tax Strategist at Hall CPA, explains the advantages and intricacies of real estate professional status and the short-term rental ‘loophole,’ highlighting strategies for both active and passive investors to optimize tax efficiency.
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Transcription
Debunking Tax Myths
Ryan Carriere: People are talking about tax this and tax that and it’s man, there’s so much garbage out there. You set it up this way. That makes no sense. Not only do I have to unteach you and then reteach you. Now we’ve got to undo all these things that you set up and then reset them up correctly. You actually should be doing this and now we’re helping them unwind things and then reset up doing things better.
Proactively is going to be way more beneficial long term. It seems like you’re saving money in the short term, but at the end of it’s just throwing money away.
Ben Fraser: What the options are, because I think a lot of people that especially don’t have a confidential estate background, but I’ve started investing passively don’t even understand if it’s being passive or active, how that impacts their tax situation.
Ryan Carriere: The point is that you can see. Separate your investments into, Hey, everything over here. That’s passive should theoretically maybe never get taxed. It’s not going to offset your W2 and business profits. If I continue this ball rolling the time that it could stop is if you basically stop investing and you stop generating new losses.
Introduction to the Podcast
Ben Fraser: Hello, Future Billionaires! Welcome back to another episode of the Invest Like a Billionaire podcast. Got a great episode today. Anybody that has been investing in real estate passively and maybe considering trying to be a little more active to get some advantages of the tax codes. We brought on Ryan Carriere of Hall CPA.
They are a hundred percent focused on real estate investors. He talks about advantages you can take as a real estate investor if you’re just doing passive investment, but then also talks about a few different strategies for people to consider that may not want to be full on real estate investors.
Investors are their primary source of income, but can still get the benefits of the tax codes. We talk a lot about real estate professional status as well as the additional strategy that I was even unaware of. So this is really neat on my short term rentals. So you definitely wanna check this out.
It’s a great time to be thinking about just maximizing tax savings before the end of the year here. And I think you’re really gonna love this episode, so be sure to listen to the whole thing and I’m sure you will get a lot out of it. Thanks so much.
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Meet Ryan Carriere of Hall CPA
Ben Fraser: Ryan, thanks for coming on the show. Appreciate you coming on.
Ryan Carriere: Yeah. Thanks for having me, Ben. Appreciate that.
Ben Fraser: Yeah. We’ll give a little bit of background just on you and on Hull CPA and kind of what you guys do is core business.
Ryan Carriere: Yeah. So I’m Ryan Carriere CPA. I am in Minneapolis, Minnesota, a suburb here in the Midwest. It’s currently a beautiful day.
It’s actually going to get up to 92, which is hot here.
Ben Fraser: Oh man. Yeah. I’ll take that. Yeah.
Ryan Carriere: All right. Thanks. But yeah, born, raised here, school here all those things. Yeah, I got my CPA many years ago and then just after college went through various accounting and then CPA firms.
I’m also a real estate investor myself. Not a massive portfolio holder. I think we have about five properties, most of those partnerships. Single families, multifamily all the way up to a fourplex is the kind of size we have mostly bought in 20, let’s see, 2017 to 2022.
I feel like that was a good year to be buying with low interest rates, things like that. But certainly very different now and actually in conversations with some of my partners to sell. Some of those potentially this year, if interest rates drop, and we might talk about that here on this episode.
But yeah, basically here, CPA I’m a senior tax advisor like you said, been at the firm for several years. The firm itself has been around, I think, since Late 2015. So about seven eight years or so whatever that comes to the math but yeah, we’re whole CPA brand hall is the founder kind of managing partner but we’re also known, like you said, as the real estate CPA.
So two parts to that. I just like to break it down. So CPA, we do tax consulting. We do tax preparation, like filing taxes with the IRS and accounting services like bookkeeping. But the real estate side of that, like you said, too, we specialize in just real estate tax. Really, it’s, no one’s going to come to us who doesn’t own properties, or, hey, I’m mostly focused on being a dentist.
Can you help me there? Ah, we’re CPAs, right? Just like you might need a, I always like to use the example, like an eye surgeon. You might need to get surgery on your eye. Okay you go to an eye surgeon. You might ask some other questions about medical things you’ve got going on, health things you’ve got going on.
They went through residency. They went through medical school. But their focus is primarily on eye surgery. So you’re going to ask them questions specific to that. That’s how I see our firm. You’re going to come to us when you’ve really got questions and pain points around your real estate and tax, questions and solutions you’re looking for to be optimized and efficient, that’s really where we shine and that’s where our specialty is.
