How are taxes calculated when renting only one room in your home for Airbnb? How are the expenses calculated, such as cleaning fees, lawn care, pest control, maintenance, snacks, and other amenities offered to guests?
In this episode of Tax Tuesday, Toby Mathis and Jeff Webb of Anderson Advisors discuss calculating Airbnb taxes and answer additional tax-related questions.
Submit your tax question to taxtuesday@andersonadvisors.
Highlights/Topics:
- What are your thoughts on using a nonprofit that is funded with cryptocurrency? The cryptocurrency will need to be converted to cash and appraised when donating it.
- When purchasing a self-storage facility, should it be in it’s own LLC and can it be combined in an LLC that already has a property within its entity? It’s recommended to put it into two LLCs: Property in one and business in the other. Always separate them.
- How are taxes calculated when renting only one room in your home for Airbnb? How are the expenses calculated for amenities offered to guests? Depends on if it is a rental or for a business. There are two kinds of expenses that need to be calculated – direct (only applies to specific rental space) and indirect (utilities, mortgage interest, homeowners association fees, etc.).
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Resources:
How Women Achieve Financial Freedom With Stocks & Real Estate (Feb. 5, 2022)
Full Episode Transcript:
Toby: Hey, guys. This is Toby Mathis.
Jeff: I’m Jeff Webb.
Toby: You’re listening to Tax Tuesday. Welcome to another wonderful Tuesday where we are bringing tax knowledge to the masses. Today’s going to be a fun one, Jeff. We have lots of good stuff in store. All right, guys. We have a lot of tax professionals on. We’re on a tax deadline today. I realized that tax time is all the time. Which deadline is this one?
Jeff: This is what we call a drop dead for the March 2021 corporations. This is the last day to file forms on time. Then the September year-ends can extend.
Toby: Would it be March? March would actually—wouldn’t it […] in September?
Jeff: No, the March year-ends original return would have been due in July.
Toby: You’re right, sorry. All right, let’s jump in. We got a lot. We got Eliot, Christos, Dutch, Ian, Dana, and Troy. We have a whole crew here to help you. Let me just go over how this works.
It’s not just Jeff and I. We are going to be monitoring the chat. But if you go into Q&A and ask questions, we have a bunch of tax professionals. You have tax attorneys, you have CPAs, you got some bookkeepers. You got all sorts of folks in that question and answer. I’m going to see how good you guys are in the chat area. In the chat area, put where you’re from. Let us know where you are from so we can say it.
There’s somebody from Anacortes. I always say this, my mom lives in Anacortes. If you’re from Anacortes, hello. Oh my God, they’re flying through. Gosh, darn it, Clermont. They’re just going too fast. Bakersville, Aurora, Maryland, Palm Desert.
Jeff: Hey, I was from Palm Desert.
Toby: You’re from Palm Desert?
Jeff: For a few years, I lived there.
Toby: That’s hot. San Jose, Asheville, Delaware, Virginia, Ann Arbor, Corona, Omaha. Where is this one, Auburn, Alabama. Parents met in Auburn, Alabama. Pensacola, Florida. My parents lived in Pensacola for quite a while. They came out to Washington. This is like history day. There’s more, oh my gosh. They’re still flying through. I’m trying to get to where they don’t fly through so fast.
Jeff: You all see these lines fly past.
Toby: It’s just going crazy. Vegas, hey. It’s where we’re at right now. Delaware in the house, from Minnesota. San Diego, Temecula. They’re from Minneapolis, which is a great town, probably colder now. San Jose, Woodinville, Washington. I know Woodinville very well. Colorado, Saratoga. Gosh, you guys are all over the place. I’m having some fun with you all, but they’re just flying by too fast.
All right, here’s the deal. If you have tax questions when we’re not doing a Tax Tuesday like, hey, I’m sitting around, I have a tax question, email it on there. We go through and we make sure that we’re answering them. Just email it to taxtuesday@andersonadvisors.com and we’ll get you an answer.
If it’s super specific to you, we may say, hey, become a Platinum at least, pay us the whopping $35 a month. But otherwise, we just answer it. If you ask questions here, you go ahead and throw it into the chat if it’s just specific on what we’re hitting like you just need a clarifier. Otherwise, if you have a question that pertains to yourself, just throw it into the question and answer. I can already see Christos knocking them out.
It is above freezing in Minnesota today. That’s a good thing. Oak Mills in North Carolina. We were on a Zoom call with our folks down in North Carolina. You guys are frozen. They were stuck in their house because there was so much ice in North Carolina. I’m always like, wow, that looks cold.
All right. The whole idea, guys, is we’re going to have a little bit of fun. It’s fast, fun, and educational, but the whole idea is that you get your questions answered and you don’t get a bill. Unless you want us to send you a bill and force us to, we’ll send you a bill, but otherwise, no. Somebody says, “Has it been changed from every 2:00 PM to biweekly 3:00 PM? No, it’s been biweekly 3:00 PM for, Jeff, how many years? I don’t even know.
Jeff: At least the whole time I’ve been here.
Toby: We’ve done well over 100 episodes of this. All right, here are our opening questions. We’re going to go through each one of these in turn. We always go over the questions before we answer them.
Here’s the one, “What methods can be used to continue to trade a security with a small loss other than wait 30 days to avoid the wash sale? Can I use options immediately for the same stock and avoid the wash sale?” Interesting question.
“Profits from selling stock on the New York Stock Exchange or capital gains and are federally taxed appropriately. But should they also be taxed with a C-corp entity managing the trading was created? If yes, why?” We’ll answer that.
“I receive stock from a company I work for and it is in my account under my name only. If I opened a joint brokerage account with my husband and transfer some stock there, can we gift $32,000 worth of stock to our child for 2022 without any reporting as married filing jointly?” Is it $15,000 or $16,000?
Jeff: It’s $16,000 in 2022.
Toby: It’s going up, so we’ll knock that one up. You’ll understand what we were just talking about here in a second.
“Thoughts on using a nonprofit that is funded with cryptocurrency.” I just picked that one because it seemed random.
“When purchasing a self-storage facility, should it be in its own LLC and can it be combined in an LLC that already has a property within its entity?” We’ll knock that one out.
“I currently have a private lending business. My understanding is that my life insurance premiums are tax-deductible on my Schedule C as long as the proceeds are used to protect my capital assets will not benefit me personally. Is any of this true, or if not, when is it okay to deduct the premiums?” I always love those. Is any of these true? I’ve heard this.
“I’m selling real estate property in California. We used straight-line depreciation for more than 30 years about $700,000. Do we add Depreciation Recapture Tax Rate 5% for $700,000, or use just 20% long-term capital gains rate? Total capital gains will be a little over $5 million.” That’s an interesting question. We’ll get to that and we’ll explain what all those things mean.
