A Florida-based psychiatrist is capitalizing on a tax advantage associated with short-term rental properties, generating substantial income and significant tax benefits. While the venture requires considerable effort, the financial rewards, including a six-figure income from her short-term rentals, are proving highly lucrative.
Key Takeaways
- A Florida doctor is utilizing a tax "loophole" related to short-term rentals.
- This strategy allows for the deduction of rental losses against primary income.
- Short-term rentals can yield six-figure incomes but demand significant management.
The Short-Term Rental Tax Advantage
Dr. Nicole Shirvani, a board-certified psychiatrist in Florida, has expanded her investment portfolio to include both long-term and short-term rental properties. She notes that her short-term rentals, particularly those in Virginia’s Shenandoah Valley, have generated more income—exceeding six figures—than her long-term rentals.
While the operational demands of short-term rentals are higher due to frequent guest turnover and associated logistics, Shirvani finds the tax benefits compelling. Operating short-term rentals allows property owners to deduct various expenses, including utilities, cleaning, maintenance, insurance, and furnishings. Mortgage interest and property taxes are also deductible.
A significant tax benefit, often referred to as the "short-term rental loophole," allows property owners to deduct certain property-related costs, such as depreciation and repairs, which are classified as passive losses. Typically, losses from rental activities can only offset other passive income. However, under this loophole, these losses may be deductible against one’s primary income, such as a salary.
Qualifying for the Loophole
To qualify for this favorable tax treatment, specific IRS criteria must be met. The average stay at the property must be seven days or less. Alternatively, if the average stay is 30 days or less, the owner must provide services comparable to those offered by hotels, such as supplying linens and amenities. Additionally, property owners must pass a material participation test, demonstrating direct involvement in the property’s operations. This often involves dedicating more than 500 hours annually to the short-term rental business.
Considerations for Short-Term Rental Investors
Before investing in short-term rental properties, potential investors should consider several factors. Shirvani suggests evaluating the property’s location, focusing on areas with attractions that draw tourists, such as beaches, ski resorts, or theme parks. The property itself should be appealing enough that the owner would enjoy staying there. It’s also crucial to research local regulations, as some communities have restrictions or prohibitions on short-term rentals.
For those who prefer to generate rental income but wish to avoid the intensive management involved, hiring a property manager is an option. While this reduces profits, it significantly alleviates the workload. Owning rental properties involves tying up capital in an illiquid asset and carries risks, including unexpected repair costs that can impact profitability. Alternative real estate investments, such as Real Estate Investment Trusts (REITs), offer a way to invest in real estate without direct property ownership.