Understanding Short-Term Rentals #3

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In the last blog, we learned that the rent from short-term rentals is considered ordinary income (like flips) and not passive income (like long-term rentals). That’s a big deal because ordinary income is subject to the self-employment tax of 15.3%. In this article, I’m going to teach you how to hold title to the short-term rental and how to save on the employment tax.

First, you want to hold title (who “owns” the property as listed on the county land records) in an asset-holding LLC, like a “series” LLC. If you’re unfamiliar, go back and read the blog, “The Series LLC” from September 18, 2020. This LLC is taxed either as a sole-proprietorship (single member) or a partnership (multi-member). It is NOT taxed as an S-corp. (no S-election!!)! This is important. And ALL your rental properties should be owned like this!

So, there is no difference in how you hold title or own your short-term rental. Own it just like all your other rental properties. But, because this rent is taxed differently than the rent you collect on long-term rentals, you going to structure the “renting” part differently.

The first thing you will need to do is set up a “property management” LLC. This is NOT the LLC that owns the rental! This is set up to do nothing more than manage the short-term rental (you can also use it manage your long-term rentals and deflect liability!). Then, your LLC that owns the short-term rental will lease it to the property management company on a long-term lease (can even be more many years!). The property management LLC then does the short-term leasing and property management.
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SBA Sets PPP Forgiveness Guidelines

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You might have seen some rumors on this already, but I wanted to help make everything clear for you...

A few weeks back I told you that there were some tax professional rumors circulating about “automatic PPP loan forgiveness” for loans under $150K. Remember that?

Well, they did it!Except it is for even smaller loans (under $50K).

And it's not "automatic", but it is very, very easy.Here is the simplified applicationif your loan falls in that category.

The borrower needs to make various certifications -- that the spending meets at least 60% of PPP loan proceeds and attach verification of payroll costs and non-payroll costs. But you don't have to perform FTE (Full Time Equivalents) or salary reduction calculations. Owner wage limitations still apply of course.

It's essentially an affidavit for you to sign. (Under penalty of perjury, naturally.)
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Understanding Short-Term Rentals #2

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Last week we talked about short-term rentals and the need to confirm the licensing and zoning issues that may apply. Here we are going to talk about the taxation of short-term rentals. What follows is a summary of some tax issues. This is NOT meant as tax advice. Please consult your own tax professionals.

Rented for Fewer than 15 Days During the Year– When a property is rented for fewer than 15 days during the tax year, the rental income is not reportable, and the expenses associated with that rental are not deductible. Interest and property taxes are not prorated, and the full amounts of the qualified mortgage interest and property taxes are reported as itemized deductions (as usual) on the taxpayer’s Schedule A. This would only apply if you rented out your residence or a vacation property on occasion.

The 7-Day and 30-Day Rules– Rentals are generally passive activities. However, an activity is not treated as a rental if either of these statements applies:

  1. The average customer use of the property is for 7 days or fewer—or for 30 days or fewer if the owner (or someone on the owner’s behalf) provides significant personal services (like cleaning). This is the important one.
  2. The owner (or someone on the owner’s behalf) provides extraordinary personal services without regard to the property’s average period of customer use. This probably wouldn’t apply as you won’t be providing these kinds of services on a long-term rental.

If the activity is not treated as a rental, then it will be treated as a trade or business, and the income and expenses, including prorated interest and taxes. IRS Publication 527 states: “If you provide substantial services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service.” Substantial services do not include the furnishing of heat and light, the cleaning of public areas, the collecting of trash, and such. So, the “rent” you receive from typical short-term rentals is considered “ordinary” income (just like flips!), and you’d want run the income through an “S-elected” entity.
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How To Approach Bigger Business Players In Your Niche

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"The only person you are destined to become is the person you decide to be." -Ralph Waldo Emerson

Successful people rarely reached the top without a lot of help along the way. The ability -- and willingness -- to ask for help is one trait that really stands out among those who are truly committed to success. You find these people at your local Real Estate Investors Association https://nationalreia.org/find-a-reia/

Personally, I've been approached a number of times by tax and accounting "up-and-comers" I and have seen this done the right way ... and the wrong way. Whether it's your boss or another entrepreneur, here are some tips for seeking advice and connections from those who get asked for this all the time:

• Do NOT waste their time. Once they've agreed to help, get to the point quickly. Don't go through your life story in excruciating detail, nor spend an hour explaining your business plan or the plot of your novel. Plan what you want to ask so you can make a clear, succinct request.