Ben Fraser: Got it.
Understanding Real Estate Tax Benefits
Ben Fraser: So talk a little bit about that a little more. Cause I think a lot of people, as we’re getting newer to investing in real estate, whether passively or actively, we’re actually directly owning the properties and managing them. Everyone hears about the great tax benefits of real estate, right?
But you really have to have a basic understanding of what you’re doing, how you’re doing it to be able to take advantage of those benefits. And from my experience working with. The right CPAs that understand those nuances is really important. So talk a little bit about, maybe where, some CPAs that may say, yeah we work with real estate, investors, with your guys, Real clear focus on that.
How does that kind of help you and help your clients with that? You know, a very narrow focus.
Ryan Carriere: Yeah, so most other firms Are what we would call generalists meaning they maybe have a few industries where most of their clients are in these top four industries, that’s great. We’d still consider them generalists because they’re working on all sorts of things.
Whereas our firm, we literally will only take people who do real estate period. They might have other businesses going on, right? Hey, maybe they’ve got a small consulting business or they own a construction company. They have an architect business, whatever kind of supplementary thing. But the main thing that they come to us for is their real estate.
So it’s this generalist versus specialist if we want to make distinctions there and make those two categories and so what we have is essentially the whole firm Greatly understands in so much detail All of the nuances within the code and what allows us to be a specialist is that we can just narrow our focus Into becoming experts in just these things You That means one, we get way more repetitions than a generalist.
We have a lot more questions that specifically come through for this type of industry, real estate, whereas, a general, a generalist is going to maybe get those questions every once in a while. So it’s Hey, I got to refresh myself on this, or, Hey, I think it works like this, let me get back to you.
And then they don’t or something like that, where we just have all the repetition. And we have the time to really just nail down and look at even court cases, for example. Something we’ve done really well is review dozens of court cases just on real estate. For example, just to help us understand not only what does the code say, what does the regulation say about real estate, what does the tax court cases look like, what do the audit technique guides look like from the IRS agents as they’re going through audits.
So it allows us to get really deep With a whole lot of repetition and that’s what all our firm does. So just the amount of confidence and comfort and the number of questions that we’ve got in just a very deep one section industry like real estate allows us to be so much better than the rest of our competition.
That’s giving kind of general advice that just can’t compare.
Ben Fraser: Yeah.
Active vs. Passive Real Estate Investing
Ben Fraser: So do you guys work mostly with the primary business has to be real estate or it can be also past investors as well?
Ryan Carriere: So a little bit of a nuanced question. When it comes to and this can maybe be part of where we talk about, Some of the tax rules and things like that in a second But really ways that we’re able to help is for people who are more active Because then we can be thinking about things like real estate professional status or the short term rental loophole high cost segregation studies actually help to offset that active or w 2 or business profit that you’ve got outside of just real estate So really the ways we can help most most effectively and more ideal clients for us are those active investors.
It doesn’t mean we can’t do anything with passive investors, it’s just a little bit more limited, especially if they’re like, Nope, I’m never going to be active. This is all I’ve got. Okay. Here’s a bunch of passive losses and you can use them when you sell the property or when your properties actually start making a profit.
So it was just a lot less tools we can have, especially within real estate. Again, with those passive investors, we could be talking about things like, Hey, you’ve got this other business here. Okay, what does that entity structure look like? Should you have an S corp? Should you have a C corp?
Should it just be an LLC? So we can talk about things like that. We could also be thinking about, Hey, are you paying your kids? How does that play into your business and what you’re doing there? So there’s other things like that we can explore. But it’s not what I would call the bread and butter of helping an investor like an active investor.
Ben Fraser: It makes sense. Yeah. Cause you’re not going to, we can talk a little bit about cost irrigation and these kinds of things, but effectively, obviously if you invest in real estate, you get some non cash tax losses that you can use to shelter other income. But if you’re a passive investor which means you’re just investing in syndications or funds and not have any involvement in the day to day.
You’re limited in how you can use those losses against your other income, right? So it’s segregated into different buckets, so to speak. And if you’re, you got a strong W two that you’re earning a strong income from investing in real estate as a past investor, may not necessarily help protect against that income.
And so what you’re saying is because if you work with more active investors, you have a lot more flexibility in how you can use those losses and how you can protect other types of income. Is that? Is that right?
