The Hidden Benefits of Short-Term Rentals: Tax Secrets Revealed!

Stephen Schmidt (00:02.948)
Welcome back to the show where we interview the nation’s leading real estate entrepreneurs and those that serve the real estate industry It’s your host Stephen Schmidt back at it again and I got a real treat for you guys as I Typically do it’s if it’s your second third or hundredth episode Welcome back to the show and if you’re finding us for the first time I’m sorry that you didn’t find us sooner. Where have you been? We’re glad to have you

You’re going to get a ton of value out of this episode. got Vince Porter in the house and Vince is an absolute Titan in the real estate investing and the tax professional space. And we’re going to get into some really interesting things today about his experience, especially working with syndications, investing himself, but also in being a tax pro for the last 20 plus years. And there’s, as many of you know, plenty of ways that you can

Let’s just say for because I’m not in the space that you can circumvent or use the tax code for your own benefit as we would probably say, compliantly, since I’m not licensed. I’ll advance to the talking there. But just before we get started, remember at Investor Fuel, we help real estate investors, service providers and real estate entrepreneurs, 2 to 5X their businesses so they can build the businesses they’ve always wanted in order to live the lives they’ve always dreamed up. With that being said, Vince, welcome to the show today. It’s a pleasure to have you.

Vince Porter (01:28.008)
Thanks, Stephen. I appreciate the opportunity. I’m looking forward to chatting and I think you hit the nail on the head. It’s real estate space has a lot of big tax opportunities and we can kind of talk about as much as you want or get into it and I’ll give you my two cents on it.

Stephen Schmidt (01:44.644)
I will pick your brain three parts from Sunday. if it gets too nerdy for you, you just let me know. But I guess, yeah. So let’s do this. Let’s at least, to give some background, right? Let’s give our listeners a little bit of background on you. How’d you get started in the tax space? What made you decide that? Pursues a career.

Vince Porter (01:54.188)
Yeah, we just won’t lose listeners. I’ll nerd out with you as long as you want to.

Stephen Schmidt (02:12.603)
How did that evolve into your own real estate investing and then you working with syndicates? And then we can get into all the other nitty gritty IRS code 75.234 later on in the show. Tell us a little bit about that and how you got to where you’re at today.

Vince Porter (02:20.973)
Yeah.

Vince Porter (02:26.382)
Yeah, we’ll leave all the code section talk to the other accountants, but glad to be here. So going back to turn of the century, I graduated, went to Arson McGladry, a big firm, and they stuck me in the corner and I did nothing but commercial real estate tax returns for like the first four years of my career.

Stephen Schmidt (02:46.299)
No kidding.

Vince Porter (02:46.644)
Absolutely hated it at the time because I only saw this one subsection of the tax code. But I got really good at it and I knew I was going to leave to join my father and I did that in 05. Been here for last 20 years managing the practice.

But what I was able to do is really understand the nuance of passive activity loss limitation, cost segregation, all of the things that go in to making real estate what it is. So I parlayed that technical knowledge I learned there into our practice here. And then when 08 hit and the mortgage crisis blew up, I had a lot of entrepreneurial clients that started jumping into multifamily.

And I was like, hey.

this is where I can help if you ever heard of this a cost segregation study. Here’s what it does. Here’s how you use it. Have you heard of low income housing credits? Have you heard of this, this, and this? And I was able to parlay my knowledge, really help our clients make a lot of money. And that in turn got us to the point today where we’re doing about 10,000 K1s a year across several hundred partnerships, whether it be big syndications and multifamily or commercial space. And we’ve just

been growing there ever since. I got tired of sitting on sidelines and doing all these tax returns and seeing these guys make a ton of money and I wanted in on that action. So you know about 2016 I started investing with some of my clients and syndications and then eventually bought some short-term rentals myself to take advantage of the tax code and here we are.

Stephen Schmidt (04:28.603)
What do you like Vince about the syndication model of being able to put your money in even if you’re not necessarily an experienced operator? Obviously, a lot of them only will take accredited investors, minimum amounts, et cetera, just to kind of keep things kosher. But what do you really like about the syndication model?

Vince Porter (04:45.57)
Yeah.

Vince Porter (04:49.772)
Well, you know, think the biggest thing that I really enjoy is, you know, obviously whatever capital you have is certainly important to you, but you can passively invest into that and get returns and let somebody who’s experienced that knows what they’re doing, has navigated the ups and downs of the real estate market, let them manage that money for you. And I really fundamentally do like it more than shoving my money into a

you know an IRA fund or I do like IRAs but you know the stock market and just letting the hedge fund managers control that at least with syndication route or with real estate investing directly myself I’ve got a real tangible effect on how that dollar goes and you know selfishly it’s pretty cool to drive down the street and see this big 300 unit complex and say hey I’m a I got a piece of that

Stephen Schmidt (05:46.855)
Yeah, 100%. It’s about its ownership. It’s the American dream as they call it, right? So.