• Be as specific as humanly possible. Don't just ask, "What should I do?" Imagine you can ask only one question (because that may be the case). Identify the most important issue you're facing that your expert is qualified to address and build your question around that. You may get a chance to ask a follow-up, or to move on to another subject, so be prepared, but don't assume you'll have all the time in the world to get to what you need.
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Understanding Short-Term Rentals #1

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There has been a big push for landlords to look into short-term rentals (think, Air BnB) as opposed to longer-term (monthly or yearly) typical rentals. The reason for the push is that renting a property nightly can bring in much more per month—even including vacancies. It has become almost an entirely new real estate investing technique.

While a great way to make additional rents, there are things that you should understand before jumping in with short-term rentals. The first is legality. All rental properties are regulated by the city in which they are located. You will also see county or state-wide regulations. But typically, state laws govern the relationship between landlords and tenants and other larger matters. In most jurisdictions, the specifics of what types of rental properties are allowed are done at the city level.

This city-sponsored legislation arises because cities are charged with protecting neighborhoods and the “look and feel” of their respective cities. And they have a lot of authority on rentals. Most cities require landlords to register ALL their rentals properties, pay a licensing fee and make determinations as to how many unrelated tenants can live in a give property. If you are a landlord, you should take a serious look into your city’s regulations!

But, short-term rentals are a new and different kind of rental. Cities certainly accept renters in their jurisdiction. But short-term rentals fall under the same category as hotels. So, if you have a short-term rental property, you are a hotelier, not a landlord. And most cities do not want hotels and the transient nature of hotel guests in the middle of residential neighborhoods.
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5 Business Mistakes That Can Be Fatal by Janet Behm

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“Life isn’t about finding yourself. Life is about creating yourself.”  - George Bernard Shaw

Based on what I've seen in my work with local businesses, here are the basic business mistakes people make when starting and operating a small business. These are by no means an exhaustive list of business mistakes, merely the most common -- and eminently avoidable...

  • Not having a CLEAR business plan.  A good business plan will guide you through the first few months and years of your business. It should contain metrics that help you monitor costs as well as progress.

It doesn't have to be fancy, or even something that would hold up under an investor's scrutiny (though, certainly, if you're going down that road, go the extra mile and make sure it's good). But itdoeshave to give you a roadmap to the goals you should be hitting by certain points -- 3 months, 6 months, 12 months.

  • Doing everything yourself.  Even in a one-person operation, you'll have your hands full. If you're not able to hire employees, at least be ready to outsource the tasks that aren't integral to your daily operations.

In this way, of course, you free yourself for the highest-level activities, such as marketing and sales.
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Dream Now. Yes, Now.

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“Life isn’t about finding yourself. Life is about creating yourself.”  -George Bernard Shaw

You'd probably be surprised if you sat in on some of the meetings I have with certain tax planning and preparation clients.

This is by no means the majority of my clients, but there are some who have socked away a significant nest egg ... but who are bored, tired, and a little numb.

And, of course, there are those among my clientele who have not yet reached the financial (or otherwise) zenith they've been working so hard towards, and they are still stuck in the grind of "everyday living". They spend hours reading the "news" and tilting at windmills on Facebook, and then they wonder: where is all this time that others seem to have to build their career?

In many instances, they haven't taken the time to re-assess whether or not what they're shooting for is, in fact, the place where they will be most alive.

They haven't taken the time to dream. And, more importantly, they haven't put a concrete plan to whatever dreams they might have had in earlier days. They're dragged around by their nose by national events and whatever circumstance comes their way.
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3 Keys to Converting a Single-Family to a Commercial Property

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Hopefully you’ve learned there are a lot of ways to make money in real estate! Forcing appreciation and “best use” are common terms. How do you make a property more valuable than it currently is? That’s the real question and there are a lot of ways to do it. One way is to change the “use” of the property. Below are 3 simple keys to evaluating a deal where you take a single-family residence and turn it into a small office space.

