364. The Tax Questions High-Income Real Estate Investors Are Asking in 2026

Summary

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Tax Smart Real Estate Investors Podcast

Episode 364: The Tax Questions High-Income Real Estate Investors Are Asking in 2026

Date: February 9, 2026
Hosts: Tom & Nate (Hall CPA)

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Overview

This episode is a rapid-fire, Q&A-style session where the hosts, Tom and Nate, answer high-impact real estate tax questions sourced directly from their Tax Smart community and client base. They focus primarily on challenges and strategies facing high-income investors in 2026, especially around property sales, capital gains, cost seg on new builds, short-term rental loopholes, and the evolving pitfalls of using property managers. The hosts combine practical advice with real-life anecdotes and recent regulatory updates, offering actionable insights for real estate investors at all experience levels.

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Key Discussion Points & Insights

1. Mitigating Capital Gains When Selling a Rental (01:32)

• Situation: An older couple is selling their lone rental, seeking tax-efficient ways to minimize capital gains as they exit landlording.
• Options Outlined:
  • Sell in a Low-Income Year: To possibly reduce capital gains tax brackets (avoiding 20% bracket, net investment income tax).
    • “You can sell it in a year that you have low income, right?” – Host 1 (01:32)
  • Delaware Statutory Trust (DST) or 721 Exchange: Roll proceeds into passive, institutionally-managed real estate; note liquidity limitations.
  • Seller Financing: Spread the gain out, easing the tax burden over time.
  • Tax Loss Harvesting: Sell losing investments to offset the gain.
  • Passive Losses: Use accumulated losses (check Form 8582).
  • Reverse Cost Segregation Study: Allocate value to personal property (Section 1245) to optimize for capital gains treatment.
• Expert Advice: Sometimes, the simplest route (“bite the bullet and sell”) is best if liquidity is needed.

2. Interest Deductions with Uncooperative Lenders (06:28)

• Problem: Investor built an ADU with $400k in private loans but can’t get a 1098/SSN from the lender for tax reporting.
• Best Practices:
  • Always collect a W-9 upfront before disbursing money to contractors/lenders, enabling you to issue 1099s and withhold if necessary.
    • “My recommendation is on the front end, before you pay someone, ask for a W9.” – Nate (06:28)
  • Ideally, get documentation before making payments to avoid the lender “ghosting” you post-payment.
  • Claim interest as a rental expense if you have a valid borrower-lender relationship—even if you lack a 1098.
  • Takeaways: Proactive documentation prevents compliance headaches.

3. Cost Segregation on New Builds & Bonus Depreciation (08:31)

• Question: Can a new build STR qualify for cost seg and 100% bonus depreciation?
• Answers:
  • YES: New builds are eligible—cost segregation studies can be performed just as on existing properties.
  • Documentation Critical: For self-constructed properties, meticulous records are necessary for bonus depreciation allocation.
    • “You gotta get a cost segregation study. I’m sorry, that’s just…literally required by the IRS in their audit technique guide.”– Nate (09:30)
• Recommendation: Always use a professional, engineer-driven cost seg study, not a DIY approach.

4. Short-Term Rental (STR) Loophole & Material Participation (09:53)

• Topic: Using the STR loophole to offset W2 income and the 100-hour participation test.
• Key Clarification:
  • Strict Division: Construction/development hours do NOT count toward material participation for STR activities; only operation/preparation (furnishing, guest communications, etc.) after the property is “placed in service” are eligible.
    • “The actual building of the home is not going to count…once the home is built and you’re furnishing…that’s when you start counting those hours.” – Host 1 (11:33)

5. Efficient Logging of Material Participation Hours (12:13)

• Efficient Tracking Tools:
  • RepsLog – created for real estate pros.
  • Clockify & Toggl – generic time-tracking apps, also useful.
• Best Practice: Avoid generalized entries; be specific and diligent to withstand IRS scrutiny.
  • “[Good tracking] is absolutely crucial to protecting your deductions when it comes to if you do get audited by the IRS.” – Nate (13:07)

6. The Dangers of Personal Use Days & Section 280A (14:16)

• Rule: Using an STR personally (or letting family/friends do so) can severely limit first-year depreciation under Section 280A.
• Example Explained: A single personal stay could prorate away most of your year-one depreciation deduction.
• Advice: In year one, treat the property as a business only—no personal or charitable use—to maximize deductions.