Ryan Carriere: Exactly. Yep. There’s just so much more we can strategize about. That’s how we see ourselves tax consulting. That aspect of the firm is like a strategist.
Okay. You’re going to go buy this property. Okay. Passive, non passive. If you want to make it non passive, meaning active, that’s the, maybe the industry terms active versus non passive are the same thing. If we’re going to do that, how can we do that? When might we do that?
Is it a thing this year? Is it a next year thing? Is it a five year thing that we’re doing? Okay, if we’re going to do it next year, let’s get you well versed in how this is going to look as far as meeting those requirements. And just being a lot more planning and proactive on the front end, instead of Just come back to me as your tax preparer and let me know if you met it.
So it’s very proactive in our approach and in planning for that and getting the education in front of our clients to say, Hey, here’s how this works. Sometimes we have to actually un-teach bad things. Social media, right? People are talking about tax this and tax that. Here’s how you do this, and it’s man, there is so much garbage out there unfortunately.
So then we have to un-teach, and then re-teach. Or, it’s, hey, you thought you could do this yourself, right? DIY things out there. You set it up this way. That makes no sense. Not only do I have to un teach you and then re teach you, now we’ve got to undo all these things that you set up and then re set them up correctly.
Or, hey, you’ve been having this sort of entity structure that doesn’t make any sense, you actually should be doing this, and now we’re helping unwind things and then re-set up things. So anyway, the point is that basically doing things proactively is going to be way more beneficial long term.
It seems like you’re saving money in the short term, but in the end it’s just throwing money away at least from all the clients I’ve helped. I’ve helped about 250 of our clients over the last couple of years.
Ben Fraser: Okay. Wow. Yeah.
Strategies for Maximizing Tax Savings
Ben Fraser: What I like to do is set the framework of, what the options are, because I think a lot of people that especially don’t make conference a background, but I’ve started investing, passively don’t even understand there’s been passive or active and really how that impacts, their set tax situation.
Yeah. I’d like to maybe start with LPs, right? If you’re investing in real estate, how do you view or how should you view those investments and the potential losses from those? How can those get used against your income? And then I would like to shift to active investors, because I do actually think they’re this middle ground, right?
We can talk about the STR loophole and some other things to see if you can go and get rep status, as a household. It really unlocks a lot of things, which I think is a pretty powerful concept. But before we get there, let’s talk about if someone’s just saying, Hey, I know I never want to be involved.
I don’t want to run short term rentals. I don’t want to own any long term rentals. I don’t want to be involved in the day -to -day. I just want to be a passive investor. But I’m newer to this. What do I need to expect? I’ve heard it’s a great tax shelter, but there are limitations. So talk about, What limitations are, then what are the benefits as an LP if you’re investing in passive real estate investments?
Ryan Carriere: Yeah. So I’ll split it up for the passive people, two buckets in my head. One is the people who are like just their first syndication and what you can do, just bifurcate one individual, investment, one syndication is that effectively. You can be using depreciation in there for, probably these passive losses to then offset in shelter, any sort of passive profit that you might not have gotten from, buying, being able to use depreciation.
Okay. So we’re just looking at one property. You’re basically reducing any sort of taxable income because you’ve got things like depreciation. Great. We’ve now sheltered profit there. Great. It’s siloed and that’s that. Now, the other aspect of it though, is for people who maybe have multiple.
Investments or properties that are passive. What gets interesting once we have multiple is that we can now be doing this timing game. So let’s maybe use a simple example and I’ll try to make this fast. Let’s pretend that we’ve been making an investment this year. It gives us a 50, 000 loss LP investor.
Okay. Let’s then say we fast forward five years from now. And that investment is now going to sell, right? They’re going to sell it. They’re going to whatever. I’m getting all my money back plus some capital gains and depreciation recapture, all of that. So now if along the way, you’ve been over those five years, maybe doing even just one LP investment every single year, you have been accumulating.
Let’s just assume every time they’re doing a cost seg and just accumulating this big passive loss for you every year, you’re getting new losses. So again, it’s sheltering the profit from those individual properties, but now we’ve got this big event in year five. So now what can happen is, just say plainly, passive losses can offset passive profit, okay, or gain.
So the point is that you may have this kind of accumulation of losses. They’re not offsetting your W 2 or business profits because it’s passive. We gotta make that distinction first. But the point is that you might have a big sale and now you basically could be paying no tax. In that year, if you’ve got all these losses to neutralize any sort of year that you’ve got a big gain, and then what happens, you’re five, you then take those proceeds.
