How to Use Short-Term Rentals to Offset Taxes & Build Wealth

Danielle Michel (00:00)
the STR gets around all you don’t need to be spending more time in real estate than anything else. It’s a lot simpler. And basically what happens is your average day has to be seven days or less in the home. or you could have a 14 day rental, And then you need to meet something called a material participation test.

which means like if you bought the property in December and you’re the only one managing that property because you only have three weeks left, you would meet that test from that alone, just from that and renting it out one time for three days. And that means is you can take a $500,000 property and essentially if you did a cost segregation on it where you accelerate depreciation and a bonus on that, you would get about a write-off of $180,000 And dollar for dollar tax savings, that could be

$60,000 in tax savings that you wouldn’t have to the IRS just from buying a piece of property.

Dylan Silver (00:45)
huge.

Hey folks, welcome back to the show. Today’s guest is a serial entrepreneur, CPA by training and is based in South Carolina by way of Long Island. She’s an investor, hundreds of doors, runs a tax firm.

Please welcome Danielle Michel. Danielle, welcome to the show.

Danielle Michel (02:40)
Thank you, Dylan. I’m very excited to be here.

Dylan Silver (02:42)
It’s great to have you on here and we were talking a little bit before hopping onto the show here. I always like to have people from my neck of the woods from Northern New Jersey. You’re from just around the corner in Long Island and it’s funny because when I grew up there, it felt like there was a lot of competition between Philadelphia, between New Jersey, between Long Island and then I moved to Texas and everyone’s like, simpatico. As soon as I see one person from the East Coast, I’m like, hello, hello. So it’s great to have you on here today. I always like to start off at the

top, Danielle, by asking folks really how they got involved in real estate.

Danielle Michel (03:16)
Yeah, of course. And I agree, being in a transplant city where I’ve moved myself, it becomes a united nation when it comes to just like northerners in general. But I also appreciate not being there on a day to day. Also, I love to visit and also appreciate the hustle and the crime, but not for an everyday life. So how I got started in real estate, I’ve always been an avid investor from like childhood, from when I can remember. I opened my first business when I was 16 years old.

Dylan Silver (03:25)
Yeah.

Danielle Michel (03:41)
I went to college for accounting and business just because I was good at it and I knew I wanted to do something in business. But the second I could own a piece of real estate, which I bought my first piece in like when I was 22, 23 years old, I did that. And then I went into my first renovation project where I had my primary residence before I got married or any of that stuff, my early twenties. And then I ended up buying a house in a close auction that was around the block. was…

the crappiest house on the block, but in a really, really nice prestigious village area. And the taxes in the North are extremely high. So my taxes then were about $20,000 a year just for the taxes alone. So being a new investor, I realized quickly that maybe I should switch houses and just live in that house versus my primary. So I sold the primary, renovated the other one.

And it took a little while, and I knew that as a longer term project as I invested in other real estate, just more as like a silent investor and passive investor with whatever small dollars I had at that time. And I flipped that house and I bought it for 400, I think it was in a closed auction for like 480,000. We put in probably like 200,000, I ended up taking like a homeowner’s line of on the home. Whatever I could do to try to just grab funds, you know, while keeping a…

Dylan Silver (04:53)
Yeah.

Danielle Michel (04:57)
Consistent salary so that I was able to get like mortgages and stuff like that I used the whole loan and leverage When I started and then I ended up flipping that for over a million dollars.

So that was the first one and

now I no longer invest in New York that was because that’s where I was at that time So I from an investor standpoint, it is not what a favorable for investors per se

So now I am still an active investor. own a, I have a long-term and short-term rental property management company. And then I also have my own portfolio that I have with myself and a partner right after this podcast today. I’ll be going and looking at some properties in the two to $3 million range that are like short-term rentals for myself, for it. Cause I’m really just trying to play the real estate tax scheme right now as well and maximize out on some of these new advantages that

Dylan Silver (06:28)
Yeah.

Danielle Michel (06:32)
came with us with one big beautiful tax bill. So being that CPA background, understanding how to play the game from an investment standpoint, but also being able to capitalize and utilize it from a wealth strategy and a tax saving standpoint. That’s the game that I love to play all day, every day.

Dylan Silver (06:49)
I want to ask

you about ⁓ the short-term rental space. There’s a couple things that piqued my interest. I want to touch on tax strategy here in a second, but the short-term rental space is an interesting one, right? Because Airbnb really dominates, and I’ve had many people on the show who love STRs, but also I spent a year in Dallas. That’s where I got my real estate license, and I believe in Dallas, in many parts of Dallas, you can’t do short-term rentals any longer under 30 days, so that people kind

I’ve had to pivot away from that strategy What was it about and is it about short-term rentals that you really like and then also how do you go about? Finding properties that would make a great STR

Danielle Michel (07:29)
Yeah, those are great questions. And I mean, I could talk all day, but for purposes of time in here, I’ll keep a pretty high level. So what I love about STRs is, number one, out of my portfolio, from a quantity standpoint, I personally own and also manage more long-term rentals, where from a profitability standpoint, my short-term rentals are my most profitable by far.

