July 2025 Rental Property Book Updates

WCG CPAs & Advisors updates our rental property book, “I Just Got A Rental, What Do I Do?” periodically to reflect new IRS guidance and real-world issues that affect investors. This edition highlights three timely updates—grouping short-term rentals, paying your children from the rental, and using cost segregation to improve cash flow. Each topic touches on a different angle of how smart tax planning helps real estate owners preserve tax deductions, maximize long-term returns, and build wealth.

Sidebar: When we say real-world issues, we must give credit to our prospective and current clients who ask all kinds of questions. Reality is stranger than fiction, right?

The buttons below will take you to expanded versions of each of these rental property topics.

Cannot Group Short-Term Rentals With Other Rentals

Short-term rental owners often ask whether they can group their short-term rental properties with long-term properties to make it easier to meet material participation thresholds. The answer is no—and that distinction is critical for proper tax reporting.

If your average guest stay is seven days or less, the IRS classifies the property as a business, not a rental. Treasury Regulation 1.469-1T(e)(3)(ii) makes it clear that these activities are “non-rental,” which means they cannot be grouped with long-term rentals under the real estate professional rules in Treasury Regulations 1.469-9(g).

Sidebar: This is part and parcel the reason why your hours spent on a short-term rental do not count towards the 750 hours needed for real estate professional status. In other words, an STR is more like a hotel than a rental, and hotels are not considered real estate activities.

You can still group short-term rentals together under Treasury Regulations 1.469-4 if they form an “appropriate economic unit,” such as properties you manage yourself in similar markets. However, mixing them with traditional rentals—those with average stays over 30 days—can break the grouping election and create exposure if reviewed by the IRS.

Grouping is usually done to help meet one of the material participation tests. As a refresher, here are the big 3-

• 500 total hours,
• 100 hours and more than anyone else, or
• Substantially all the work.

A real estate CPA, such as those on WCG’s Rental Expert Pod, can help you document time correctly and determine which chores, duties and tasks count towards material participation.

Paying Your Children From the Rental Property

Another July update focuses on a practical family strategy—employing your children to help with rental properties. Whether they manage online listings, paint, or assist with maintenance, paying them can shift income within the household and generate meaningful tax savings when handled correctly. Sure, you can’t get them to clean their own room, but the rental? That’s a snap, right?

Parents can pay each child up to the standard deduction amount—$15,000 for 2025—without creating taxable income for Junior. That money becomes a deductible business expense to the rental property if the work is legitimate, documented, and paid at a reasonable rate. What is a reasonable rate? $50 an hour is unlikely. $25? $30?

There are three main ways to do it:

• Create a property management company and run payroll from there. This setup scales well across multiple rentals and can allow children under 18 to earn wages exempt from Social Security and Medicare taxes.
• Use an existing S corporation if you already operate one for other business activities. You can process payroll there, but employment taxes apply regardless of age.
• Pay them as independent contractors, which is generally discouraged. Most states presume workers are employees, and contractors pay self-employment tax at 15.3%.

Documentation is critical. Keep timecards, job descriptions, and pay records showing that the arrangement is bona fide. Paying a teenager $15,000 might mean about 500 hours of real work which is 10 hours a week, every week—so the tasks and hours must make sense.

When structured properly, employing your children becomes one of the most practical rental property tax benefits available. At a 24% marginal rate, paying a child $15,000 could save the parents roughly $3,600 in taxes while giving the child valuable work experience and the opportunity to fund a Roth IRA. Maybe tuck some money away for college or for their first home purchase.

WCG CPAs & Advisors’ rental property CPA team in conjunction with our amazing payroll team often helps clients set up payroll systems and determine reasonable wages to keep these family strategies compliant and effective.

Cost Segregation: Cash Flow Play

The final July update revisits cost segregation, a technique that accelerates depreciation through 100% bonus depreciation or Section 179 expensing to improve early-stage cash flow. It doesn’t increase your total deductions—it simply moves more of them to the front of your ownership timeline.

For instance, a $700,000 property with $500,000 of building value might generate $100,000 in accelerated depreciation through a cost segregation study. At a 24% marginal tax rate, that equates to a $24,000 immediate tax savings. Reinvesting that cash or paying down debt sooner enhances long-term returns.

The strategy works best when you can use the tax deductions right away—either through the short-term rental loophole or by qualifying as a real estate professional. Investors limited by passive activity loss rules may still carry forward the benefit or realize it upon sale.

Cost segregation also requires planning for the future. Large first-year deductions mean smaller ones later, so understanding your income trajectory and exit timeline is essential. A seasoned real estate CPA can model these effects, helping you decide when acceleration makes the most sense, and when it might not be the best.

Even if you expect to sell within a few years, today’s lower-cost cost seg studies often justify the effort. Spending around $1,000 to unlock tens of thousands in early tax deductions can still produce strong returns, especially when combined with other rental property tax benefits like 100% bonus depreciation or Section 179 expensing.

In short, cost segregation remains a powerful cash-flow tool for investors who plan strategically and document carefully. A rental property CPA firm such as WCG CPAs & Advisors can coordinate the timing of deductions with your overall tax plan to keep both short-term liquidity and long-term compliance in balance.