7. AI Advice Cautions—Don’t Trust ChatGPT for Nuanced Tax Law (16:38)

• Discussion: AI tools are helpful, but they often “get it wrong,” missing context and nuance in tax regulations.
  • “They don’t have the full context…they’re still missing key things.” – Host 1 (16:38)
• Advice: Use AI for research and second opinions only. Always check with a qualified CPA before acting on AI advice.

8. The $25k Passive Loss Allowance (18:31)

• Scenario: Can investors offset non-passive income (wages, cap gains) with passive losses using the “$25k exception”?
• Answer: Yes—if AGI is under $100,000, passive losses can offset both earned and investment income, provided you materially participate.

9. Short-Term Rental Hours—Counting Toward Real Estate Professional Status (18:47)

• Clarification: STR, LTR, and mid-term rental hours all count toward the 750-hour REP threshold, but each must meet their own material participation standard to unlock non-passive treatment for losses.
  • “Short term rental hours will help you get to the 750… but will not help you get to the material participation requirement on your long term rentals.” – Host 1 (19:18)

10. Material Participation & Property Managers—Why It’s (Almost) Impossible (19:35)

• Myth Busted: Managing to “spend more time than my property manager” for STR material participation is almost always futile.
• IRS Bias: When management fees appear on your return, the IRS will presume you are not materially participating.
  • “You're assumed to not be material participation. So it's like you're assumed guilty, right…?” – Host 1 (19:48)
• Lucero v. Commissioner Case: Taxpayers lost because they could not prove they outworked their manager.
• Advice: Do not use a property manager in year one if you want to claim material participation; otherwise, expect a tough (and probably losing) audit/fight.
  • “It’s just not worth it.” – Host 1 (22:34)

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Notable Quotes & Memorable Moments

• On Selling in a Low-Income Year:
  “You can sell it in a year that you have low income, right?” — Host 1 (01:32)
• On Cost Seg for DIY’ers:
  “Unless you are an engineer and you think your specs can go up to snuff with the IRS…you gotta get a cost seg study.” – Nate (09:30)
• Audit-Proofing Your Logs:
  “It’s absolutely crucial to protecting your deductions…if you do get audited by the IRS.” – Nate (13:07)
• On AI in Tax Research:
  “They don’t have the full context…they’re still missing key things.” – Host 1 (16:38)
• Short-Term Rental Personal Use:
  “In year one…let the property run as a business. You probably need to do that anyway since it’s your year one as operating short term rentals…” – Nate (14:16)
• Property Manager Pitfall:
  “You're assumed to not be material participation. So it's like you're assumed guilty, right…?” – Host 1 (19:48)
  “It’s not a battle that I’m looking forward to fighting.” – Host 1 (21:17)
  “It’s just not worth it.” – Host 1 (22:34)

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Important Timestamps

• [01:32] Mitigating capital gains when exiting real estate
• [06:28] Handling insufficient 1098/SSN from lenders on interest deductions
• [08:31] Cost Segregation for new builds and documentation for bonus depreciation
• [09:53] STR loophole, material participation & 100-hour test
• [12:13] Efficient ways to log hours for IRS audit defense
• [14:16] Section 280A: Why you should not use STRs personally in year one
• [16:38] What AI tax advice gets wrong
• [18:31] Using $25k passive loss exception to offset W2/cap gains
• [18:47] Counting STR hours toward REP status
• [19:35] Can you outwork your property manager for material participation?
• [21:17] Legal precedent & pitfalls – Lucero v. Commissioner
• [22:34] Final verdict on property managers and material participation

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Flow & Tone

The hosts use a conversational yet direct tone, blending humor (“Like playing chicken with your property manager…”) with solid professional advice. Real stories, case law references, and regulatory links keep the content both practical and accessible for novices and seasoned investors alike.