“My husband and I would like to buy a small house that my mom owns free and clear. I’m going to propose seller financing. She is 82. My question is, what happens if she passes away before the loan is paid off? I am the beneficiary of her estate along with my brother. How can I structure the terms to best suit everyone involved?” Good questions. I’m glad you’re dealing with it ahead of time, so we’ll knock that one out too.
“Do I need to perform cost segregation in the year I acquired the property for the same year bonus depreciation or performing it next year is okay? I bought property in 2021, ran cost seg in 2022, write off bonus depreciation for tax year 2021.” That’s a good clarifier and we’re going to knock that one out.
All right, last couple of questions. “What is your opinion on cryptocurrency and mining?” This is Jeff’s favorite question, by the way. “Is there big money to be made with mining with less risk than the currency? How much money does it take to get in the game?”
“My question is: how our tax is calculated when renting only one home in your room for Airbnb? How are the expenses calculated, for example, cleaning fees, lawn/pests control, maintenance, snacks, and other amenities offered to guests?”
Those are all really good questions today. We’re going to have our hands full. We always try to be done in an hour. Those of you guys who have been watching for years, you know that we had a little bit of a problem because we would just answer all questions that came. Sometimes we went a little long. By the way, I’m a tax attorney. Jeff here is a CPA. You’ve been a CPA for how long now?
Jeff: Thirty-one years.
Toby: When you have to think about it, it’s been a long time. All right, real quick. If you like Tax Tuesday, if you want to listen to any of the past episodes, we do break them up and put them on YouTube. I’m going to ask you a big question, a big favor, please subscribe to our YouTube channel. Pretty please, go in, subscribe. If you want to, you could do it now. I even put in a rotating arrow into the presentation, so you can go into YouTube.
You do that and you click the little bell. The reason that you’re going to do that now is because of the tax laws. When Build Back Better or whatever version they come out with, there’s going to be something, there’s going to be tax law changes and we want to make sure that we’re able to get out to you. Or if they do things like last year, they made certain portions of your income non-taxable after the tax season started. After people started filing their tax returns, they made a mess. So we like to reach out to you guys right away because that’s where we put stuff.
All right. Jeffrey, “What methods can be used to continue to trade a security with a small loss other than wait 30 days to avoid a wash sale? Can I use options immediately for the same stock and avoid a wash sale?” What’s a wash sale?
Jeff: A wash sale is when you sell a security at a loss and you purchase it 30 days before or after the sale of that stock within 30 days.
Toby: Is it before?
Jeff: It’s also before.
Toby: If I buy some stock and then I sell—it doesn’t make any sense—I don’t get the loss?
Jeff: It’s for those people who go in and want to sell for a loss like today, but they knew they were going to do it, so they bought a bunch of stock two weeks ago.
Toby: What’s the downside of doing it? What is the bad part of the wash sale? You just don’t get the loss?
Jeff: You don’t get to recognize the loss until you sell what we’re going to call the replacement stock.
Toby: It’s going to adjust your basis.
Jeff: Yeah.
Toby: A fancy way. It’s not like you lose the loss, it just gets blended in with the stock that you purchased. If I have a stock that loses money and I lose, I sell it, I have a $10 loss, and then the next week, I go, ugh. It starts coming back up and I buy it back, they’re going to pretend that you never sold it. They’re just going to say, oh, there were a couple of dollars there that you’re missing, we’re just going to take that couple of dollars and adjust your basis.
Jeff: Where this can come into play is I own a stock and it’s not going well so I sell it. A week later, it dropped a whole bunch and I thought, oh, now this is a good value, and I get back into that stock. I’m not going to be able to recognize that first loss immediately. It’s going to get built into my basis because I bought it back.
Now the question, how can I avoid this? You can’t, not even with options because what this code section actually says is even a contract to purchase additional stock, which is what an option is, it disqualifies you.
Toby: The one way you could do it. Let’s say you had Exxon, you had a loss, and you’re like, hey, you know what, I want to buy it back but I don’t want the wash. You could buy an index like maybe Go Energy. You could do something that’s broad market. But if you do something that’s specific to that particular security, no, you don’t get it.
Jeff: What about buying through another entity?
Toby: Still not going to work as long as it’s the same taxpayer. Even in IRAs, they say that you can’t do it with the individual, and then go in and buy it back in the IRA. I sell it over here, take the loss individually, buy the same stock the same day or within 30 days, and I buy it in my IRA, they’re going to say that’s a wash sale.
Jeff: I think what’s key here is they say a stock with a small loss. I don’t worry about it. If the stock has become a good sale or a good purchase, then I buy the stock and not worry about that small loss.
Toby: A standard workaround is not to trade in December. I like it. All right, “Profits from selling stock in the New York Stock Exchange or capital gains and are federally taxed appropriately. But should they also be state tax for the C-corp entity managing the trading was created? If yes, why?”
Jeff: Okay, I’m going to go by that the C-corp is just managing the stock. They do not own the stock. I’m not going to tax them wherever the C corporation is. They’re just advising the owner of the stock.
Toby: They don’t have any income from it. If the C-corp is a partner in an LLC that is managing or something like that, then that portion of the income would be taxable where the corporation is located, but otherwise, no. Federal tax is on the total transaction. State tax is allocated to the state in which the income is being generated.
I’m thinking about a situation, not necessarily with the C-corp, but like California would try to bring everything into it. They always say, it’s all taxable here. But here, even the C-corp is never going to be brought in on the income that is being generated outside that C-corp. That’s always going to go to the individual.
Jeff: And if the C-corp is only managing assets, I think I have that C-corp in a non-taxing state.
Toby: You’re probably going to be looking at Wyoming, Nevada, the usual suspects. If you’re in Texas or Florida, even possibly Washington, you can do that too. But it’s always a matter of getting your calculator out and saying, should I do this? C-corps are great. Otherwise, 100% medical, dental, and vision deduction for any reimbursements made in the health reimbursement plan. You get a 21% flat tax rate. It’s actually pretty cool. People are always worried about the double tax, but we do thousands of C-corp returns, thus, the deadline today, right?
Jeff: Yes.
Toby: How many dividends did you see issued?
Jeff: Dividends? We don’t issue hardly any dividends.
Toby: That’s the punchline. It’s double taxed if you do a dividend.
Jeff: I mean, I can think of maybe a handful.
Toby: How many C-corps actually show a profit? Nationally, it’s maybe 20%.
Jeff: For our C corporations, it’s probably under 5%.
Toby: All right, here we go. “I received stock from a company I worked for and it is in my account under my name only. If I open a joint brokerage account with my husband and transfer some stock there, can we gift $32,000 worth of stocks to our child for 2022 without any reporting as married filing jointly?”
Jeff: Yes, you can. However, I would not do it this way. There is something called splitting gifts where you can gift $32,000 to your child, but you split that gift with your spouse. You do have to file Form 709. It’s pretty easy to fill out and send in saying that, yeah, I can gift the $32,000, but this is a split gift between me and my spouse.