And if you can just invest it into another deal and get more losses. The point is that you can separate your investments into, Hey, everything over here, that’s passive should theoretically maybe never get taxed. It’s not going to offset your W2 and business profits, but it can essentially be tax free.
If I continue this ball rolling. The time that it could stop is if you basically stop investing and you stop generating new losses. So you’ve gotta be careful there. Or if you have, say in one year you’ve got multiple sales that all occur for some reason. Okay, you might have something there. You just don’t have enough losses to cover that.
But then if you, again, reinvest, we got more losses moving forward. That’s how we can play this like timing game if we can basically use passive losses to offset passive gains.
Ben Fraser: Yeah, I think that’s a super helpful way to describe it. And I think some of the challenges for some people that are getting started is that first investment or first few investments, you’re starting to generate losses and say, it’s like a more value add, business plan to where you’re not getting any income from the investment for the first year or two.
So you’re not getting any income that you can actually shelter. You’re getting these losses, but you can’t use them yet. So it can take some time to build up that snowball. But to your point is as you’re consistently disciplined in making those investments and reinvesting the earnings and using those losses from the new investments to protect, against protect, but shelter against the sales of older assets that can create this bigger snowball you’re talking about.
As long as you’re continuing to reinvest, is that an accurate way to summarize?
Ryan Carriere: Yeah. And essentially just the big picture tax concept, passive losses can offset passive gains or profits. And the misconception for most CPAs is that, oh, I can only use the losses from that property to offset the income or gain from that one property.
That’s not true. So you can use all the losses you have, even if you’ve got five properties and you’ve got one big sale on one property. All of this pool of losses, even if it’s across five properties, could be used to offset that one property’s gain, for example. So it’s this pool of passive losses and a pool of kind of passive profit or gain.
Ben Fraser: Love it. So yeah you have, it’s siloed to passive, but it’s not siloed to the individual property that you’re generating losses from. So if you have a real estate investment that produces losses for you, you’re not generating income on that, but you say a stock portfolio with Dividend income would be considered passive losses or are there other types of non real estate income that you could be generating that could be offset by that.
Ryan Carriere: The other kind of passive would be like a passive business. Those are, I’ll just say, fairly rare. I’ve seen. But stocks, dividends, interest income, that’s what the IRS would call portfolio income. And that actually would be non-passive. They’d actually do consider that active. So that wouldn’t impact the passive losses that we’re talking about.
Ben Fraser: Got it. Okay. So that, that, that would be a separate bucket. Now on the real estate side, obviously you have operating income. From a property and maybe distributions from an LLC. If it’s a syndication then obviously you have capital gains if you sell the property. So are both of those groups similarly.
The losses that I get from an investment can protect against both operating cash flow as well as a capital gain or those also separate several buckets.
Ryan Carriere: Nope, those are the same. Yep, you could use that.
Ben Fraser: Okay, so you can actually use the losses along. Without actually selling a property if you’re generating income from the assets.
Makes sense. Okay. So let’s shift a little bit to yeah.
The Hybrid Investor Approach
Ben Fraser: I think people understand what a full active real estate investor is and, going and doing as your primary business. And I think I want to shift more to the hybrid. I don’t know if you would consider yourself a real estate investor, and you have some investments and, I’m assuming you probably would try to claim real estate professional status. And, but you’re also doing this as a business with the CPA firm. So this seems like this kind of hybrid area, right? Where it’s Hey, someone’s. They don’t want to be a full time real estate investor.
They still like doing what they’re doing, but there’s options to bridge the gap, so to speak, to get into the active side, to get those active benefits. Also with the spouse too. So talk a little bit about some of the options that are available for those that are thinking, Hey, I like real estate.
I wasn’t planning on being a real estate, as a primary profession, but Hey, maybe my spouse likes doing property management or running some short term rentals or just getting more involved in the portfolio that we’re building or whatever. So talk about some of these kinds of hybrid areas that are, you can still be having a W2 income, you can also get the benefits of the tax code as an active investor.
Ryan Carriere: Yeah. So for the active side, using losses from rental properties to actually offset that W 2 or business profit. Essentially, we’re talking about either REPS, which is just the acronym for real estate professional status, or the short term rental loophole or strategy. Some people don’t like the word loophole, and so be it.