Vince Porter (05:52.63)
Yeah, you don’t get that with Tesla or Microsoft if you drive by their headquarters and you got stock in them.

Stephen Schmidt (05:59.289)
Right. They don’t know you from Adam. Well, I they still don’t in the apartments, but you know, still it’s something physically you see and go, I own that. Right. I totally get it. It’s like it’s like a more advanced way for all you folks with a construction background of when you used to work on the pipeline and you built a casino and you drive by it go, I put it in the pipes over there. And you’re like telling your six year old that, you know, I you can’t tell. That’s what I did at all when I was straight out of high school or anything. But

Vince Porter (06:09.667)
Yeah.

Stephen Schmidt (06:28.614)
Fun fun piece. So let me ask you this what’s As far as like tax advantages go What’s one of your favorite tax advantages? Within the real estate space that you think anybody that’s investing in whatever it is specifically should be taking advantage of that Maybe they don’t know about

Vince Porter (06:49.72)
Yeah, how much have you had? I’ll start out with my blanket philosophy of this.

Stephen Schmidt (06:53.198)
Hahaha

Vince Porter (06:58.402)
To really understand the tax code and take advantage and pay the lowest tax possible, you kind of need to understand what the government’s doing. the single biggest way that the government influences the economy is through tax policy. We’re seeing it right now as the House has put it through a big bill that’s going to the Senate that’s got big depreciation deductions and a lot of real estate favorable things.

Businesses and investors move the economic needle. You and I with our W-2s don’t and and that’s where the tax code lies. The

The government wants to fill up say a multifamily property with 300 people that are going in there earning W-2s. They’re going to pay taxes at a high rate. They want those high employment numbers because it makes politicians look good. So in turn, they scratch a real estate investor and landlords back by giving them huge write-offs on depreciation. You know, I don’t know how well versed your team is or your listeners are in cost segregation depreciation, but just at a high level.

view, it allows you to write off quite a bit of money inside a real estate deal versus other things. And if you structure it properly, that can be offset against your other income.

That’s a whole nother podcast, but it’s a great way to shelter cash. you might still be cash flowing on a property. Hopefully you are if you picked it properly, but you’re going to show paper losses on your tax returns. You’re not going to pay taxes on that. And then you get all sorts of other deferrals, whether it’s 1031 exchanges or whether there’s ways to structure.

Vince Porter (08:50.678)
these assets so that you pay the minimal amount of tax as possible. So it’s really fundamentally one of the biggest ways and the government loves real estate because you know in single family space they want people earning W-2s in this building I’m sitting in right now. They want to fill it up with businesses that have people working paying taxes so they get the land lowered big write-offs on that.

Stephen Schmidt (09:14.823)
Yeah, 100%. What do you like about the short-term rental space? I know that it’s been around forever, really the last, let’s be frank, 10 to 15 years once Airbnb started getting more popular, more widespread. What do you like about the short-term rentals, which you personally invest in versus long-term rental?

Vince Porter (09:23.309)
Yeah.

Vince Porter (09:32.492)
Yeah.

Stephen Schmidt (09:40.473)
midterm etc. and do they have any significant tax advantages to them?

Vince Porter (09:42.04)
Yeah.

Vince Porter (09:45.526)
Yeah, yeah. mean, cash flow and numbers aside, taxes are phenomenal. So I promised I wouldn’t nerd out with you, but to explain why I like short-term rentals, let me nerd out for two minutes. So the IRS taxes you in three different ways. They tax your active income. That’s going to be your W-2 income, and that’s going to be businesses that you are actively involved in. The term is material participation, but we’re not going to walk down that nerd route right now.

They tax you on your portfolio income. This is interest, dividends, and capital gains you get from the stock market. And finally, they tax you on your passive income. This is income from activities you invest in.

that you do not have active participation in. Maybe you’re just putting money in and you’re getting activity from that. Real estate fundamentally by letter of the law is passive unless it’s not your real estate investor it’s passive and the reason this is important is because passive losses cannot offset active income.