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Takeaways

• Plan exits and capital gains with foresight to time your sale and evaluate all deferral methods.
• Proactively gather and maintain tax documentation (W-9s, cost seg studies, tracking logs) before financial transactions occur.
• Maximizing STR tax benefits demands rigorous adherence to both material participation requirements and operational “best practices” (no managers, no personal use in year one, detailed logkeeping).
• AI is not (yet) a substitute for nuanced, context-rich CPA advice.
• Some tax “loopholes” have become riskier as IRS enforcement and case law evolve: don’t gamble on beating property managers at their own game.

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To learn more or get your own questions answered, visit TheRealEstateCPA.com/Podcast or join the Tax Smart REI Facebook Group.

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Transcript

[Tom]

You're now listening to the Tax Smart REI Podcast, the number one tax podcast.

[Host 1]

For real estate investors.

[Host 2]

Your source for all things real estate, accounting and tax. Here we reveal our secrets that can save you thousands in taxes, streamline your accounting process, and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors, and current clients on what strategies they use to grow their business and how they steer clear of Uncle Sam.

[Tom]

Thanks for tuning to this week's episode.

[Host 1]

Of the Tax Smart REI Podcast.

[Tom]

Today, Nate and I are going to.

[Host 1]

Be taking questions from the Tax Smart community on Facebook, within the whole CPA.

[Tom]

Client community and just frequently asked questions.

[Host 1]

That we've been getting here as we start the year. So going forward, we're also going to be moving into a more segmented format of the podcast, so you'll be hearing more details on that coming up. But we'll be diving right into all these questions in just one moment.

[Tom]

You've probably never found a real estate newsletter worth reading, and that's because we hadn't created ours yet. The REI Daily is a newsletter you actually want to read whether you own one property or 100. We created this for you. Each issue delivers crucial tax saving strategies, legislative updates, as well as real estate market insights. Everything you need to stay sharp and ahead of the game. Get the real estate and tax news that actually matters straight to your inbox. Subscribe to the Rai Daily newsletter today and at therealestatecpa.com subscribe. That's it for now and right back into today's episode.

[Host 1]

And we're back. Thank you everybody for tuning in again. We're just gonna kick it off with the first question we have here for today. I know there's a lot of questions on people's minds and this question is my husband and I have one rental property. We've decided to get out of the game and sell the house. Okay. So they're exiting the game of real estate. We will incur a profit so they'll have a capital gain. How was the best way to reduce the capital gains taxes? We're going to pay off our debts and reduce expenses. We are getting up in age. Seems like they're about to retire. Do you have any advice? Would be thankful. All right, so capital gain. How do you mitigate a capital gain? Let's and my presumption here is they don't want to be landlords anymore. It's just kind of where the question is worded. So the first thing you could do and someone had commented this already, so Shout out to them for commenting this. You can sell it in a year that you have low income, right? So if you sell in a year of low income, you will theoretically minimize your capital gains taxes because you'll be paying 15% percent and potentially avoiding the net investment income tax and of course that 20% capital gains tax bracket. So this is one option to sell it and bite the bullet and move on.

[Nate]

Right.

[Host 1]

Another option is to invest into a dst, okay, A Delaware statutory trust. Those are usually class A type properties like a Walgreens or like a Dollar General or whatever Best Buy, what have you. That is kind of like a syndicate where you're not actively managing it, but you exited out of real estate and got the burden down. However, you typically will not tap into the sales proceeds that in that case, right, you'll be investing the sales proceeds. And the same thing with a 721 exchange, which is where you basically sometimes invest in a DST first or sometimes directly into the 721 exchange fund where you'll get share effectively like REIT shares effectively. Long story short, we've covered 721exchanges here on the show. You can go back and check them out, but that's one option. But if you're looking for liquidity to pay down debts, you know, the best option might just be just to bite the bullet and sell it or maybe even look at seller financing where you could at least spread the capital gain out over a period of time. Nate, any thoughts on this?