But the point is, those are the two strategies that we can use to move losses that would normally be passive, right? For LP investors to now actually be considered active or non passive to offset that W2 and business profit. So just to comment on myself I would not meet it personally because one of the tests for real estate professional status is you have to spend more than 50 percent of your time in a real property trade or business.
But you mentioned spouses. So here’s the thing. So my wife is currently staying at home. We have our daughter due in a month from today.
Balancing Tax Benefits and Family Dynamics
Ryan Carriere: So she’s staying at home taking care of the kids, but the point is She could potentially, because she doesn’t have necessarily what the IRS would call like another job to provide personal services because she’s staying at home with our family.
She could potentially not have that issue with the 50 percent of her time, but she would need to accumulate 750 hours in a real property traded business and then make sure that she meets material participation in our long term rentals. So she could say that your comments are on the spouse thing.
We could do that. Here’s the thing. My wife does not want to do that. There’s tax things, right? That is good and beneficial for tax savings. There’s also family and marriage dynamics that don’t make sense. My big comment I just want to make to people, and we talk about this almost every episode on our podcast TaxSmartREI, is that do not let the tail wag the dog.
Okay. Do not let the tax savings dictate and be the primary focus for why you’re making investment decisions or what you’re going to buy. Okay. That’s one kind of key, I don’t know if you want the tenant or principle that we have. We have seen people do that and then get frustrated and regret those decisions because they got into a bad investment.
So that’s just a big picture comment. But again, you could do that.
Real Estate Professional Status for Spouses
Ryan Carriere: If you’re listening to this, you’re like, hey, I’m working full time. My spouse doesn’t have another full time job or maybe they’re working 10 hours a week. They’ve got some little side business Hey, you could pursue that. You just need to make sure you meet all the requirements.
Okay, so that’s absolutely a possibility for real estate.
Ben Fraser: One little note on that.
Household Perspective on Tax Benefits
Ben Fraser: So in this situation if your wife was qualified reps that would If you guys filed jointly for your taxes, that would actually your W 2 income would be sheltered from those losses, right? So it’s the household perspective, not an individual income perspective, right?
Ryan Carriere: Correct. Yep. And that’s actually something we’ve seen other taxpayers mess up on. They will assume that it’s like they’ll have a partnership between the husband and wife. And 50 percent will go to the husband. 50 percent will go to the wife. They’ll say, Hey, the wife met real estate professional status.
So only her losses can be non passive. That’s not what the code says. So it’s the whole married filing joint couple, both aspects of that can all be considered non passive. Even if, for example, I’m the only one working full time in a W 2 type job, all the losses we generate then can offset that income. Absolutely.
Ben Fraser: Yeah, it makes sense. And I appreciate your comment too, but I do think so. Okay. This is a very powerful concept in the tax code that’s perfectly legal and can be pretty, pretty impactful, but it’s not a magic pill. You’re basically doing this to create tax savings, but if you make a bad investment or you’re doing something you hate, the juice probably isn’t worth the squeeze and, tax savings on a bad investment, actually, that could result in a bad tax bill.
A loss or something is probably putting you in a worse position than just not doing it at all. So point well taken. I think a good point to make, I think about some friends that I have that are business owners and do very well, and make a lot of money. And the husband was W2.
He had a great job, mid level management. They started buying real estate just with the income they were generating. And, he decided, they ran the math and talked with the CPA. And Basically, for him to leave his W 2 and become a real estate professional by having material participation in their few properties they had was actually going to save them substantially more money than he was making as a W 2 earner.
And in that situation, he actually got to leave a pretty hefty hour work week that he could, then move over to the real estate to save time and save money so that’s a unique situation. That’s not everybody, but I think it’s, he wasn’t even aware it was possible and probably would have done it several years sooner if he hadn’t known it.
Ryan Carriere: Yeah, that’s very common for people to come to us and help them evaluate that. I think people need to look holistically. Not only just okay, how many hours am I putting in my W 2? What am I making after tax on that? What are the other tough benefits that I might be giving up?
Is there like health insurance or a 401k? You got to look at the whole compensation package. But for one spouse making a lot and if the other spouse isn’t making a lot, If you’re in the 37 percent bracket, yeah, that can make a lot of sense to make a switch like that. But the other thing too, maybe for your friend’s example, is that he actually might be happier and be able to spend more time on family or taking care of other things and whatever.
So it’s not only just saving taxes, but then you’ve got the intangible of Better just work life balance and happiness and especially the triple benefit Maybe you want to call it a win is if he actually likes the work of being more hands on, right? Maybe he actually switched to doing more renovations himself or talking more with tenants or whatever. Now that’s a total win, right?