So if you have real estate losses that are passive and you have a big W-2, you can’t mesh those two. You can’t offset that. So there’s ways to go through it I can walk down that. But the nice thing about a short-term rental is that it’s nuanced in the tax code like a hotel. So it’s not in the same…

realm as real estate. What that means is if you’re managing that short-term rental you get all the same benefits that real estate provides you. You can do a cost seg on it. You can rack up a lot of losses and then you can use those losses to offset your active income. So take me for example. I’m a CPA.

Vince Porter (11:36.608)
If I wanted to take real estate losses from a short-term rental, I could not because I’m spending 40 hours, 40 hours plus let’s be honest, working in the CPA practice to do the same thing to get the losses from real estate. I would have to do at least that or more and I’m not gonna do that. And my wife, who I love very much, could be a real estate professional but she doesn’t wanna do that with her time either. But if we have a short-term rental,

Stephen Schmidt (11:45.734)
Sure

Vince Porter (12:04.49)
we can do that as long as we’re actively managing that thing and it’s fairly easy. So short-term rentals have a little nuance there that you can really take advantage of the tax code where some of the other real estate investments get sucked up into some passive loss limitation rules which again is a little nuance in there but it’s a big one.

Stephen Schmidt (12:29.99)
Sure. Can you give an example of like a fair comparison of that? Like what you mean by some of the others?

Vince Porter (12:37.454)
Yeah, okay. So let’s, let’s, let’s say you got $100,000 to invest, and you got two options, you’ve got a passive syndication deal to go buy this class A property in downtown Dallas, it’s worth a trillion dollars, or you could put that $100,000 into let’s call it a half million dollar short term rental.

Okay, and let’s say you’re you and if you’re married are not real estate professionals and we can walk down that route what that means but basically you’re not real estate professionals. Well, if you invest into that syndication, you’re going to put that $100,000 in here and hopefully we get back to 100 % depreciation which means you might get a K1 loss in year one. It could be you know it could be

60, 70, 80 % of the value of that money you put in. So you’d get a paper loss of 60, 70, $80,000 in year one. But since it’s passive, you cannot take that loss against your active income, W-2, other business income. So what happens is that loss gets suspended. And you don’t lose it. It’s just carried forward in the future. And then it only gets used when you have passive income.

or when the deal itself sells or goes away, then those passive losses are a lot.

Okay, so that $100,000 provides you no tax savings in the syndication. If we do that same thing in the syndicate, in the short-term rental, you know, half a million dollar house, $400,000, you’re probably going to get maybe call it $100,000 deduction. Let’s say you’re in, you’re able to take that full thing, you’re in the 37 % bracket, it’s going to save you $37,000 in tax in year one. So that first, that $100,000 you put in,

Vince Porter (14:32.238)
only cost you $63,000 and guess what that $37,000 it saves you. You’re getting that money today not two, three, four, fifteen years down the line. So you got the time value of money working for you. So you can then deploy that $37,000 and go get another investment or you know do whatever you want to with it instead of having it held up with the IRS.

Stephen Schmidt (14:59.622)
Yeah, that totally makes sense. Because this is something I actually even recently learned. mean, I’ve been an entrepreneur, contractor, whatever you want to call it. I haven’t filed a W-2 for a full year in, I don’t know, five years maybe. And so on that note, I didn’t realize that even some people that are, let’s say, a higher earner on a W-2 that are getting shredded alive by taxes,

could in some cases, and I’m not a financial professional, Vince says, so this is just for educational purposes only, is that you could actually offset even your W-2 income through real estate, and tell me if I was wrong in how I interpreted this, but you could almost entirely offset what you make in given year if you invested properly. Is that incorrect?

Vince Porter (15:45.09)
Yeah.

Vince Porter (15:51.694)
Absolutely. Now to kind of clarify that and nerd out on the tax side for you. So that passive loss limitation I was explaining, passive losses which real estate and the tax code are passive cannot offset active income. So the way you get around that is maybe your spouse or the non-working part of your couple can be the real estate professional and for

quick summary. A real estate professional in terms of the tax code doesn’t mean you have a real estate agent license or anything like that. It means you spend 750 hours a year working in real estate and then and that equates out to I don’t know 15-20 hours a week on average and then you spend 50 % or more

of your working time in real estate. So if you’re a full-time CPA like myself working 40 hours, even if I’m at the 750, I’d have to work 40 plus in real estate to be a real estate professional. And there’s court case after court case that have thrown that out.

but your non-working spouse, if they’re not working at all and they’re willing to put in that work, they can become a real estate professional. And that’s where the real magic happens when you can start unlocking some of those losses that you’ve made, even through syndications if you’re on the GP side of it or doing some of that active work. But even if you can’t match that, that short-term rental is still available to you and it doesn’t have the stringent requirements.

to that real estate professional status.