[Nate]

Yeah, good question. So originally I was going to suggest like, okay, why do we have to sell? Right? That's the question I would ask like, do we have to sell this property? And like, because hey, I always ask like can we borrow? Whatever. And if you actually look in the details, they say they want to sell this so they can just have a little bit more capital to do different things with, which totally fine, right? That's not an option for us to just refi and borrow and like, like take, take advantage of the current equity in the property. That normally is my favorite non taxable transaction in that instance. Right, Norton? Because you do that refi, you get the equity, you've gotten the cash in your hands and you do that, right. Like with normal, it's the same thing as a Burr strategy for the most part. So that's an option. One other is like, right, everyone's going to say this, it's not a brilliant move by any stress management. It was tax loss harvesting. Right? Maybe you've got some losers in the market. Right. I know I did last year and I went through my, my all Robinhood account and kind of like scrolled through and found some of the losers. Like, okay, I don't think these guys are going to do any better. I'm not like expecting it. So I'm going to sell them off, right. I had some capital gains this year, so I'm going to sell those off and I'll just reposition myself into the ones that I like, right? Some of the mutual funds, ETFs, whatever it winds up being. So that's one example. Another one you could potentially like. I think these people want to be completely out of real estate, right. So I would ask first, like, do we have any passive losses? Right. These are just like the low hanging fruit that we don't have to do anything crazy with. So we have passive losses that we can use to offset this that we accumulated, right. Go check for your Form 8582. That's going to tell you if you have passive losses that can be used or not. So that's one example. Like Tom said, you're going to have a low capital gains bracket. If you've done a cost sake. Here's one thing I'll recommend is that you can look at doing a, it's been rebranded, but essentially an allocation study. An allocation study says, hey, I looks at the, for the most part, when people buy real estate, they want to buy the shell, right? They want to buy the structure, the foundation and the land. They don't always care about what's on the inside, right? They don't care about your furniture, they don't care about some of the cabinets or stuff like that. They might rip them out and do their own thing anyways. And so by doing what's now called a reverse 1245 cost segregation study, which is essentially just a reallocation saying, hey, this furniture is not worth very much. This isn't worth more value to the assets that are eligible for capital gains treatment, not depreciation. Recapture. That's another opportunity, right? That's a little bit more high level for those who have apartment buildings or less than apartment buildings, commercial buildings or STRs, right. Looking to sell. That's an option opportunity I would explore. But those are some suggestions that I have.

[Host 1]

Cool, cool. So yeah, there's some options there. So might want to speak to a tax strategist, see if they can help you work through the finer details of that question. But there's some food for thought. We have a question, some more on the compliance side, which I guess is appropriate as we're entering into tax season here in full swing. I borrowed over 400k with a high interest rate from private lenders to build an ADU in my backyard. I paid more than 20k in interest in 2025. I requested a 1098 or their SSN for tax purposes, but they refused. I know their name and where they live as stated on the loan. What should I do? Do I put this interest under my rental expenses? Any input is much appreciated. Do you have any thoughts on this one, Nate?

[Nate]

This is like I see it. I see another post in here. Someone from mid January have coming up with the same problem. Like, hey, I requested my contractor for W9 and they're saying, nope, I'm not giving it to you. I unfortunately had several clients that ran into this issue too, where you try to get W9 and like, guys, my recommendation is on the front end, before you pay someone, ask for a W9 every work of the contractor. Right. Even if you don't expect them to do 600 bucks. Right. Like, if you don't expect not to be at that threshold, still get that W9 before you pay them. Because if you do that and they say no way, that way you can withhold 25 or 2425. I can't remember the exact number. Whatever the withholding is, issue it to them saying, hey, you're only going to get 25% of your check because I am required by the IRS to withhold it for you and send it to them and do it on the W on the 1099, then they'll probably get you W9 pretty fast at that point in time. Yeah, if that happens.

[Host 1]

Yeah, usually, yeah. You want to either get it upfront when you're initially setting up the relationship or before you start making payments, you know, because at the end of the day, once you start making those payments or you make the payments and they have no need to respond to you. You know, it's happened every single year that I've been in this, in this industry and it's going to continue to happen because they know exactly how it works. So the bottom line is get it signed either at the start of the relationship or before you start making payments. Because once you start making the payments and you paid them what they needed, there's a high likelihood that they could ghost you. All right, so we have another one here. I'm considering building a home as a short term rental after learning about 100% bonus depreciation, cost segregation. Would a cost segregation even apply? To a new build. Short answer is yes, you can do a cost segregation study to a new build. As much of the, much of the components that you'll be putting in, it's just like any other house, right? It's. You just do a cost segregation study on the new build, they'll break out the 5, 15, 15 year property that is eligible for 100% bonus depreciation. Nate, I know sometimes we talk about, because you have all the documents for the new build that you could kind of piece that together, you know, how practical is that? Or would you agree that a cost segregation study is just the better play?