You’ve got the taxes, you’ve got the time and you’ve got just the enjoyment of the work that you do, right? We’ve only got so much time here to work. We’re going to all retire at some point or just be incapable to do it. So like enjoying the work while you can, that’s a triple win to me. So that’s awesome.
Ben Fraser: Yeah, that’s awesome. Yeah. And is that something that you guys can help with clients assess, this, does it make sense? Here’s what the numbers say, but here’s the considerations that you got out. Think about and work through some of those. Is that something you guys, I’m assuming, help clients with?
Ryan Carriere: Yeah. Every once in a while, people want to evaluate that. It does become difficult if people are making like the same dollar amount. Who’s going to leave? Okay. One of you is more miserable and wants to go into real estate. I’m watching the time back. Okay. That’s more clear.
So sometimes it’s literally like we don’t care if it’s tax savings. We just need a break. And if it means we get to offset just the one spouse’s W 2 and business profits, great. That makes sense.
Ben Fraser: A net neutral is a win because you get the intangible of just better quality of life. So absolutely.
The STR Loophole Explained
Ben Fraser: Talk a little bit about the STR loophole or strategy for those who don’t like loopholes. What that means.
Ryan Carriere: Yeah. So it’s essentially doing a very similar thing to real estate professional status. And just to say it again, plainly for listeners, essentially you’re taking what would normally be passive losses from rental properties.
And now by meeting the real estate professional criteria, Moving them to that active or non passive bucket. So the short term rental strategy does the same thing. The main difference is, number one, the requirements. I’ll get there in a second. But number two is the type of real estate we’re talking about, right?
It’s called the short term rental loophole. So this is only for short term rentals. So what makes a property a short term rental? With the IRS regulation we’re talking about, It would mean properties that have an average stay per guest for the year of seven days or less. Okay, so think of a pretty traditional VRBO, Airbnb vacation rental.
It’s mostly rented on the weekends. That is going to be what we’re looking at. And just the one comment i’ll say here some people think oh, it’s you know, 7. 1. Am I good enough?
Material Participation Tests
Ryan Carriere: No, you’re not that’s above seven like you’re not gonna fly Literally got to be seven point zero zero zero zero zero zero you get the point right or less Okay, so it’s got to be less than seven That’s criteria one the second criteria, which we didn’t really touch on for real estate professional status but is meeting one of the material participation tests.
So a lot of people just talk about vague terms like, Hey, you gotta be involved in your properties. Okay. What does that mean? It means according to the IRS material participation. So essentially there are seven material participation test options. The two that we really focus on as a group are meeting for 500 hours.
So that comes to, if you’ve got a full year, about 10 hours a week, or second 100 hours. And more than anyone else. Okay. So those are the two material participation tests we look at. And just to say it again it’s an either or, okay. You’ve still got to meet test one, which is a seven day average, but then you choose one of the material participation tests.
If you’ve met both criteria, you’ve met the short term rental strategy for that, the short term rentals. So material participation we could get really, I talk about this all day So I get really in depth if we want but bottom line comments to make for most people out there like my clients They’re really just shooting for that 100 hours minimum and making sure it’s more than anyone else Because it’s really hard to do with even just one to two properties If you’re a full time W 2 employee or business owner to really get to 500 hours, it can be really tough to do that.
So they’re just shooting for that. What kind of seems like a lower threshold test. So here’s an example. So I had someone, so many people have done this. I’ll just use one person in my head. Someone who bought a short term rental at the end of 2022. That must’ve been basically bought in Florida. Had a few stays that gave them an average day, less than seven for 2022.
They flew down multiple times. Took care of a lot of things, managed the property remotely in Florida. And they got, I think it was something like 150 hours. The second closest person to them was like their cleaner who got 75 hours. So they were good, right? So that’s an example of meeting it, but only having to put in 150 hours for the entire year.
And they did that all in December and November. So the point is like you, you can meet this much easier, which I think is your using of the word like hybrid. It’s not a full blown real estate professional where it’s 750 hours. Holy cow. That’s a lot. It’s really this is much simpler and the barrier to entry is like here.
Real estate professional status is like way up here. So a lot of people in those situations choose this. Because of the lower barrier to entry.