Stephen Schmidt (17:28.389)
That’s really interesting. So real estate professional status, that’s super, super interesting. So question that I would have to follow up with that, because I’m like the perfect example, right? Like I run a real estate podcast. I work sort of in the real estate space. Like I’m not buying and selling houses myself, technically, right? And even if I did, it’d be three LLCs, right? But for my wife, for instance, my wife stayed home ever since we’ve been married. We’ve got four kids.

Vince Porter (17:39.086)
Mm-hmm.

Vince Porter (17:47.927)
Yeah.

Stephen Schmidt (17:58.282)
How would they quantify whether she is a true real estate professional? I how do they track that you’re working 20 hours a week versus people just saying that they do, but they’re just stay at home parents or whatever.

Vince Porter (18:08.942)
Well…

You know, that’s where the rubber meets the road, Steven. So I mean, on the tax return, it’s as simple as checking a box and saying, yes, I am this. But when the IRS comes knocking during an audit, that’s where you’ve got to prove it. So one of the things that we do for our clients or help them out with is building time logs. You know, it kind of sucks, but you need to document out that, you know, I spent two hours today going to the 123 Main Street to let the plumber in and meet with contract.

Stephen Schmidt (18:18.061)
Yeah.

Stephen Schmidt (18:23.203)
Hmm.

Vince Porter (18:40.048)
on CapEx or negotiating with the bank or negotiating with tenants you really kind of have to really build out that time log and that’s what’s going to save you in an audit but you know when you file your tax return it’s just a box you check but you know if you get audited you will have to substantiate that that you’ve got that so if you’re on a W-2 and that W-2 is not your business and it’s not real estate then then you have real tough time proving that so that’s why it’s important to

Stephen Schmidt (18:50.809)
Mm.

Vince Porter (19:09.968)
to nail down that real estate professional status for.

if not a working spouse, if they can. that’s just one of the assets. I mean, lot of ways to do it. We’ve got a lot of clients where we really work hard on that passive and active structuring because depending on what you’re doing, if you’re in deals and things, you can generate a lot of money from passive income and then use the passive losses from real estate to offset that. So there’s more than one way to skin that cat, I guess, is what I’m saying.

Stephen Schmidt (19:44.911)
So let me ask you this, and this is honestly, like full transparency, this is a selfish question, but it does come up quite a bit in the circles that I run in and it’s about the vehicle, right? Like there seems to be all this like mysterious, don’t, like I understand 6,000 pound vehicle, like I could ride it off, whatever, blah, blah, blah, right? But obviously, like if you’re driving your vehicle, 90 % for work, however you can quantify that, prove it, et cetera, like.

Especially as you’re going out and looking at properties for investors for example, you’re going out looking at properties Maybe you’re meeting the contractor out there letting the plumber in like you mentioned and Let’s say you want to take advantage of you know, the fact that like yeah, I like driving in a nice vehicle I’m in my car 30 hours a week 20 hours a week, whatever that might be driving to various properties like is there some red tape people should avoid when they go to like looking at maybe getting a newer vehicle and then

Meeting the actual requirements to have that as a legitimate tax write-off and does it have to be a new vehicle?

Vince Porter (20:46.477)
Yeah.

No, it doesn’t have to be a new vehicle. It certainly can be a used vehicle and get those same sorts of activities. But the thing you’ve got to really protect against are, you know, are you driving that thing to and from the grocery store? you picking the kids up from soccer practice in it? Are you using it personally? And be honest, because, you know, if you’ve got hundred thousand dollar G wagon that you want to ride all for, it’s probably more than that. It’s probably 200, but

you’re using that for personal use, gotta allocate what’s personal and what’s not personal. Because the business use of the vehicle is certainly a big deduction you can have. You just have to be, you what are you actually doing for it? And, you know, there are luxury limits when it comes to those bigger cars and things like that. But, you know, it’s…

Stephen Schmidt (21:32.004)
Mm-hmm.

Stephen Schmidt (21:39.961)
My thought process is where this comes from, like I said, it does come up in the circles I run in, but like right now, we just had our fourth kid, right? My wife’s driving a mid-size SUV and I’m like, well, we probably should upgrade to a Suburban here at some point, but I haven’t figured out how I can go get you a Suburban, take the loss, take the tax write off for it and it still be kosher for you to drive it around and do whatever else I need you to do for me running errands and.

all that kind of stuff, like for our business, but also still be able to pick my son up from school, for example, if that makes sense.

Vince Porter (22:08.044)
Yeah.