So with my long-term rentals, generally, like if you’re taking out a mortgage or something like that, which most of us are, then you only have a certain amount of room in there generally for if anything goes wrong, repairs and maintenance, et cetera. Now, of course, you hope other things happen, like appreciation on the house, and you’re able to increase rents and things like that, but most investors that start out are just getting like single-family homes for a long-term rental. So one thing goes wrong and you need a complete roof repair, that can throw you an additional $10,000 you weren’t expecting.

in that year, right? So when it comes to SCRs from a, there’s three buckets, I look at it, there’s your current income, so from a cashflow standpoint, ⁓ that’s the most profitable out of any of the real estate that I own for sure, even the multifamilies from like per cap, per door basis. And then number two is, what’s really awesome about it is the STR strategy when it comes to, it’s something known in the industry, and I don’t like this word as an advisor, but,

for a relatability, it’s called the STR loophole, which is the short-term rental loophole. So what this means is when it comes to being able to take advantage of real estate from a tax strategy standpoint, you generally cannot just take advantage of real estate and offset current active income because that’s considered passive. Real estate generally falls into a bucket called passive activity. So for people that have like W-2s, a lot of people that are in real estate are not full-time investors yet.

but they desire to be potentially. So they may still retain a W-2 job, right? Just having a real estate license alone doesn’t make you fall under the definition of the IRS code of a real estate professional status, which then would offset your active income. What’s cool about STRs is it’s a lot easier to be able to be applicable for this. So I mentioned that I have a property management company and I have a portfolio with a partner. My partner and I own everything 50-50 that falls under our Pulsar Charm Property Management Group.

Dylan Silver (09:28)
Right.

Danielle Michel (09:46)
and under an investment group. Now for him, I’m a business owner and he’s a full-time high-wage individual making significant salary. So he cannot be considered a real estate professional because in order to do that, you’d have to have over 750 hours and you’d have to be spending more time in real estate than anything else. So a W-2 owner that is working full-time cannot meet that unless they have some kind of spouse.

Now why do you want to meet that? Because

you want to be able to offset like depreciation is what’s going to cause a paper loss, right? It costs segregating properties is going to accelerate your depreciation. Right now, Trump just brought back bonus appreciation and permanence. That’s an incredible advantage that anyone that’s in real estate or is interested in buying anything, you guys need to pay attention to this because generally anything that’s under a 20 year life, you can write off at 100 % in the first year. So if you’re planning on potentially having to pay taxes at all, whether it’s through it,

Dylan Silver (10:48)
Yeah.

Danielle Michel (11:14)
W-2 or if it’s at the end of the year when you pay your tax bill, the STR gets around all of that because you don’t need to be spending more time in real estate than anything else. It’s a lot simpler. And basically what happens is your average day has to be seven days or less in the home. So it has to be seven days or less when you annualize it over a year. So you could have a 14 day rental, but if we want to annualize it and we took an average seven days or less, you need to be doing that. And then you need to meet something called a material participation test.

which means like if you bought the property in December and you’re the only one managing that property because you only have three weeks left, you would meet that test from that alone, just from that and renting it out one time for three days. And then what that means is you can take a $500,000 property and essentially if you did a cost segregation on it where you accelerate depreciation and a bonus on that, you would get about a write-off of $180,000 of a write-off, right? And dollar for dollar tax savings, that could be

Dylan Silver (11:55)
Right.

Danielle Michel (12:13)
$60,000 in tax savings that you wouldn’t have to the IRS just from buying a piece of property.

Dylan Silver (12:15)
huge.

Danielle Michel (12:18)
So you use a down payment for that or you can use it for a short term rental and get cash back in your pocket. So STRs for those reasons from cashflow and from also just usability when it comes to playing the real estate tax game, there’s so many advantages when it comes to STRs.

Dylan Silver (12:33)
I’m a big fan. have a good friend of mine in the Dallas area who I worked with. I was a JV minority partner on some of these deals and he was the ⁓ either the JV or the end buyer. And I love the Airbnb space because in so many cases to your point active income and then also greater cash flow than you know long term or mid term. So there is there is turnover there is. ⁓

more effort that goes into it. But if you like hosting people and you love real estate, then I think it’s an amazing opportunity for investors. I do want to ask you my other question that I had. You mentioned tax strategy and cost segregation as a CPA and as someone involved in real estate. I think there’s a lot of people who probably have questions for you. Now, maybe give away some of the gold, but not all of the gold. When folks may be just starting out in the real estate space, they may start to see on the surface,

Wow, there’s all these strategies that I can be taking advantage of even though I am a w-2 employee Let’s say but now that I’m getting involved in real estate. I can take these deductions I have this that can offset maybe even some of my w-2 income if folks wanted to maybe start looking at tax strategy But let’s say they don’t have a business that’s cash flowing, you know tens of thousands of dollars a year They may just be getting started. They may just be breaking even even what would be your advice to those folks who maybe just?

started but are interested in tax saving and tax strategy.