[Nate]

Cost segregation study is a better plan. If we're talking about the timing of bonus depreciation with 2025, then you need to have those documents in order to do the componentizing to be able to show, hey, that you placed this piece in service. You placed that piece in service talking to a lot of self constructors who, hey, you got to be able to have and show that your subcontractor completed this on this date. You got to be able to show that in evidence to your tax pro and to whoever's doing your cost segregation study to actually be able to get over the hump there. You're going to have to work in tandem with both with a tax pro and the cost seg person to actually get this out. You need a lot of documentation, unfortunately. Right. It's only this year. So we never like, after this year, everybody gets brief, let it go, never worry about it again.

[Host 1]

Yeah, Nate, I think they're talking about like in 2026, they're going to build this. So it's not, not, not the 2025 issue, but it's just in 2026 they're going to build a short term rental. Does the cost segregation study still like, they're still eligible for 100% bonus depreciation? To be clear, it's just. Is a cost segregation study the best way to get the component or should they try to compile it in some other way?

[Nate]

The answer, the easy answer is you have to get a cost segregation study.

[Host 1]

Right.

[Nate]

Unless you are an engineer and you think that your engineering specs can qualify, can go up to snuff with the irs, which per their technique guide, it would not. You got to get a cost segregation study. I'm sorry, like, like, that's just, it's just literally required by the IRS in their audit technique guide saying you need this done by a qualified engineer. And so you got to go out and get to the, get to Them for that.

[Host 1]

Okay, cool, cool, cool. Bottom line, cost segregation study the best way to get your 100% bonus depreciation. And yes, you can do cost segregation study on new builds. So moving right along, I need some help strategizing. I am considering a new build for short term rental investing and want to use the short term rental loophole against my W2 income. Okay, cool, cool, cool. I think the more the most likely test I can meet is 100 hours and more than anybody else. That's how everybody does this, you know, for the most part. I'm kidding. That's. That's what everybody. That is, that is usually the test most people are going to be. Usually. Uh, when does the hundred hour test begin? When the home is placed in service or during construction of the home.

[Nate]

Yeah, that's a great question. So construction slash development of the home is a separate activity compared to the running of a short term rental. Now and let's like wait, what's that mean? Right. If you're the one building the property yourself, then all that time, that's development activity, that's probably qualifiable. Reps, hours. Just FYI, assuming that you can show all of that, but that's not material participation time for your short term rental. Now you say like, okay, when's a cutoff? Well, I would say the cutoffs like when you're actually working on the inside of the property. Like what I mean by that is like getting it ready to be an Airbnb. Right. Like if I go out today and I go buy a home to turn into a short term rental, the time that I'm spending on getting that home ready to go, that's from participation time. Right. I'm not actually building the property. I'm not actually like putting, laying the foundation, et cetera. Those are two different activities. Per the tax code it specifically states in, I believe 1.4699 could be confused on my regs there. But I think it says specifically that development activities and the operations of an activity are very separate.

[Host 1]

Okay, cool. So the actual building of the home is not going to count towards material station, but once the home is built and you're furnishing the home and actually starting to get it ready for the short term rental, that's usually when you be able to start counting those hours. Okay, great. So there's a part two to this question. We're going to keep going here. This is, these are good questions. I'm sure a lot of people have these.

[Tom]

Hey, real quick, if you've been a long time listener to the show, then you know we give everything away for.

[Host 1]

Free from how to use the real.

[Tom]

Estate professional status and the short term rental loophole to save tens of thousands of dollars on taxes to upcoming tax changes. We don't hold anything back and the only way we would help more real estate investors is if you rate, review and share the show. It just takes 15 seconds to leave a quick rating review or share with a friend who may find this information useful on their real estate journey. That's all for now.