Toby: If you didn’t want to file anything, then the trick is, but they don’t know. If I give $32,000 with a stock to a child, I suppose if you’re giving the stock, you’d want to make sure that the IRS knows the value of the stock on this date, this was the item just in case it grows. But otherwise, if it was cash, you wouldn’t really care which account it came out of. You could just say, I gave a cash gift of up to $16,000, it’s not reported.
Jeff: Right. The stock is gifted at its fair market value, not its cost.
Toby: Why would they gift stock to a kid?
Jeff: So they don’t have to pay the taxes on the appreciation.
Toby: They don’t have to pay the taxes on the appreciation, but there’s a kiddie tax. If they’re getting dividends, it’s going to be taxed to the parents after $2200?
Jeff: Yes.
Toby: Up until that child is 18, possibly 24, depending on who’s providing care for it.
Jeff: The other thing I noticed in this is transferring stock that you got from your company. You need to make sure there are no restrictions on transferring that stock.
Toby: Yeah. Somebody says, “How do you know the value of a stock for a startup?” That’s tough. That is really tough because you’re going to have a valuation if it has value because people have been raising money, possibly. Otherwise, what are you going to have to do, get an appraisal?
Jeff: Yeah. If this is not publicly traded stock, I’m much less likely to do it. I’m probably going to need to get the business appraised, and if it’s not my business, that’s not happening. It’s possible your HR department may tell you the value of the stock.
Toby: Yeah, it’s tough. It’s almost easier just to get the cash. But what you do, in theory—for a child, again, this wouldn’t work. If they’re under 24, they’re going to college, and you’re supporting them if they’re under 18, they would get the basis of your gift. If I have stock that’s highly appreciated and I don’t want to pay tax on it, I could give it to my child and have them sell it. The problem is, the kiddie tax is going to roll that right back under you and assess it to the parent’s tax bracket. If you didn’t know, that took place.
It’s only for the passive and portfolio incomes. It’s not for the kid’s earning wages. But if you have a 16-year-old, for example, and they go work at McDonald’s, that’s not going to be added up to the parents. But if you give a child a rental home and they’re 16, those rents are going to end up on your return. It gets kind of funky.
All right, hey, if you guys like this type of information, we have another tax and asset protection workshop coming up on January 22nd, this weekend, so Saturday, Clint and I. I should know. They’re asking like, it’s coming up in a few weeks, no, it’s this weekend. You can absolutely join us. You’re going to learn all about trusts, LLCs, corporations, and how the taxation of real estate occurs. It’s absolutely free.
You can absolutely pop in and we recommend that you do. Even if you’ve been to some classes in the past, so much stuff changes. 2022 had a few little knick-knacks that have changed up. But in the last three years, it’s been major changes.
All right, getting back into our questions. “Thoughts on using a nonprofit that is funded with cryptocurrency.”
Jeff: I don’t have an issue with this, funding my nonprofit profit with cryptocurrency. They’re going to have to be the ones who have to come with their cash so they can actually use it in their mission. The one side note with funding with crypto is you’re going to have to get it appraised. Not a big deal, but…
Toby: It’s weird because if I own it as a miner, and there’s a question about mining later in here, but let’s say I earn it as a miner, it’s the spot market. It’s whatever that market sold for that particular day. Basically, anything during that day because I have a range. When you donate crypto, you actually have to get an appraisal done.
Jeff: Yup.
Toby: It’s weird, right?
Jeff: I’ve been reading recently that some organizations are really pushing hard on the IRS to give some real guidance on cryptocurrency.
Toby: There’s a market 24/7 for it. I don’t think we need an appraisal. Maybe on some of the coins, it’s a little bit funky. But if you have some standard coins, that would be pretty easy to issue up. There’s a market for it.
Jeff: Yeah. If you donate more than $5000 of crypto and you don’t have an appraisal, they’re going to deny the donation.
Toby: Yeah. Here’s the deal, most larger charities for sure are taking crypto now. Otherwise, they need to have a wallet. Here’s why you do it because let’s say I had some Bitcoin and it’s gone up in value 300%. I bought it for $10,000, now it’s worth $30,000. If I donate it, I get a $30,000 deduction. If I sell it and donate the funds, I have a $20,000 tax at the gain. I bought it for $10,000. It’s now $30,000, I have long-term capital gains of $20,000, and then I would get a $30,000 deduction, so I still have a tax liability. That’s why you always do it.
“If you purchase property with crypto, do you have to sell it in cryptocurrency too?” No. Crypto, when you buy things with it, the IRS treats it as though you sold the crypto, turned it into US dollars, and then purchased with it.
Jeff: That’s absolutely correct.
Toby: You actually have a taxable transaction when you do it. If I take my Bitcoin or my Doge and you buy the Tesla with it, you sold the Doge on that day, and then you bought a Tesla.
Jeff: That’s a good way of looking at it. You have two transactions when you do anything with crypto like that.
Toby: Good question here too. “Does wash sale apply to crypto?” As of right, no. But it was in the proposals under the Build Back Better plan to apply a wash sale to crypto because guys like moi like to sell and then immediately buy back whenever crypto would pull back. If you want to have whiplash, get into crypto. Get into Bitcoin and watch the 30% swings one day. If you don’t like drinking but you still want that same I don’t know which way is up feeling, do some crypto. Otherwise, it’s not for the faint of heart.
Somebody says, “Can you put the questions there same in the Q&A?” I wish we could. I’ll just repeat them, but we have so many chats. Whenever we open chat, you’re going to have that person, not that we’ve had this happen every single time we’ve done this. They start soliciting everybody. I got this. They start asking for money or they do something goofy. So we just shut it off, but we’ll tell you.
All right, “When purchasing a self-storage facility, should it be in its own LLC and can it be combined in an LLC that already has property within its entity?
Jeff: My preference is to put it in two LLCs. I put the property in one and I put the business in another.
Toby: You’d have two LLCs for?
Jeff: I’d have the property that has the storage rentals and then I’d have the business that’s actually running that storage.
Toby: Assuming that you have a management, you’re not using a third-party management, you want to take the real estate and separate it from management.
Jeff: Correct.
Toby: In this case, they have other self-storage facilities. So would you have the real estate owned in one? Let’s say you had two storage facilities, one management entity or one management group, would you have the real estate in the same LLC?
Jeff: I probably would not. If it was just other rental property like single family homes, I would not mix it with this self-storage facility.
Toby: Yes, so the liability goes with the property. The liability could also go with the manager if the manager, for example, discriminates, assaults somebody, does whatever, or steals, that liability is going to be with the management and the management entity and it could be down to the real estate. They’ll say, hey, you’re responsible too. What you want to do is separate out the liability of the real estate from each other.