Ben Fraser: That. Okay. So these are two separate things. So this is not a subset of wraps. This is a whole separate part of the tax code that you can qualify for. Wow. Okay. I don’t think I’ve even heard that.
This is a separate thing. So are there any limitations on saying someone’s working W2, but they also are able to put 100 hours in and meet the material participation test? Does that allow their W 2 income to be viewed as or not be sheltered from the tax losses or how does that work?
Ryan Carriere: So it can. So let’s say for example you’ve got a W2 earner making just say 500 grand. Okay. They’re in the 30 something percent tax bracket. And let’s say in 2024, they’re going to implement this. And they produce a say 100, 000 loss with all their losses from the property in that first year. Now, instead of paying tax on the full 500, they’ve now got this additional 100, 000.
So basically offset that 500, 000. Now they’re only paying tax at 400, 000. Okay, at max. So now we’ve inserted a huge amount of losses. If they do not meet the short term rental strategy in our example, they’re still paying tax on the 500, 000. And this 100, 000 of losses we’re talking about just sits here, it stays passive and can’t touch the W 2.
Ben Fraser: Got it. But if they can meet this threshold, the benefit that you get from being in REPS, which is your earned income or other types of income can get advantage of these losses, you can actually do that with this lower barrier to entry method. That’s accurate.
Ryan Carriere: Yep. And just the nuance is that you’ve got to have short term rentals.
So some people will come to us and they’ll say something silly, which is Hey, I’ve got these long term rentals and I just want to meet the short term rental strategy. Okay. Where are your short term rentals? It’s like you’re trying to mix something together that can’t tell you this.
So it’s like you actually got to have short term rentals.
Ben Fraser: Yep. So an average of seven days or less. No wiggle room there. Are there any limitations on self dealing? Like I know if you use a self directed IRA, you can’t. live in a property that you use to purchase funds. Can you stay at the property if you’re trying to claim this or are there any kind of limitations there? A little bit of an aside, but.
Ryan Carriere: No, good. It’s a good question because if people are just Hey, I’m going to go do this. And they don’t talk to someone who understands it. They’re going to get so many things wrong. So here’s some things that can be wrong. Number one would be letting a family stay there or letting friends stay there for free.
Or you staying there yourself or number four would be you swapping stays with another short term rental owner. So there, there’s so many ways that, yeah, you need to be careful of self dealing. Essentially, just to keep it as simple as possible, just put it on the market and let someone else stay there.
If you start trying to get too creative with friends staying there for free or family staying there at a big discount, anything like that, the IRS is going to see that as personal use of the property. And those aren’t going to be actual rental stays as far as calculating that average of less than seven.
So yes, you have to be very careful. Don’t try to mess with something like that would be my advice.
Ben Fraser: Interesting. Okay. Yeah.
Managing Short Term Rentals
Ben Fraser: And then one of the things, so if you have say a property manager helping, but you’re still involved in, other parts of the property does that, do you have to be the property manager on them or just, they have to then provide an account of their number of hours and you just have to have done more than that?
Ryan Carriere: The latter. Yep. So the tricky part there with the property manager is it is going to mean you probably have less time. Unless you’re doing a bunch of renovation and improvements on the front end with the property, which is very common for short term rentals. You buy a single family home and you go renovate a bunch of stuff.
But if you have a property manager you’ve got less time But now you’ve got someone else who has more time So what I would generally recommend to people is can you just manage it yourself? Especially that first year especially the year that you’re trying to get this material participation but second if not You Why do you need a self, why do you need a property manager?
What are you really trying to solve for? Because some people just say, I just want someone whose boots are on the ground. Okay, why do you need to call them your manager? Now that looks bad. Why don’t you just have someone that you hire like a handyman to say, Hey, I’m just going to message you once a month.
Can you just go pop into the property and make sure things look good? Okay, that’s totally different. Or Airbnb and all these places you can do co hosting. Why don’t you just get like a co host if the issue is more so you just don’t want to be responding to guests all the time and their questions.
Okay, that’s a co host. They’re not a full blown property manager, right? So it’s really just asking yourself, why are we trying to get this property manager? Because if we just get this one little thing here and a virtual assistant or something, that looks way better for you if you’re ever audited.
And you say, oh yeah, I just had a virtual assistant help me with this. They got 50 hours, I still had 125. Okay, you’re good. So just be careful of what you are really after and what are you trying to sell for?
Ben Fraser: Very cool. Okay. Last question, Ryan.