Obviously, there are a lot things to consider during the entire process, but these keys will help you evaluate the property to see if it will even work.

Key #1 – Zoning: This should make sense. You need to find a property that is in a zone that allows the conversion. You see things like “mixed use” or other classifications unique to the city. The best place to start looking is on wider, more congested streets where there are family residences or where you see these kinds of conversions already existing. This is usually due to the changing nature of that part of town. Many cities will re-zone those areas into mixed use to encourage a change in use. If you don’t’ have the right zoning, either you can’t do the deal or you’ll have to get the lot re-classified. While possible, it can be a much longer and expensive process but one worth looking into.

Key #2 – Parking: Assuming you have the right zoning, you may not have the right property. Commercial buildings mean that customer or employees will be coming to the building. That means more parking needs. In fact, your zoning laws will dictate how many parking stalls you will need. You can bet that the number will be bigger than what will fit in a standard driveway. For a 2000 square foot property, you could see up to 7 or 8 stalls needed. And remember, there are setbacks, turn around area and most likely even a handicap stall which is almost twice as big as a standard stall. The parking is often the one issue that will kill your conversion.
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The Series LLC

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Have you heard of a “series” LLC? It’s a special kind of LLC that is available only in a handful of states. Delaware was the first state to adopt it and now about 20 states that offer it and the list is growing.

While it was initially designed for other purposes and industries, the real estate community has jumped on it. So let’s explain what it is. First, it’s an LLC in structure like any other LLC. There are members, managers, an operating agreement and certificate of organization, which is filed with the state. It can be taxed as a pass-through (single member), partnership (multi-member), and it can even make an “S” election with the IRS to be taxed like an S-Corp (although there’s rarely a need for this and it can cause tax complications).

But then, this special LLC is permitted to create what are called “series” within its structure. To understand this, we need to talk liability protection. If you own a rental property in an LLC and there’s a slip and fall, the plaintiff will sue the owner of the house, that is the LLC. Being the defendant on lawsuit means that if there’s a judgement against it, the court can go after ANY asset the LLC has. This would include other rentals. Thus, most investors prefer to separate out their rentals so that the bunch are not as risk if there is a problem with one.

So, investors would set up a holding company (that did not own any rentals) and then a sub-LLC of that for each rental property. So, each rental was in a different company altogether and there was a separation of liability. But, that’s a LOT of LLCs to create and manage! Your attorney will be very fat and happy with you.
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What You Should Know About The CDC Eviction Stay

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“Do not do to others what angers you if done to you by others.” -Socrates

So yes, this is real, and it is happening.

But it's also not something that means "instant apocalypse" for landlords, nor does it mean that every renter can simply and legally stop paying rent and " just tap their heels together three times and..." and pocket it as savings.

That's because, of course, there are caveats, provisos, etc. So, let's dive in...

First of all, the authority the CDC cites to establish this rule is the Public Health Service Act of 1944, which is also being cited in a variety of contexts over the course of the past 6 months.

Might there be legal challenges to this? Oh yes.

But that doesn't mean it's okay to ignore this eviction moratorium. It's on.

Per the ruling, the eviction stay is in place until the end of the year (for now).

But good news/bad news, this doesn't mean that anything goes.

Tenants must:

  • Earn a documentable AGI (Average Gross Income) of less than $99,000 (single) or $198,000 (married filing jointly),
    AND
  • demonstrate they have tried to pay at least some portion of monthly rent,
    AND
  • have suffered income loss or medical expense increases due to COVID-19
    AND
  • have applied for government assistance in some form or fashion,
    AND
  • confirm and document that if they were evicted, they would be homeless or have to go to an unsafe, crowded facility,
    AND
  • file a specific form with the landlord. (If you're a tenant needing to do this, I suggest sending the form by certified mail for legal paper trail purposes.)

So ... if you meet all of these requirements, then you can take advantage of this order.
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