[Host 1]

We'll dive right back into today's episode. Any tips for logging hours? When I previously did this with a purchase of a renovated cabin, I logged hours in Excel, which is really time consuming. I will continue that unless someone has a more efficient system that I can share. So I can just give my tips and Nate, we'll hear your take on it. So there's time tracking applications like Reps Log that's specifically made for tracking material participation hours. There's also apps like Clockify and Toggl you can put on your iPhone. I'm sure they have it on Android too. It makes tracking time a little bit easier. And I'm not aware of too many AI tools right now that are really kind of taking things by storm, but I'm sure that's next in some way, shape or form. But right now, Clockify, Toggl, those types of apps, Reps Log, those can make it a little bit more streamlined for you then a little bit more user friendly than putting into an Excel spreadsheet, but I don't know by how much.

[Nate]

Yeah, I'm going to give a real life example. I had a client who did not necessarily do the best job with their logs. They actually had a lot of generalized entries and the IRS agent was not happy about these generalized entries and wanted to throw out the case because they're so generalized with it. I know it's not a fun part. Tom and I, we're not paperwork guys. It's not the most fun thing in the world to go track hours and stuff like that. But I can tell you it's absolutely crucial to protecting your deductions when it comes to if you do get audited by the IRS and if you have questions from them. So being able to use apps like Toggl, that's fantastic because it's actually legit. You can show the time clock that happened. Right? And the day, all that wonderful stuff that's hard to refute that. Right. And so that way you can always go back and change like what you actually put on there. Right. Just don't be generalized when you do that. So like Tom said, Repslog is a good one. Toggle is a good one. Clockify. I will say that, like, there's not a. Like you can probably go make your own cloud app, right? And go make your own cloud app that like lets you have the ability to do that, right? Or just like talk to ChatGPT. A lot of speech to talk type of entries that you can use as well. So just FYI, like, are we limited somewhat, but there's options for you out there.

[Host 1]

Yep, yep. Okay, cool.

[Nate]

Tom, I got this question. It wasn't from like our Facebook group. It was from another. It was from another real estate group and it was someone saying, I have a short term rental put in the service in November. We're planning for 2025 taxes and they're talking to their CPA and I said, hey, make sure that you don't touch the property this year. And like, what he meant by that was don't stay at the property, don't stay there, don't do anything there. Right. And the reason why is because he brought up 280 cap A, which was totally important and correct suggestion. Right? So that. What is 280 Cap A? Basically it means if you have personal use days, if you stay at. While the Airbnb is operating, we'll go through that in a second. But while the Airbnb is operating and you stay there, that means if you have, let's say in November, you're only going to get five stays and you stay there once. That means you have now an equation of five out of six days. You have to subtract expenses out. Now, going fractionally, going back to grade school, middle school math. If you have a five out of six and we have to prorate your depreciation out for year one, you're going to lose a significant amount of depreciation. Right? And 280 cap A is actually a lot more hard to utilize than the passive loss rules, right? Because it goes into a different bucket, in my opinion. So it makes it more difficult to utilize. And so what we're saying when people say that is like, hey, don't stay there, right? Do not personally use the property. Do not let spouses, don't let family members, unless it's uncles or cousins. But like, do not let them stay there unless. And even if they're paying for market value, right. Friends can do it, no problem. Cousins. But then they got to pay for market value. And a lot of People want to also like give to charity. I love that. Just FYI, year one it's going to hurt your depreciation. So I recommend year one don't do anything special, let the property run as a business. You probably need to do that anyways since like it's your year one as operating short term rentals and running the business. Probably need to figure your kinks out first before you start doing the other type of stuff. But just a quick blurb on 280cafe of people asking those type of questions and I then of course this happened too is someone else jumped in the comments and started saying well this is what ChatGPT is saying LLMs are saying, right? And hey, I love LLMs, I use them every single day. But they don't get all the context correct and that's so important about having that context. And so hey guys, I think it's great when you like share with your CPA that like hey, this is what my LLM said. This is what Claude, this is what Gemini chatgpt said to me. What are your thoughts? I think it's a great use case but having it, but thinking it's always correct. I would be very questionable with that.