The easiest way to think of this is if you have a single glass of coffee and there’s hot coffee in it, that’s the liability that goes with real estate. You want to have each bit of hot coffee in its own cup. Otherwise, you mix them up. If something goes wrong on one property, it’s going to hit both properties. It’s going to nail both, so you always separate those up.
I experienced a crypto that is swinging 400% in one day. That’s just, oh my God. It has to be a Doge or something or one of the new ones. Four hundred percent. Anyway, sorry, got distracted.
The LLC, again, it’s just separating a liability. How about for tax purposes though, Jeff? Let’s say that we had the structure. We had a management entity and we had two pieces of real estate that are separate LLCs. Do we have separate tax returns to do on all of these?
Jeff: We could, but let’s just consider the real estate bit and self-storage operations. We could say that’s what’s called one economic unit and have it all taxed together.
Toby: One tax return, right?
Jeff: Yup.
Toby: If you’re not familiar with that, could you do that with a dental office that also owns the real estate?
Jeff: You could. You could do it not only with real estate but related businesses. The bakery that also has the truck service takes the bakery goods out too.
Toby: Even though they’re separate entities for liability purposes, they blend them all together. Even though one’s passive and one’s active, we blend them together. This is how you get to write off passive losses when you’re self-renting.
Let’s say Jeff and I start up a Jeff and Toby’s Consultant and we buy a building. In the building, we do a cost seg and we write off a huge chunk of money. This big massive loss comes down. Jeff and I look at each other and go, you know what, we don’t want to pay tax this year. Let’s treat it all as one unit. Then our profits from our consulting business, let’s say we make $200,000 in profits and we also have a W-2 income of $100,000. So we have a total of $300,000 of income that we are splitting. Then we have this real estate that kicks down $300,000 of loss. Guess how much tax we have?
Jeff: Zero.
Toby: And anybody out there that’s like, wait a second, that’s a passive activity. Real estate is passive. Not when you do the grouping. When you group and treat it as one economic unit, when you’re self-renting, you can. Even if it’s not 100% you, as long as it’s the majority of it.
Jeff: One thing with a self-storage unit, I’m cost segregating the heck out of that sucker.
Toby: You’re going to get way more than you realize when you do cost segregation. If you don’t know what a cost seg is, what’s a cost seg?
Jeff: Cost segregation is where you have engineers or something like that go in, look at your real estate, and say, oh no, no, this isn’t structure, this is a land improvement, this is equipment, or these are fixtures. They basically divide up your property into different categories. The categories that they’re separating from the building and the land usually have a much shorter depreciation life. That makes them eligible for bonus depreciation, which I believe is still 100% this year and 80% next year.
There is a real advantage to doing this. There are some other advantages too involved in selling properties and so forth. We’ll get into that, but cost segregation is a way to really bump up your depreciation if you’re able.
Toby: Yeah, that’s a fancy way of saying, when you have a building like we’re in an office building right now, we have carpet on the floor that’s not part of the structure. That carpet is going to last five years. The IRS would say it’s going to last 39 years because we’re an office building. This carpet’s not going to make it 39 years, but that’s what the IRS would say, and I shouldn’t even say the IRS.
If you choose the default rule, which is actually the incorrect rule, so when you go in and you actually do cost segregation and you change the election, it says you are changing from an impermissible method to the permissible method. You’re actually fixing something that’s broken because they said the broken methodology is the default. It’s kind of weird. When you actually read it, you’re going, wait a second, that can’t be what I’m checking here. Yeah, I’m correcting the methodology. They’ll just say, hey, we’ll let you treat it. That’s not good for you.
We’ll allow you to hurt yourself. We won’t tell you that you’re hurting yourself and we’re not going to bring it to your attention, unless you want to fix it. Somebody says, “For residential, would that be something like a garage? Is it a separate structure, a fixture, not real estate?”
Jeff: No, that would probably be a structure.
Toby: The garage door and the motor, those are separate. The fixtures in the walls are separate. If you had to bring electricity to that area like you’re doing specialized garage doors for an oil change, that would be separate. Those are all 15-, 7-, and five-year properties, which you could bonus depreciate. Boom.
Would it be worth the cost segregation on residential? In all things tax, it’s a matter of getting your pencil up. Quite often, we don’t do the cost segregations here, but we can get you the cost segregation analysis done at no cost. We’d be happy to refer you to our source that that’s all they do. It’s a CPA firm that does nothing but cost segs and energy credits. They’re very, very good at it because they’ve done so many.
I think Patty just put their link up there. That’s Eric Oliver. We’ve been working with them for years, and they’ll tell you, here’s how much the study costs and here’s how much it will say. I use a real simple methodology. If it’s going to 7X my money, if I spend $1000 and if it’s going to put $7000 in my pocket, I’ll do it. I think he’s going to use the same thing.
You want to get a nice return on it. In a residential, it may cost you $3000, but if you put $30,000 in your pocket, that’s worth it. If it’s not, then maybe.
All right, “I currently have a private lending business. My understanding is that my life insurance premiums are tax-deductible on my Schedule C as long as the proceeds are used to protect my capital assets and will not benefit me personally. Is any of this true, or if not, when is it okay to deduct the premiums?”
Jeff: Almost never. The only time you can deduct life insurance premiums that I’m aware of is under Group Term Life Insurance, but you have to have at least 10 employees and be providing them with a term policy.
Toby: And it’s only up to $50,000 of death benefit.
Jeff: Right.
Toby: The only other time is under COLI, Corporate Owned Life Insurance, where the death benefit is taxable. Normally, insurance proceeds are not taxable. If I have Jeff as my death beneficiary, I have life insurance, and it’s $1 million. I kicked the bucket, Jeff gets $1 million, and he pays zero tax on that.
Jeff: Right.
Toby: If it’s a company, Jeff works for the company, and they buy $1 million of life insurance on Jeff, they don’t get to deduct those premiums. I didn’t get to deduct those premiums. But at the same token, the $1 million dollars is not taxable to the company.
Jeff: Right.
Toby: But if the company says, you know what, we’re going to write off those premiums and we’re getting the benefit, I don’t know whether they would still have access to the cash value tax rate. I’m not aware of that off the top of my head, but the death benefit would be taxable, then they would allow you to do that. It’s my understanding. I think that there’s a little sliver in there. But in a private lending business, no, I don’t believe it.
I think what you’re really doing, and this is perhaps what somebody is talking to you about, is micro cap where they’re having you do basically an insurance company and they’re allowing section 531, 541, or something like that. It’s a micro-captive insurance, where you’re insuring something that normal insurance will not cover. If you’re using the life insurance to protect the proceeds to protect your capital, possibly they’re talking about doing that through a micro-cap company and that’s part of how they’re diversifying the assets, but I’m not certain.
“Insurance premiums for companies are not a deductible business cost?” Somebody is asking. It’s life insurance and there’s one exception. The life insurance premiums are when it’s a group life plan, $70,000 or $50,000 of the death benefit or when the death benefit’s going to be taxed. I don’t think there is.
