Own STRs? Here is How to Structure Them

I know a lot of you have long term rentals (LTRs), with that said I am starting to speak to more and more of you that also have short term rentals (STRs). I have been fielding tax questions on how the IRS is wanting more taxes on the STRs versus the LTR. Let’s talk about it.

If someone has STRs and has no involvement in the operations standpoint, the structure will mirror that of the LTRs structure. For those of you not familiar with what the typical passive income structure is, let me explain. It is an LLC, taxed disregarded, that will be the lifetime beneficiary of the land trust that holds the deed to the property. As long as you are not going to be a material participant in the management and booking side of the rent, then the IRS shouldn’t try to take extra from you. If you are going to be a material participant, i.e. booking yourself, providing docs inside the rental, etc., then the IRS will want self-employment tax (15.3%) from you on that rental income. Yeah, that’s not a good day, I get it.

How do we reduce our taxes? That’s a great question. We have come up with a great way to have LTRs and STRs without paying out the nose in taxes every year. Many of our real estate investor clients have both an active and passive income business, so it’s not a big thing to tie them together for the STRs. Let me explain how this works. The active income business, an LLC taxed as an S Corp, will lease the STR property from the passive income business, LLC taxed disregarded. The active income gets filtered through the S election and gets caught in the 1120s tax filing. This way the rents collected from the STR can be divided into the “reasonable” salary and distribution helping you save a bunch in self-employment tax. The rent that the active income business pays to the passive income business gets filed as normal rental income on your personal 1040 schedule E.

By setting up the structure this way you get to make sure that your rentals, whether they are LTR or STR, are adequately protected. It allows you to grow your rental portfolio without breaking the bank and keeping the books simple to

manage. It also allows you to have a good plan for reducing your overall tax liability every year. We all know it’s not just about how much money we can make, it’s also about how much we can keep.

If there is anything I said in this post is confusing or raises your curiosity on your current structure, feel free to reach out. One of the great things about being part of the ADPI community is the availability to team members like us here at NCH to help you out.

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DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.