[Host 1]

Yeah, ChatGPT and AI in general, whatever AI platform and I've used Gemini a lot recently. Like Gemini too, they don't always get things right in the tax field and even till this day they've gotten a lot better but they're still not 100% right and they don't have the full context. There's still little odds and ends that they're still missing. We know we did an episode back on that a few months ago where we like stress tested ChatGPT and it really didn't, you know, it didn't perform good when you kind of really got into the nitty gritty. But so the crux of this one was they were saying not to stay there. 288. And that was the correct guidance.

[Nate]

Yeah. So somebody else came in saying with ChatGPT and ChatGPT was like telling him, oh, you don't worry about that.

[Host 1]

Right?

[Nate]

Well because they said that like once you fall under the 14 days that the 280 Cap A rules no longer apply, that the personal you stay rules don't apply anymore. And that's totally incorrect unless you're working on the property, spending four showers like spending and spending a half day, whatever. Spending a working day on the property and it's always going to count against you. We don't want to do that. Right. We Want to maximize the deductions as much as possible.

[Host 1]

Right, right, right. No, for sure. And that's a big, it's a big thing for people to be aware of because a lot of times with short term rentals you want to use it personally, you want to let friends and family use it, it's got to be aware of the rules and we get this a lot. So definitely speak to your qualified CPA, talk about short term rentals before you kind of make those decisions. All right, cool. So we got a few more questions here for today's episode. Here's a good one. If I have 10k in wages and 15k in cap gains from a stock sale, can I use the 25 passive exception to offset this? Yes, you can use the 25k passive activity loss exception to offset that. As long as you're actively participating in the, in the activity and you're under a hundred ,Thousand dollars in AGI, you can use that 25k passive activity exception to offset the cap gains, the wages, so on and so forth. It's non passive. Right. It's like the real estate professional status at a very, very small micro level with that 25k exception.

[Nate]

There. Somebody asked, I have 10 long term rentals. Acquired our first short term rental in September 2025. They personally manage all the properties, spend more time on their real estate hours than any other job. Can I count the hours spent on my STR towards rep status? Will that help me get over the hump to get to 750.

[Host 1]

Hours? Yeah, this is a great one. This is a good.

[Nate]

One.

[Host 1]

Yeah. So we actually wrote an article on this when they updated the regulations under Reg. Section 1.4699. So basically short term rentals, hotels, motels and similar establishments are considered real property, therefore making it a real property trade or business. It was both in the regulations and in the examples to those regulations at the bottom. And basically those short term rental hours will help you get to the 750 hour requirement, but it will not help you get to the material participation requirement on your long term.

[Nate]

Rentals. Bingo.

[Host 1]

Yep. Yeah, so that's kind of how it works, long story short, but you're looking at it like your long term rentals and your midterm rentals are its own separate bucket. Your short term rentals, it's own separate bucket. Together those hours can help you get to 750. But the material participation requirements to turn each of those non passive is.

[Nate]

Separate. Tom, this is another, another home run. I think someone's asking, hey, I have a Property manager. And I'm trying to see if I can beat the property manager in my time. Okay, what are your thoughts on that one, Tom?

[Host 1]

Okay. It's like playing a game of chicken or something. Yeah. So the challenge is the crux of the question is, can I spend more than 100 hours than my property manager for the purposes of the material participation test? And we get this a lot on short term rentals. And here's the thing. The IRS atg, the Audit Techniques Guide has been relatively explicitly clear in the sense that if you have a property management, you're assumed to not be material participation. So it's like you're assumed guilty, right. By the very get go of using a property manager. And for good reason, because for the most time the property manager is doing that. The second thing is actually tracking it and proving it's a whole other story. Right. You can track your hours, but you have to be able to track and prove that the property manager spent less time than you on the day to day.

[Nate]

Operations.