Jeff: Yeah, and this question says that the company is a beneficiary, but it looks like in this case, he is still the company, so he is ultimately the beneficiary of this life policy too.
Toby: Yup, absolutely 100%. But anyway, we’re not going to keep diving in. It’s a Schedule C. There’s no way he’s going to get it, so he’s a sole proprietor.
Jeff: Fine, Toby. Fine.
Toby: Hey, Infinity, the women’s class. It’s coming up on February 5th. You are going to be in for a treat. This is for the ladies out there, women in investing. We have Nicole DeBlasio, Markay Latimer, Pia Washington, and actually, Patty’s going to be on. Patty, is Maureen going to be doing it too, or is she going to be doing some of the follow-up stuff? Who else is going to be there? You can unmute yourself, Patty. She’s probably gonna freak out.
Patty: No, we have a couple of special guests that are going to come in.
Toby: Can you say who the special guests are?
Patty: No, they’re special guests.
Toby: Special guests. But anyway, it should be really fun. We do Infinity every month and it’s really great. This one’s going to be specifically addressed to women’s issues. I’m not going to say, guys, that you can’t go. This is geared not towards us, but towards issues that are uniquely for a lot of the ladies out there. We have a lot of really good talented folks. I mean, we’d sit this one out.
I’ll end up watching it just because I like to watch it, but it should be fun. It should be a lot of fun. It’s absolutely free. There’s a link there if you want to join up. What is Infinity Investing? I’ll just explain it in a nutshell. It’s when you’re able to not work if you don’t want to. You have enough passive and portfolio income coming in that you don’t need to work.
You become a volunteer. How do you build up those income sources? That’s what Infinity is about. We actually use a calculator. We’re pretty methodical about it. We build up dividends, rents, interests, capital gains. We’re looking at things that you don’t have to continue to work for. We hold things forever like we’re really boring. Somebody says, “At least we get to hear from Patty.” People are excited. They get to hear Patty.
Patty is really good. I get to talk to her every day. She doesn’t talk to you guys on the camera a lot. It’ll be a fun treat, so you guys can actually go on there too. She’s very, very accomplished in real estate. Had her own building company and had some partners that were—you’d know the name if I said the name. They’re pretty famous, so she’s very well accomplished.
All right, “I am selling real estate property in California. We used straight-line depreciation for more than 30 years of about $700,000. Do we add Depreciation Recapture Tax Rate 5% for $700,000 or just 20% long-term capital gains rate? Total capital gains will be a little over $5 million?” Jeffrey.
Jeff: If you have used straight-line depreciation, there should be no recapture. It sounds like this may be fully depreciated depending on what it is. You’re going to have a gain of $5 million. However, I wouldn’t calculate it at 20%. I would calculate it at 24%, 23.8%. I just round it up just in case we make mistakes for net investment income tax.
Toby: And there’s no recapture on that.
Jeff: No.
Toby: Not on straight line?
Jeff: No.
Toby: If they had depreciated it normal, would they have recapture?
Jeff: Sometimes, but not often. A lot of accelerated rates went away. The standard way is the modified straight line depreciation. Under makers, it’s 27 and a half years of straight line or 39 years for commercial property.
Toby: They would have the 25% on recaptured depreciation?
Jeff: I don’t believe so. I did some calculations yesterday and it wasn’t kicking it out.
Toby: I thought you still did. Whatever the case, you would always subtract that off of the long-term capital gain. The total gain, if it was $5 million, you wouldn’t have to worry about it. If you do, you’re taking the $700,000. I thought that the $700,000 would be subject to recapture. You’re saying it’s not just because it’s straight line? I may be missing something here. Residential property, they own it, they depreciated it fully?
Jeff: When we’re talking depreciating for recapture, are we talking about unrecaptured 1250?
Toby: Yes.
Jeff: It still wasn’t popping up?
Toby: Weird.
Jeff: Anytime you have that, it is only on the amount of depreciation you’re taking the $700,000. It wouldn’t be on the entire $5 million.
Toby: I think what they’re asking, so they took $700,000 of depreciation over 30 years.
Jeff: Right, and I’m saying I’m not sure that you would have that 25% rate.
Toby: I’d have to go calculate it, but I thought that there’d be recapture with the $700,000 that you’d have at least the recapture on the portion that you wrote off because they depreciated it.
Jeff: Right.
Toby: You took it. But whatever the case, you’re not going to pay twice. The depreciation recapture or the young unrecaptured 1250 is, as we’re putting it, that’s the proper term for it, but everybody calls it recapture. When you take depreciation, you recapture it on a straight line. It’s going to be taxable at the recapture rate, which is 0 to 25%, depending on what your practice.
Jeff: That’s what I was saying. If the recapture did apply, it would not be on the entire $5 million, it would be just the $700,000.
Toby: Right, and that reduces. You have your total gain, subtract the depreciation recapture, the remainder is long-term capital gain. That recapture is going to be a max of 25%. The long-term capital gain, as Jeff points out, is going to be 23.8%. I didn’t know there was a way to get around that, so I’m perplexed. We’ll hit you back up on that. There might be something that I’m missing here.
Jeff: I like to plan for the worst.
Toby: “My husband and I would like to buy a small house that my mom owns free and clear. I am going to propose seller financing. She is 82. My question is, what happens if she passes away before the loan is paid off? I’m a beneficiary of her estate along with my brother, how can I structure the terms to best suit everyone involved?” Jeff?
Jeff: The owner financing is an asset to your mother. When she passes, that asset gets passed to the estate. At that point, the beneficiaries of the estate, I’m assuming, is 50% you and 50% your brother. You would technically owe your brother for half of the loan balance at that point.
Toby: Or depending on what else is in the estate, you might take the loan and they might take it.
Jeff: Correct.
Toby: Here’s the deal that you got to pay attention to. When you do inter-family loans, you got to document them if they’re more than $10,000. There’s imputed interest. The Federal AFR rates, they get published every quarter?
Jeff: Yeah, the blended rate comes out once a year.
Toby: This is a long-term rate. We can actually say, here’s the lowest you can charge. Assuming that mom wants the lowest, if you pick like a 4%, you’re safe. If you pick what’s kind of out there in society, you’re safe. If you want the lowest, you go to that list and you say, all right, mom’s loaning this to me, basically. She’s carrying it back and that’s a note. That is, like Jeff says, it’s an asset of the estate.
You’re a beneficiary of it. I assume you guys are 50/50, you would each own half of that note. You could just keep it in place, you could just keep paying it, and you’re getting half and your brother’s getting half. Otherwise, you could address it in an estate plan like a living trust or worst-case scenario as a will.