Danielle Michel (14:02)
Yeah, so great question. And you’re gonna take one step at a time when you’re first starting, right? So you can’t expect to like master the game when it comes to being the best real estate investor. You also can’t be expect to also master the tax strategy game as well. So starting with one step at a time is the best way. So the first thing I would recommend to do is, is analyze why you want to invest in real estate. So is it for your

Current income, is it for your second bucket, which would be your retirement? Is it for legacy to maybe pass to children or family in the future or don’t need? And that’s important to realize because that’s gonna help drive where your decisions go.

And when it comes to being able to take advantage of taxes, you don’t need to be profitable at all. Like what we call a paper losses means that you could actually collect money every single month. But on paper, when you file your taxes or you look at your financials,

It actually shows a loss. That’s why it’s a paperless because depreciation, cost segregation, all those things are not tangible things. Those are not furnitures and fixtures. You’re not going out and buying beds and that’s what the expense is. But instead you’re driven into a loss because of depreciation. So it’s not a bad thing when it looks negative on paper. Now, of course, you don’t want to invest in something just for our tax strategy. Like you want to invest in something for the full picture. You want to make sure that a tax tail doesn’t wear the dog, right? Like you need to make sure that

from a cash flow standpoint that you have a buffer in there again, because if you’re in a close to break even investment and you’re going in, then if anything goes wrong, you’re already, you’re in real life negative, not depreciation, paper loss negative, and that’s money out of your pockets, you have to come in with reserves. So for W2 employees, I’d recommend just investing in somebody else’s if it’s the first time, but also with rights, what I mean by rights is there’s passive investing, like I mentioned before, where

Like if you were going to come into my investment and I was doing a syndication or something like that, you may not have any say on anything I do, but you get a cut. Now there’s a difference when you go in and partner with people and every deal can be structured differently. You can make up your own deal at the table tonight at dinner with your friend and however you want to structure it, that’s up to you. Just need the paperwork to back that up. So what I would recommend is going in with somebody that has done it before so you can learn from them. That would be the best first step.

and then making sure that you come in as a partner so that you get the advantages of the tax write-offs and the depreciation on all those things to offset your current income. You just need to understand that just because you invest in real estate doesn’t mean it’s gonna offset your active income unless you can consider that real estate active. And that’s where the short-term rental loophole and that’s where real estate professional status come into play is because you need to be able to take that piece of real estate and actually make it.

It’s got to be considered active income and it defaults into passive income. So it’s not going to offset your W-2 unless you’re a real estate professional or short-term rental.

Dylan Silver (17:36)
Now let me ask you this and maybe these are some granular questions so people may have to reach out for some of the answers for these but if folks are let’s say looking at deals right the driving that they do look into deals I’m imagining they can deduct some of that if it’s recorded also when they’re out and you know potentially doing repairs to these projects those are expenses that they can deduct as well if they’re doing any kind of repairs I’m imagining right on a very base level right.

Danielle Michel (18:04)
Yeah, so you’re exactly right. Any repairs and maintenance that you’re doing yourself, you can completely write off. So that could be even equated to your time, right? Like if you were gonna, if you set things up properly, there’s ways that you could take advantage of this where you can actually either A, pay yourself from the property if you have a partner or whatever it is and you’re the one that goes and repairs things in lieu of a contractor or a licensed person. But yeah, all of that is completely trackable and that is a true expense to the actual property itself.

Dylan Silver (18:32)
We are coming up on time here, Danielle. I wanna ask you about some of the other ⁓ businesses and some of the entrepreneurial ⁓ drive and passion that you’ve had in some other areas. You mentioned a couple before hopping on here, but for our audience, what have been some of the other ⁓ fields and ventures that you’ve dove into?

Danielle Michel (18:51)
So I’m a true lover of business. It’s not about what you do, it’s how we do it. I have to see the vision. I’ve invented products. have a patent where I’ve done a fire safety device that I’ve brought into market. And then I have also owned fitness studios. I currently own ⁓ my third tax firm right now, accounting firm. I invest in other people’s real estate as well. Like I said, I property management business and I’ve invested in some other people’s like laundry mats and just some of the like local type of things as well.

I love business, I love all the things. I got to believe in the vision and the mission in order for me to take it on as an active investor though. ⁓

Dylan Silver (19:26)
Danielle, where can

folks go if maybe they’re in South Carolina or maybe they have a deal somewhere in the Carolinas they’d like you to take a look at or maybe they’d just like to get in contact with you?

Danielle Michel (19:36)
Yeah, so I have a full team just in my tax form alone. We have over 20 employees, but ⁓ anything for me personally, you could reach me. All my handles are the same. It’s Michel Ventures, Danielle Michel Ventures, but it’s not like the female name. It’s M-I-C-H-E-L for Michel. So Danielle Michel Ventures, Instagram, X, YouTube, all those things, and I’ll respond to any DMs personally there.

Dylan Silver (20:00)
Danielle, thank you so much for coming on the show here today.

Danielle Michel (20:03)
Thank you so much, Dylan, for having me. This was wonderful.