Election Year Tax Implications
Ben Fraser: Obviously you’re in 2024. We’re in an election year. At this point, it’s pretty wild.
It’s happening. And It’ll be very interesting to see what happens. I don’t think a lot of people have a crystal ball, obviously, but let’s play both scenarios. What do you think? If we have interest rates dropping and obviously maybe changing of the guard, how does that potentially impact some of the tax code towards real estate in general or not?
Ryan Carriere: Historically, if we’re looking at, just Democrat Republicans basically Republicans have generally been a little bit more real estate investor friendly as in bringing back things like tax cuts and jobs act in 2017, a hundred percent bonus depreciation came back with the Democrats and their side.
Historically, what we’ve seen is taxing the rich and removing or proposing things like removing the 1031 exchange, or if we keep the 1031 exchange, it can only be up to this amount of gain. There’s been talk about if you make a hundred thousand dollars or more, An additional 4 percent tax on anyone who makes over a hundred thousand from the Democrat side.
So there is a, to me and all of my colleagues probably a pretty stark contrast in the tax implications. If we have either side, when, if we just look at real estate investors which are our clients and a lot of your clients are pretty favorable with, would be our understanding of the Republicans being nominated into the white house.
And pretty what we’d say disfavorable just on the tax policy side if the democrats were to win, obviously, we’ve got three three parts to our political system That’s just one part But as far as the agendas and kind of people thinking hey We’ve got power to move things these things along or get these bills passed very stark contrast I would say as far as who’s going to be more benefited For real estate investors in the tax situations.
Ben Fraser: Yeah. To play devil’s advocate though, a little bit the past four years, we’ve had a Democrat presidential arm and there hasn’t been a whole lot of like super negative things. I feel like it’s been proposed and you’ve taxing unrealized gains, other kinds of crazy stuff, but for the most part, this stuff’s been around in the task for a long time and doesn’t monumentally shift.
With the changing of a guard in general, right? Is, would you expect, if we continue with the democratic presidency that some of these things that have been proposed to actually get through, the system or obviously partly that depends on Congress and all that, but do you feel like there’s more risk if we continue on with another 4 years as Democrats or it’s still, hey, they’re still pretty limited in what they can do and all these, ideas that they have.
Yeah. Only a fraction of them ever make it through to become law.
Ryan Carriere: I think that last sentence is pretty true. Only like a fraction if any ever really gets changed. The tax cuts and jobs act was very significant as far as real estate investors because of things like 100 Bonus depreciation that was massive.
The other big thing there was opportunity zones. That was a Completely new thing, right? Similar in a lot of people’s minds to something like a 1031 exchange where you’re deferring these capital gains and things like that when you’ve got this gain But at the end of the day, yeah it’s very limited on either side, generally, and we’ve gotta kinda have it move through all three parts of our political system.
So yeah, it’s every party’s gonna kinda say, here’s what we do. At the end of the day, it might be just a couple things. And the comment I made about the 1031 exchange, for example, That has been something I think goes back like decades as far as other politicians trying to get rid of that.
So it’s who knows? So you have a very valid point. Even if we just look at these really objectively, here’s their list of things. And it’s Oh, this one seems very favorable. This one seems very unfavorable. Only a small fraction might actually get through at the end of the day.
Who knows? Like you said, as far as what’s changed so far even with Biden being in office the last four years, it’s certain things have changed a lot, yeah. But very minimal has necessarily changed in just the taxes.
Ben Fraser: Awesome.
Conclusion and Contact Information
Ben Fraser: Ryan, thanks so much for coming on, man. This was a really great conversation.
I’m sure our listeners will pick up a lot of good golden nuggets here. What’s the best way for people if they want to reach out or more about you and your firm and how can they do that?
Ryan Carriere: Yeah, so people can find me on LinkedIn Ryan Carriere CPA you’ll see my face, you’ll see all CPA kind of being on there.
If people are interested in becoming a client of ours, you can go to https://www.therealestatecpa.com/rc RC as in Ryan Carriere. You can fill out a brief little form if you’re really serious about working with us. And then we can see if we want to set up another call. Otherwise LinkedIn, I post on there every weekday every day I work lots of content and things like this of the short term rental strategy I go even more in detail on, real estate professional status, cost segregation studies, entity structure, all sorts of things like that So if you want more, this conversation find me on LinkedIn.
I read there a lot.
Ben Fraser: Awesome. All right, Ryan. Thanks so much, man. Really fun!
Ryan Carriere: Thanks, Ben.
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