Vince Porter (22:13.294)
Yeah, well this is kind of where technology comes in play and what I recommend to our clients. Get an app like Mile IQ. It’s going to tie into your Bluetooth so whenever you get in that car, if you’re lazy like me, it’s just going to record it in the background and then at the end of the day or the week or the month or at tax time, you can go through there and swipe left or right and tell it is this a business trip or is this a

Stephen Schmidt (22:20.708)
That’s what I have, yeah.

Vince Porter (22:38.552)
personal trip and that then is going to build out the report in the back end to show you what really is personal and what’s business and then you’re going to have that documented. I mean if you’re old school and you want to keep a tablet in your glove compartment and write your odometer out as you start and finish you can do that as well but seriously who’s going to do that? I’m a CPA I’m not even going to recommend

our clients do that but the apps out there are super efficient for this and they will really truly get that so for like you if you drive to pick the kids up from school that’s personal but if you drive to go tour properties or go meet with a set of investors that’s a business trip.

Stephen Schmidt (23:20.6)
Right. Yeah. so the other piece of that is, is obviously like with an audit, for example, I think that’s the big scary bear that everybody wants to avoid. And when they get in it, they want to be bulletproof. So that way nothing comes up and then they have liability. Right. So like, for example, with the vehicle, the mileage thing, you know, I think if we’re even being honest with ourselves, like there’s some times where I go a couple of weeks and

Vince Porter (23:34.445)
Yeah.

Stephen Schmidt (23:45.721)
Then I’m like, shoot, I gotta go log my miles. And, cause like I don’t have a set time on Friday morning at 8.30, that’s when I log my week’s miles or whatever that is. So like, how do they quantify, is it really important to also keep a schedule and a calendar of this is what I was doing to be able to pair with those mileage logs, to be able to prove that where you were going was actually for business?

Vince Porter (24:07.414)
Yeah, yeah, mean that’s the best rule if you can have that. mean these apps can, there’s a spot to say in there, went to have lunch with the broker from CBRE or whatever, so you can write that in there. But yeah, at the end of the day, let’s say you get audited three years ago and the IRS is trying to document what your real estate mileage is and how you got to this right off of this suburban you took.

Stephen Schmidt (24:13.55)
Sure.

Vince Porter (24:37.378)
want to know okay I don’t know the difference from this address to this address why is this business and why is this personal so that that level of detail would really go a long way to helping you out but you know as you you know as you

I’m going to tell you, I’m lazy. I’m a CPA and I advise this stuff to my clients all the time, but I’m lazy. So in my app, it’ll pick up that this address is for this type of thing and it’ll start remembering that. So that’s less work I have to do. And that’s worth whatever it is, a hundred bucks a year I pay to have the app is to have that bulletproof report at the end of the year if the IRS wants to come challenge anything we’ve written off.

Stephen Schmidt (25:02.392)
Right.

Stephen Schmidt (25:19.268)
for sure, love it. Is there anything that we haven’t talked about that you’d like to talk about on the show? We’re already over time, but I want to give you the opportunity, because we did get off in the weeds a little bit. Is there anything you want to talk about specifically that you haven’t yet hit on?

Vince Porter (25:28.568)
Yeah.

Vince Porter (25:32.32)
Yeah, no, I feel like you’re setting me up for something and I need to bring some sort of knowledge. You know, I will say this, today is it stands, in June we’ve got a house bill that’s coming due and it’s bringing bonus depreciation back to 100%.

if it passes. And both sides of the aisle, Democrats and Republicans, are certainly in favor of that. And I really truly, I know a lot of real estate investors know what that is and they want it back. I do think that will help deal flow. I think that will help the real estate market. Obviously, you know, I don’t think we’re going to see historic interest rate cuts like we had back in 21 and 22, maybe ever again in our lifetime. But if you

get more favorable depreciation that’s in this bill, I think it’s going to be great time for you to go out and invest if you’ve got some power to drive to go get whatever asset class you want to because 2025 is set up for big depreciation deductions. So we’re excited about seeing what passes there.

Stephen Schmidt (26:44.324)
appreciate you coming and sharing some knowledge on the show Vince. If people want to connect with you for more or learn about what you’re working on, where should they go for that?

Vince Porter (26:52.226)
Yeah, guess email is a great thing. Vence at mytexascpa.com or go search Vence Porter on LinkedIn. You’ll find me there. But it was great to be here and anytime you need help, I’m here for you.

Stephen Schmidt (27:10.353)
Thanks again for joining man. I appreciate it a ton Hope you guys got as much value out of this episode as I did and we’ll see you in the next episode