Nicole Shirvani is a board-certified, full-time psychiatrist in Florida. But she’s also a profitable property investor, with long- and short-term rental properties in her portfolio — including one in Florida, where she lives, and two in Virginia’s beautiful Shenandoah Valley.
She’s shared her success story on the podcast Semi-Retired MD and with Business Insider. Shirvani says her short-term rentals have brought in more income — in the six figures — than her long-term rental (1) (2).
But with that extra income comes a lot more work.
“There are guests coming in and out, so there are just so many different logistics,” she said.
In contrast, she said, with a long-term rental, she doesn’t have to do as much. Now she’s converting a triplex into a mid-term rental. Both long-term and mid-term rentals have similar upsides.
“Once you find an appropriate tenant and the place is doing well and the maintenance is all done, you don’t really get involved as much,” she noted.
Still, she enjoys the short-term rentals not only as a way to express her passion for interior design but for the tax benefits.
When you operate a short-term rental, you can deduct operating expenses like utilities, cleaning services, maintenance, insurance and furniture. You can deduct mortgage interest and property taxes.
If you rent a property out for 14 days or less a year, you do not have to report the rental income on your tax return. However, in that case, you also lose the option to deduct operating expenses like the ones mentioned above (3).
But there’s another tax benefit to short-term rentals: the ability to deduct certain property-related costs, like depreciation and repairs — considered passive losses — from your primary income. It’s known generally as the short-term rental loophole (4).
Usually, losses from rental activities can only be used to offset other passive income. But with the short-term rental loophole, you may be able to deduct those losses against your salary.
That could lead to huge tax savings for someone like Shirvani.
To qualify for this classification, the average stay at your property must be seven days or less, or the average stay must be 30 days or less but you provide services that are similar to what a hotel might offer, like linens and other amenities.
You must also pass a material participation test (direct involvement in the property) as defined by the IRS.
This includes spending more than 500 hours working on your short-term rental business.
If you’re thinking about buying a short-term rental property, consider these questions Shirvani asks before moving forward with a purchase.
What’s nearby? Attractions like beaches, ski slopes, theme parks, and hiking trails can be a big draw. Similarly, buying a rental property in a major city could be a lucrative prospect.
Would you enjoy staying at the property? If you don’t find the location appealing, chances are, guests won’t either.
What are the short-term rental rules and bylaws in the area? Some communities prohibit short-term rentals while others impose strict regulations, such as quiet hours.
If you like the idea of generating rental income but aren’t up to the task of managing a short-term rental, consider hiring a property manager. They’ll take a cut of your profits but do a lot of the work.
Owning and managing a rental property is a lot of work, and there can also be a fair amount of risk. Your money is tied up in an asset that’s not very liquid, and you could run into repairs and other costs that eat into or negate your profits.
There are ways to invest in real estate without owning physical properties. You could invest in a real estate investment trust (REIT) — a company that pools investors’ money into income-producing real estate portfolios.
If you like the idea of investing in vacation properties, you could focus on hospitality REITs that invest in hotel, motel and resort properties.
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Business Insider (1, 2); Vacasa (3); Dimov Tax Specialists (4)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