[Host 1]

Right. And there was a task court case called Lucero versus Commissioner where that taxpayer had a property manager and there was a lot of flaws. And I talked about this in a previous episode recently, but there's a lot of flaws within that case. But one of the major flaws was that they were unable to prove how much time the other people spent. They could prove that how much time they spent, but the tax court was not buying because they were. They had no evidence of this. Right. The tax court was not buying their case that, that they spent more time than their property manager on their short term rental and they lost. So long story short, I'm not saying it's not possible. Okay? I'm not saying it's not possible. You know, storming the beaches at Normandy D day was certainly possible. Right. But it ain't a battle that I'm looking forward to fighting. So I don't know. That was an extreme example. Extreme.

[Nate]

Example. Tom, you're not wrong because you're coming off from like a. You are fighting a potentially losing battle immediately because the first thing an IRS agent is going to see is they're going to see management fees on your Schedule E. Then they look at your expenses and they're going to say, how did you get 100 hours of time on a property manager? Right. No offense to IRS agents, they don't understand real estate nearly as well. They don't understand that you as an owner might be doing a lot of stuff. So they're going to say, I don't believe you. And my audit technique guide here that I'm supposed to follow and understand says not to believe you either. So I'm going to call this case closed. And you can talk to an appeals officer. I can tell you the appeals officer is going to support that decision next. And then they're going to say, talk to a tax court judge. More than welcome to do that. Maybe you'll win, but it's a lot of time, money, and just like life, you'll be spending doing that, going to that fight. So, hey, if you want to go fight the good fight at tax Court, I applaud you. Let us know. We'll help you with that part. But we're more than happy to jump in and help out there. However, for those of you who do not want to take that flight, just FYI, it's a losing one and you're going to be climbing up a mountain.

[Host 1]

Absolutely. Absolutely. Like, my take on it is just don't use a property manager for the first year. That's it. It's very simple. I know, I know, I know. You want to make it passive. I know that's part of this. And, you know, try to, you know, meet the material participation requirements. And it's just. It's not worth it. It's just not worth.

[Nate]

It.

[Host 1]

Don't. Just don't do it. You know, that's my take. I'm not saying you can't do. Again, I'm not saying you can't do it. I'm saying I would not recommend doing it. That's my take on it. All right, so we covered a lot here on today's show. Again, we're going to be moving into a more segmented style podcast over the coming.

[Nate]

Weeks. Yeah, Tom, one thing I want to mention too, is going forward, we're going to be going live more often for these Q and A type sessions, so just stay tuned for that. We don't have any details yet, but we'll be talking about that in the coming.

[Host 1]

Weeks. Yeah, absolutely. There's gonna be some really good things. So stay tuned. Stay tuned. And look, if you're out there, you have questions just like this or you're looking for somebody to help you navigate exactly what you can and can't do regarding your situation and the best path to get your strategy in place to maximize your tax savings and reduce risk with the irs, go ahead and click the link into the show notes that's in the show notes or the video to this episode if you're watching on YouTube and book a discovery call. We'd love to learn more about your situation. See See if we can.

[Tom]

Help. And that's gonna be it for.

[Host 1]

Today. And we'll catch you on next week's episode of the Tax Smart REI.

[Tom]

Podcast. The Tax Smart Real Estate Investors Podcast is for general information purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. Information on the podcast may not constitute the most up to date legal or other information. No reader, user or listener of this podcast should act or refrain from acting on the basis of the information on this podcast without further first seeking legal and tax advice from counsel in the relevant jurisdiction. Use of an access to this podcast or any of the links or resources contained or mentioned within the podcast show or show Notes do not create a relationship between the reader, user or listener of the podcast and the host, contributors or guests. Any mention of third party vendors, products or services does not constitute an endorsement or recommendation. You should conduct your own due diligence before engaging any vendor. For more information, reference the show notes or description of this.

[Host 2]

Episode. Thanks for listening to today's show. If you enjoyed the show, please find us on itunes and leave us a review. You can also email [e-mail] with any feedback or topic suggestions. We are always taking on new clients and with the new tax laws in play, you really don't want to navigate this alone. Let us help you save money on taxes with your accounting and CFO needs to become a client. Navigate to our client [e-mail] and fill out a web form with as much detail about your situation as possible. Thanks so much for listening. Have a great rest of your.