3 Things to Do Before You Buy Your First Short-Term Rental
For high earners, a short-term rental can be a real tax strategy. Buying one only for the tax benefits is how it turns into a money pit.
“I'm a high earner thinking about buying a short-term rental. What should I do first?”
The short version
- Get your finances in order: budget for the down payment and keep enough liquidity for repairs.
- Do your homework. Don't buy a rental just because you heard about the tax benefits.
- Learn the material participation requirements before you count on those losses. If you mess that up and get audited, it can be a very expensive mistake.
The short answer
If you're a high-earning W-2 employee, just received a lot of RSUs, or own a profitable business, and you're thinking about a short-term rental, do these three things before you buy.
The mistake: buying for the tax benefits
Don't buy a rental just because you heard about the tax benefits. Two, three or four years later, it turns into a gas guzzler, draining money out of your pocket until you're ready to sell. That's not the goal. The goal is to hold these properties long term and build real wealth.
Step 1: Get your finances in order
Budget enough for the down payment, and keep enough cash on hand to cover repairs or anything else that comes up.
Step 2: Do your due diligence
Do your homework on the property before you buy it.
Step 3: Understand material participation
If your goal is to treat the property as non-passive and use its losses to offset your income and save a lot in taxes, learn exactly what material participation requires.
These rules are nuanced. Get them wrong, get audited, and it can be a very expensive mistake.
Frequently asked questions
Should I buy a short-term rental just for the tax benefits?
You don't want to go out there just trying to get a rental property because you heard about the tax benefits. We want to hold these things long term and generate real wealth.
What do I need to know about material participation?
Look at what you actually have to do in order to treat the property as non-passive, if your goal is to use those losses to offset your income. Those rules can be pretty nuanced, and if you mess that up and get audited, it can be a very expensive mistake.
How much cash should I have before buying a rental?
Budget out enough for the down payment and have enough liquidity on hand so that if anything were to happen, any repairs, you can take care of it.