Category: Where’s My Refund?

How Short-Term Rentals Can Offset Your W-2 Income

If you’ve been anywhere near the real estate market, you’ve probably heard the term “STR.” But what does it mean, and why is everyone talking about it?

STR stands for Short-Term Rental—typically a house, cabin, or other dwelling rented out for an average stay of seven days or less. If you meet certain IRS criteria, your property can qualify as a short-term rental for tax purposes. These criteria generally relate to how the property is used, the average rental period, and your level of participation in managing the property.

The Tax Advantage

• Accelerated Depreciation: Investment properties allow for depreciation deductions, but short-term rentals can take this a step further through a cost segregation study.

• Normally, residential rental properties depreciate over 27.5 years. A cost segregation study reclassifies certain components—such as electrical systems, plumbing fixtures, and landscaping—into shorter depreciation periods.

• This reclassification enables accelerated depreciation, meaning you can claim larger deductions earlier in ownership. These deductions can reduce your taxable income by “front-loading” expenses.

Why Does This Matter?

Passive losses generally only offset passive income. For high earners (over $150,000 a year), long-term rentals often provide limited tax benefits. Short-term rentals, however, can qualify as non-passive under certain conditions, allowing deductions to offset W-2 income.

Bottom Line

Short-term rentals can be a powerful strategy to reduce your tax liability and keep more of your hard-earned income.

Lakes Area CPAs Ltd

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And what to do with the receipts you save from them.

Lots of folks get stumped by the blank receipt cards handed back to them after dropping off a donation at the local Goodwill or Salvation Army.

Do you write in the value yourself? Do you add them all together? Do you even need one of these if the items weren’t worth much to you?

We’re here to give you the tax advice you need.

First of all–

Are you going to itemize on your federal tax return? Standard deductions on federal tax returns cover charitable contributions up to a certain dollar amount. With them you don’t usually take the time to list out every single item you’ve given away. So, you can chuck that receipt card into the recycling bin.

Except…you may need it for your Minnesota State individual income tax return. Combined cash & non-cash donations worth over $500 can get deducted, whether you take the standard deduction or not. But you’ll need to save that receipt.
Now back to your federal tax return. If you are going to itemize on your federal return–

Ask yourself this:

If you were to sell the item for its market value, would it be worth more than $250? 

For example, you bought a TV for $3,000, but that was a few years ago and you’re getting an upgrade. If you sold it on Facebook Marketplace, you could make $1,900 on it.

Instead, you choose to donate the same TV and write $1,900 onto that blank receipt (which you keep safe using the Shoeboxed app).

The rule is that all non-cash donations (i.e. personal property) worth $250 or more need a receipt. So these become very important if you donate a highly valued item or make multiple donations of personal property.

However, you also need to answer a second question.

Are your total non-cash donations for the year over $500? –If “yes,” then you need to have a detailed record for each of your contributions, even the ones worth less than $250.

If “no,” then no detailed records are required, and you don’t need to include the receipt with your federal tax return.

Here’s our rule of thumb.

If you routinely donate personal property as a charitable contribution, or you make one high-value gift in a year, save the receipts. You’ll want to keep them with your other tax source documents for at least 3 years after that specific return has been filed.

For more tax deduction tips from the Lakes Area CPAs, follow our social media updates here.

#taxdeductions #taxtips #taxdeductible #taxadvice