Benefits of Short-Term Rentals and Cost Segregation

Short term rentals can benefit property owners in several ways especially when combined with accelerated depreciation strategies.

Short term rentals, such as those offered on platforms like Airbnb, can generate more income than traditional long-term rentals, but also more involvement from the owners and managers.

Short-term rentals can command higher nightly rates, especially in popular tourist destinations or during peak seasons.

Short-term rentals can often be rented out more frequently than long-term rentals, as they are typically in high demand. Vacancy in a long term rental is never fun.

This can result in a higher overall occupancy rate and greater rental income for the property owner.

The issue with greater income is that it also comes with higher taxes, and that is where Cost Segregation comes in.

Cost segregation is a tax planning strategy that allows property owners to accelerate the depreciation of certain assets in a property, such as fixtures, appliances, land improvements and certain specialized electrical and plumbing. By doing so, property owners can reduce their taxable income and increase their cash flow in the short term.

This can be especially beneficial for owners who are directly involved in the property. Being involved in managing a short term rental, dealing with bookings, cleanings and repairs can make otherwise passive losses, become active. The power to this is that Depreciation can then offset any other income you or your spouse might have (if filling jointly).

A practical example would be an attorney who purchase an 400K short term rental property. If he manages the property, puts in at least 100 hours per year and more time than anyone else, he can now use depreciation deductions to reduce his rental income and most likely produce a loss. That loss can now be used to offset Active income such as W2 wages.

Overall, if you are paying income taxes and managing short term rentals (even if you are not a Real Estate Professional for Tax Purposes) Cost Segregation should be something to look into as it can greatly reduce your Tax Liability freeing up cash flow that can be put to use in other areas.

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