What is the number one reason why the short-term rental tax loophole fails when it comes to an audit?

It's interesting.

I know because we haven't really had any clients who failed an audit on an STR.

I can tell you an experience of STR audits.

We talk a lot about the different roles and what you need to do to earn the hours.

The reality is auditors audit all types of tax returns, so we cannot assume they understand the law with respect to STRs or how short-term rentals even work.

So we had a client that was audited earlier in 2024, actually.

What's some of the bad advice that we see on Instagram and YouTube?

Like, is that a fair statement? Or how do you think about planning versus filing?

Yeah, I mean, I would say the majority of accountants in general are trained on the compliance side.

Compliance meaning putting the right numbers on the right forms to report what happened last year.

Right.

Taking a historical look versus on the strategy side, we're really looking at what should we do next? to make sure we pay less taxes in this year or maybe next year as well.

And unfortunately, most taxpayers really only work with people who are filing their tax returns.

Most people think about taxes between January through April.

What do you see the wealthy clients doing?

It's kind of like, why do we have this limit if you can get around it this easily? Is that how you guys perceive it?

Yeah, that's why I was saying earlier, you know, the IRS doesn't make things easy on us.

They basically make us go through a hoop to kind of arrive at the same place.

So the standard rule is if your income is above those limits, then you are not able to put money into a Roth account.

Why do we want money in a Roth? Because we want to grow tax free, right? So they're saying, hey, you make too much money, you don't get this tax benefit.

But the reason we call it a backdoor Roth is instead of just putting money directly in the Roth, you can take a two step process to basically end up at the same place, which is money inside a Roth account.

And the two step process is one make after tax contributions into a retirement account, let's say for an IRA.

after that you can also do a regular backdoor roth on top of that so do that both spouses and then from there you can consider something like a 529 plan but you've largely gone through the optimal stack at that point in that order that's about 165 000 or a little bit more than that actually if you have gone through that entire stack for a married household so that's an elite level of savings and will cover most even high income earning from a tax optimization standpoint How do I do? Is that is that pretty close? Is that the way to implement this in order?

It's kind of like, why do we have this limit if you can get around it this easily? Is that how you guys perceive it?

Yeah, that's why I was saying earlier, you know, the, the IRS doesn't make things easy on us.

It, they basically, basically make us go through a hoop to kind of arrive at the same place.

So the, the standard rule is if your income is above those limits, then you are not able to put money into a Roth account.

Why do we want money in a Roth? Because we want it to grow tax-free, right? So they're saying, "Hey, you make too much money, you don't get this tax benefit." But the reason we call it a backdoor Roth is instead of just putting money directly in the Roth, you can take a two-step process to basically end up at the same place, which is money inside a Roth account.

And the two-step process is, one, make after-tax contributions into a retirement account, let's say for an IRA.

And then step two, take that money that you just contributed, convert into the Roth bucket.

How'd I do? Is that, is that pretty close? Is that the way to implement this in order?

And maybe you could just help us understand what is the benefit of front-loading depreciation and what are some instances or circumstances where you recommend that for real estate investors?

For sure.

The purpose or the benefit of accelerated depreciation, basically saying rather than waiting over time to take a tax benefit on the purchase price of my rental building, I'm going to do what's called a cost segregation study.

And what that does is it allows me to then take faster depreciation this year and maybe the next few years rather than having to wait.

So effectively, we're looking at the time value of money, of savings.

In other words, I know I have to pay taxes to the IRS.

I can either pay it now or I can pay it slowly over the next 27 or 39 years.

So How do you systematically recommend people go about doing this so that they can capture the most benefit, but that's not driving them crazy?