Let’s say your mom says, hey, I want you to get the house, I’m going to gift you the note, I’m going to give that back to you first before anything else is split up, depending on how you guys structure things. Or you say, hey, this is going to be yours and then your sibling, your brother gets other assets, assuming that it’s roughly equivalent. But you don’t have to sit here and say, oh, I have to pay it off now and all these things. If she’s 82, depending on how long that note is for, there’s a pretty good chance that it’s going to be existing when she passes.
Jeff: Would you possibly plan for getting a third-party loan either now or in the future?
Toby: You could put a balloon on this. If she’s carrying it because she probably doesn’t want all the costs associated with the appraisal and doing all that stuff, so assuming that you guys are doing an arm’s length transaction, that it’s fair price. Where you don’t want to go is you say, hey, mom, she’s got her $700,000 house and you buy it for $400,000, you’re going to end up with a $300,000 taxable event there for the under-market portion and you’re going to end up in a fight with your brother.
What I would say here is you get a third-party involved and get it fairly valued, either a broker’s value opinion—just get a broker to value it, or get an appraisal done, then pick a fair interest rate, do the carry, and document it that mom knows that she’s doing this. This is how and that’s going to be your portion. Any other assets that’s not equal to make it a 50/50 division if that’s what you guys are doing, then you would say, whatever that portion is, have it directed back to the brother, whatever that extra amount is. But again, I would document the heck out of this.
I’m biased anyway. I think everybody should be using a living trust to stay out of court. But you could document this in a living trust saying, hey, either document the loan to make sure it’s over a set period of time so you know when the balloon is or you know when it’s done being paid off, or put something in the trust that says, here’s what I should do.
Somebody says, “How to take advantage of the stepped up basis in this situation?” That’s the problem. If you’re buying the house, there is no real step up. I don’t even think the note could be stepped up.
Jeff: Your step up is what you paid for the house. The note fair market value isn’t going to change after your mother passes, there’s no step-up there either.
Toby: Your mom may have a taxable event as it’s going along. I’m trying to think of how that would end up in the year of passing. I suppose it would step up and you’d be done on capital gains if you’re paying on an installment note. Generally speaking, let’s say there’s a 30-year-note, you bought a $300,000 house, and your mom’s basis was $100,000, so there’s a couple $100,000 of appreciation, the taxable gain.
Assuming this isn’t her residence, let’s assume this is an investment property so there are no 121 exclusions, you’re spreading out the taxable event—the return of basis over 30 years, the capital gains over 30 years, and some interest is going to be the taxable event. Let’s say she passes away in year 10, you’d have a step up on the gain at that point for the unpaid portion. At that point, then the estate would be getting the interest or you and your brother would be getting the interest, and there wouldn’t be any other tax hit to the estate.
Jeff: Yeah, so that installment sale continues after death and somebody is going to have to recognize the deferred gains on that sale.
Toby: If it steps up when they die, when she passes, then you wouldn’t have it, right?
Jeff: No, it wouldn’t step up because it was bought at this date. It was bought before her passing, so there is no step up.
Toby: But when you elect an installment sale, then it’s taxable when you receive it, right?
Jeff: Yes.
Toby: So that wouldn’t step up?
Jeff: No.
Toby: All right. What Jeff’s saying is we may lose the step up and you’re going to end up with possibly a taxable situation. But that would go to the beneficiaries then at that point?
Jeff: Correct.
Toby: The estate to the […]. Your mom’s getting the […] in basis.
Jeff: What can we do instead or she could get used to the house now and inherit it later, anything?
Toby: It sounds like they want to buy the small house. If mom keeps it, she passes, and she gives it to you, your basis steps up. There are no capital gains, mom has no problem here. This is the money going the wrong direction. If your mom wants money out of it, she could potentially borrow the money from you, you’d get your step up and basis, you’d own the note, and that liability would go with the estate.
I’m just trying to think of it. It sounds like mom has an investment property. One of the siblings wants to buy it, one of the kids wants to buy it. The cleanest thing is to sell it. Mom’s carrying the note and be transparent about it. Losing the step-up in basis could be a problem.
Somebody says, “Maybe you could rent it.” Yeah, possibly rent it so you don’t lose the step up. Again, it depends on what they want to do with it. If you want to live in it, then that might be the best basis. Maybe you have a lease option on it or something along those lines. It’s an investment property that she can’t handle anymore, so we will buy it and it will need to be our rental. So I’m buying it and I’m documenting it. Is there a lot of gain that’s built-in like did she buy it a long time ago?
Jeff: It’s paid off.
Toby: “I’m saying it was my grandfather’s home.” Oh, wow. Mom step-up in basis. We’d have to know what the basis was on the date of grandfather’s passing that she inherited because that would be the basis that she would inherit at when we look at the gain. I see what’s going on. I would probably keep it in the family.
I would document it myself. The loss of a little bit of tax benefit, if you’re going to keep it in your family, to me, it’s somewhat insignificant. Then your son currently rents it. If you want to step up, you could have your mom rent it to your son. You could agree to maintain it, document it in her estate plan that it’s going to go to you. If you want to make sure you get it or that you have the right to purchase it, put an option on it. I don’t think an option would destroy the step-up. I’d have to look at it to make sure—
Jeff: I don’t know that it would either.
Toby: Yeah, it’s a really interesting question. I’d say you name it. I don’t want to tip off whoever it is.
Jeff: This is one of those that you think the first answer is the right answer and then you start thinking about the technicalities along the way.
Toby: I have to pencil it out. I’d have to know what the basis is and how much we’re really talking about. But if it’s me and I want to keep it clean and I want to keep my relationship with my brother good, I’m probably buying it with an owner carry and leaving it that way. The one thing I would look at, Jeff, does not believe there’s a step-up on an owner carry, is I would just verify that. I’m not saying you’re wrong. You’re probably right, but that would be something I’d look at to say, hey, can we get around this with an owner carry and then make it really easy?
Jeff: It’s good that he checks my answers.
Toby: I’m wrong more often than not right nowadays.
All right, “Do I need to perform cost segregation in the year I acquired the property for the same year bonus depreciation or performing it next year okay? For example, I bought a property in 2021. I ran a cost seg in 2022, but I want to write off the bonus depreciation for tax year 2021. Can I do that?”
Jeff: I bought a property in 2021 and I want to do cost segregation. I have up until the due date or if I extended my return, the extended due date of that tax return to get that cost segregation done. If you were a real estate professional in 2021, qualified, I don’t know that they do cost segregation if you weren’t. But if you were, you could do that cost segregation now, six months from now, or anytime before you file a return and apply that cost segregation to the 2021 tax return.
Toby: Yes. You can absolutely do cost segregation. What it is is in the first year you buy it, it’s easy. You just treat it as though you get the cost seg done and you treat it as 1245 and 1250 property, which just means the tangible property and the structural property. If you are in future years like three years after you bought it, you can do a change of accounting or the second year after you bought it.
The next year, you could do a change of accounting at 3115, and in that year, you would do the cost seg. The bonus depreciation rule will apply to the year that you purchased the property, but you would take it in the year that you actually changed your accounting. You’re basically making it easy. Yes, you can do it.
Jeff: Just do it.
Toby: Just do it. Run the numbers and then do it. Again, we have somebody who will do it for absolutely no cost to run the analysis to see whether it’s worthwhile doing it. They’ll tell you what it would cost to actually do the cost seg so that you go in with your eyes completely healed. But in this situation, you could wait.
“Hey, I don’t want it for 2021. It’s not going to give me any real benefit, but I’d love to do it in 2022.” Then yes, you can actually do the cost segregation in 2023 as long as it’s before the return plus extension as well.
By the way, if you like this sort of stuff, listen to the podcast, subscribe to our YouTube channel. We’re always putting content out including the Tax Tuesdays. If you like watching the videos and you like seeing Jeff live, do the replay. It’s in the Platinum portal. If you just want to listen to it, by all means, we put it in our podcast plus we put it on YouTube.
All right, “What is your opinion on cryptocurrency and mining? Is there big money to be made with mining with less risk than the currency? How much money does it take to get in the game?”
Jeff: Cryptocurrency can have a place in any investment and portfolio. I, like most CPAs, tend not to give advice on specific types of investments or insurance companies don’t like us taking on that liability.
Toby: You don’t want to tell people what to invest in?
Jeff: No.
Toby: It’s a shocker.
Jeff: We’ve had it where people have said, no, I don’t want to give an opinion on this investment. Didn’t document it and they still got sued because they didn’t document it.
Toby: I got one better than that. I got a guy that used one of our conference rooms. They said, hey, can we do a signing? We did a deed and they sued us. It was silly. They said, oh, you should have known that the guy was using your conference room just to sign the deed, he was going to sell us a private annuity like we had nothing to do with it. We got dismissed, but it was a pain and it was like, you got to be kidding me. People are knuckleheads. Anyway, cryptocurrency.
Jeff: Cryptocurrency. What do you think?
Toby: I have clients that do really, really well mining. They do the NiceHash and right now they’re doing—I’m not going to get into the types of computers. There’s ASICs and there are others. It’s really tough to get the equipment right now. It’s expensive. Some places, you can actually do a sublet where you’re being part of a group and you’re buying access to the cards which generate it.
My experience is that for every card, you’re making about $30 a day. A card would cost about $1500 plus the motherboard. Depending on how many cards you get, you could actually have a nice return. Then if the crypto grows, you do quite well. I have a client that made about $700,000 here last year who was mining. That’s great, but there are lots of costs and there’s a risk.
The reason that they did so well is because the coin that they were mining went up. That coin could just as easily go the other direction and then you’re crying, you’re losing. It really comes down to, David, you make a good point—cost of electricity. It’s the cost of actually doing the mining and the cost of the equipment. To get a really good miner with 10 cards, you’re probably talking $16,000.
Let’s say that you invest that $16,000 and with all those cards you’re making $300 a day. Over the year, it takes about a year and a half or so to make up your investment and then the rest of it is gravy. Those cards last about three years. You should be doing well, and if you get appreciation, you’re loving it. If it tanks, then you’re not loving it. If you spend a bunch of money getting Bitcoin and Bitcoin runs down, you’ll be crying.
Jeff: Tax-wise, virtually everything you invest in—equipment, electricity, things like that—is going to be all write off in the first year.
Toby: You’re going to get a big deduction if you buy the equipment. If you lease the equipment like if you’re accessing somebody else’s by joining a pool, not so much. It’s as you go, pay as you go.
Jeff: The biggest issue I’ve had with watching crypto is there doesn’t seem to be any logic to it going up and down. The big moves tend to be El Salvador. Honduras recognizes it as an official currency, Fed rates go up, or stuff like that. But nothing really tied directly to the currency.
Toby: With Bitcoin, you’d have the people saying, hey, there’s going to be $21 million coins total. It’s going to be the year 2140 before it’s completely mined. The value inherently, because of the difficulty equation, is going to cause it to go up.
Somebody says, “What is a card? You mean a Coinbase provider?” No, it’s a video card. If you’ve ever seen them, they’re loud. I’ve had clients that had them. They’re actually pretty cool, liquid cool stuff now that takes some of the heat away, but they’re computers.
It looks like a motherboard with a bunch of cables and a bunch of things running. It looks like Frankenstein’s monster. They make a lot of noise and they generate a lot of heat because they’re doing so many equations per second trying to guess the right answer to get their coin.
Jeff: Crypto, like any other type of security or investment, has a lot of potential to go up, but that also means it has a lot of potential ahead the other direction.
Toby: They’re building cool things in the Metaverse. If you’re going to buy in the Metaverse, you’re probably going to be using Ethereum. I believe that’s the coin that, for the most part, they use. If you go that route or you’re doing NFTs and you’re speculating in those markets, you could lose, but it’s like collectibles. What is it, Bored Monkey? I’m trying to think of all the other names—
Jeff: I appreciate you all not asking about NFTs.
Toby: We’ve had some clients too who have NFTs too. It’s kind of a crazy world out there. But yes, some do very, very well. Bored Ape, there we go. I said Bored Monkey, Bored Ape. You are right. There’s a whole bunch of stuff. You can just go peruse. It’s a new world and the Metaverse is going to be new.
What’s interesting is years ago, I met with the CEO of eXp Realty and did a tour, and it was a Metaverse. It’s basically what they operate. They’ve gone bonkers. It’s going to go great. I think that that probably is a future where you go into a virtual world, a virtual office. You go in there and you meet. Somebody says, “Can you depreciate real estate in the Metaverse?” I don’t know. It’s intangible.
Jeff: But you gave a good example. A lot of these coins, if they’re properly used for what they were designed for, if I have a company who needs to buy stuff from Vietnam, I can use a virtual currency to buy that without having to worry about transaction fees and transfers of money. I just send them the token currencies.
Toby: It’s easy. I’ve done it. The hardest thing is getting set up to where you’re able to take it or use it. I think that you’re going to see more and more like the Visa, the Coinbase cards, and some of these others, they’re going to make it easy.
“Snoop Dogg’s neighboring real estate in the Metaverse was going for a lot of money.” Matthew, right. I think it was over $1 million in some of these cases. The Bored Apes, some of those were going for hundreds of thousands of dollars. There’s a bunch. Cyberpunks, some of those, I think, were millions of dollars too because there’s a finite amount of them. They said here’s their scarcity, there’s intrigue about it, and collectors love it. The same thing.
Somebody would say, “Why would you buy this baseball for hundreds of thousands of dollars just because it has Babe Ruth’s name on it?” There’s something that’s the story, and what you’re seeing in the Metaverse is that’s going a million miles an hour and people are already going out there and saying, here’s something that’s really important like Snoop Dogg has his own NFTs.
If you want to speculate and go be a collector, you can certainly do that. It’s pretty fun. I’m not going to get into all the rest of it, but on the crypto, I look at Bitcoin and Ethereum. I really don’t follow much else. I bought Doge because I like Shiba Inus and I thought it was funny when Elon was doing it. I made a bunch, then I sold a bunch, and I still have some. I just goof around with it, but that’s just playing.
Bitcoin and Ethereum are what I think are probably your more serious cryptos. Bitcoin probably being the king, but they seem to follow each other.
All right, “How are taxes calculated when renting only one room in your home for Airbnb? How are the expenses calculated, for example, cleaning fees, lawn/pest control, maintenance, snacks, and other amenities offered to guests?”
Jeff: You’re looking at me?
Toby: I’m looking at Jeff because you’re the CPA.
Jeff: Your expenses are going to be calculated. You’re going to have two kinds of expenses. One’s called direct expenses and one’s called indirect expenses. A direct expense is an expense that only applies to that rental. It may be services you’re providing for that person. If you’re only having that room clean professionally, something like that. Indirect expenses are going to be your utilities, your mortgage interest, taxes, HOA fees, any number of things.
Let’s say I have a four-room house and I’m renting out a room of it. A quarter, 1/4 of all of those indirect fees or expenses are going to be allocated to that rental property. A fourth of my taxes, a fourth of my mortgage interest, and a fourth of my HOA.
Toby: If it’s seven days or less, this is going on your Schedule C, right?
Jeff: I kind of skipped over that.
Toby: Here’s the big deal, is it a rental or is it a business? If it’s a business and you’re renting out a portion of your home, then we have to be worried about some of the recapture. If it’s within the four walls, whether there’s an exception to it and things like that. You’re going to have your depreciation and all these things, but it’s going to be an ordinary business.
It’s no different than you are running your plumbing business and you’re just taking up a portion. Instead of doing a home office, you’re just using a portion of the structure of those expenses, which means you can do net square footage. Can you do room methodology and things like that?
Jeff: Yeah, the example I gave you is the rooms, you can use square footage. We talked about it. Maybe it’s one of the multigen suites where it’s a third of a house. You may want to capture the actual square footage of that apartment in the house. What makes it a little more complicated is if you have common use areas calculating a portion of that.
Toby: If you have an ensuite with a kitchenette, it’s easy, right?
Jeff: Yeah.
Toby: The same thing with house hacking. House hacking is going to be passive because it’s longer than a week. Airbnb is typically three to four days on average, so it ends up being not a rental activity. If it’s longer, like you say, amenities offered to guests, you could be up to 30 days where it’s still not rental, depending on whether you’re providing substantial services to the guests.
It all depends. If your amenities are I cook for them, I clean, and do things like that, you’re over 7 days to 30 days, it’s still not a rental because you’re doing too much. You’re not acting like a regular lease. They’re going to treat you differently. Then if you even go about 30 days and you’re doing something like you’re providing—let’s say, we’re doing a Greatest Loser type of thing where people are coming into your house and you’re running them through rehab, fixing something, therapy, or whatever and it’s incidental to that, then that isn’t even treated as a rental.
If you are just renting it out to somebody, they come in, and they stay for more than seven days, but you’re not giving them anything special, no substantial services, then it’s going to be passive. It gets kind of wonky. That’s why Airbnb is the bastion of misinformation, especially on the internet because you have all these folks trying to interpret what the IRS is thinking and there really isn’t a huge amount of clear guidance. So everybody kind of uses the, am I a hotel? Am I doing things that a hotel would do? And if I am, ahh.
If you’re seven days or less, we don’t care what you’re doing, it’s a hotel. If you’re 7 days to 30 days, then we’re really looking to say, are you providing all these other services, concierge services and things like that?
Jeff: The other thing I would caution is personal use. If I have an ensuite that I’m running now for Airbnb, don’t use it for personal use. Don’t put your mother up—wait, that’s my mom—or something like that because if it’s more than 10% of the total days rented, you get thrown into a completely different role and may not get the deduct losses.
Toby: Diana already says, “What’s considered substantial service?” Good question. The IRS doesn’t really give us an answer. It’s anything that you’re providing that a hotel would basically be providing, so changing the sheets, food, concierge service, things like that, but they don’t say here’s a list.
Jeff: Yeah, the IRS Publication actually says, when it says substantial services, it says, you know.
Toby: Yup. Basically, you know, like a hotel. Like, water? Running water and a shower? No, I’m just kidding. It’s always facts and circumstances, which the IRS likes and we don’t, unless we can make sure that they are in our favor. I’ll tell you what you do. Here’s the deal, type them out. If you are in a situation where you’re an Airbnb and you do not want to get into that analysis, then what you do is you have your Airbnb business, your host business is a corporation and you rent long to it.
Let’s say I was in this scenario and I want to make sure that it’s passive, then I rent my room in my house to a corporation. The corporation is the host, goes out and sublets it, and makes that little bit of spread. If I’m ever nervous about self-employment tax because that’s what you’re looking at if it’s Schedule C, if I’m nervous about that, if I’m nervous about whether I am providing all these other services, then I might just make it really simple and say, you know what, the host is the act of business, me as renting this space, I’m just sending it out.
Jeff: I was wondering about that. Would you do that even if you’re renting out a room in your house, rent it to your corporation, and have them do the Airbnb?
Toby: To do what?
Jeff: Would you rent out a room in your house to your corporation and then have them still do Airbnb?
Toby: I potentially do it or I’d reimburse. I’d have the corporation reimburse me for the use of my home.
Jeff: Okay.
Toby: I probably go that route. Somebody says, “We’re thinking of providing upsell package, rider, kids, et cetera to increase the value stack of a short-term rental. Is that going to trigger this?” Potentially, and that’s why we are probably going to do the workaround route. That’s what you’ll look at.
All right, that’s it. If you have questions that come up while we’re not doing a Tax Tuesday, so the next two weeks because we do these biweekly, by all means, email them into taxtuesday@andersonadvisors.com. We take the questions that we answer here from all those questions. My staff goes through all the questions and makes sure that they get answered. They highlight a handful of them and say, hey, that might be a good one for the group.
We just grab them from that list. We’re pretty much like, this one, this one, this one, this one, this one. If you have a good question that may be featured, it’s always fun and we could have conversations with people sometimes in the chat that asked the question. We do grab them from whatever you guys send in. In the meantime, be good to all the folks out there. Stay healthy. Do you have anything else?
Jeff: I have nothing else.
Toby: All right. Somebody says, “How can I listen to the recording?” It’ll be on our YouTube channel, so make sure that you subscribe to our YouTube channel. If you’re Platinum, it’ll be in the platinum portal. We always make sure that we put those things out there. There you go, Patty. Thank you. Until next time, this is Toby and Jeff. We’ll see you in two weeks.
