Tax Strategies for a $25M Dealership Owner with Real Estate and Short-Term Rentals

In this episode of the Tax Smart REI Podcast, Thomas Castelli and Nate Sosa introduce a new segment called “In the Wild,” where they break down real-world investor scenarios and uncover missed tax strategies. In this case study, they analyze a business owner running a $25 million dealership, owning the associated commercial real estate, operating an equipment rental business, and recently purchasing two short-term rentals. The episode highlights how these moving pieces interact—and where significant tax savings opportunities may be slipping through the cracks.

Introducing the “In the Wild” Segment

Thomas opens the episode by introducing a new segment designed to showcase real scenarios encountered by the Hall CPA team. These case studies focus on common tax mistakes, missed planning opportunities, and structural inefficiencies in business entities. While details are adjusted for privacy, each example reflects real patterns seen among investors and business owners.

The Investor Scenario: A $25M Dealership Business

The case involves a dealership that has been operating for 20–30 years and now generates approximately $25 million in annual revenue. The structure includes a dealership operating business, an equipment rental company, the commercial real estate used by the dealership, and two short-term rental properties purchased in 2025. One partner actively runs the business, while others act as passive investors. Given the scale of income, the owner is actively seeking ways to reduce their tax burden.

Where Depreciation Opportunities Exist

One of the first observations is that the investor likely already has substantial depreciation opportunities within the current structure. The commercial building can be depreciated, along with the equipment used in the rental business. Additionally, cost segregation studies could accelerate depreciation and generate large upfront deductions. These opportunities exist even without relying on short-term rental strategies.

Cost Segregation for the Commercial Building

A key question raised is whether the investor has completed a cost segregation study on the dealership property. This strategy allows portions of the building to be reclassified into shorter depreciation schedules such as five-, seven-, and 15-year property instead of the standard 39-year timeline. For high-income businesses, this can create significant immediate tax deductions.

Structuring the Operating Business and Real Estate

How the business and real estate are structured is critical. Many business owners separate the operating company (OpCo) from the property ownership entity (PropCo) for liability protection. However, for tax purposes, these entities must be structured and grouped correctly to allow depreciation losses from the real estate to offset operating income. This often requires identical ownership across entities or direct ownership alignment. When done properly, it can convert what would otherwise be passive losses into usable offsets against business income.

Short-Term Rentals and the Material Participation Challenge

The investor purchased two short-term rentals in 2025 to leverage tax strategies, but qualifying requires meeting strict rules. The average stay must be seven days or fewer, and the investor must materially participate in the activity. This is where many investors run into issues, particularly when using property managers. If the manager performs most of the work, the investor may not meet the material participation standard required to unlock tax benefits.

Why Timing Matters for STR Tax Benefits

Another issue is timing. Although the properties were purchased in 2025, they did not have guest stays until 2026. For tax purposes, actual rental activity is required to establish the average rental period. Simply listing the property is not enough. Without bookings, the short-term rental strategy cannot be applied, meaning no tax benefit is available for that year.

The Importance of Fair Market Rent

The hosts also highlight the importance of charging fair market rent. Renting to friends or acquaintances at below-market rates can cause the IRS to classify the property as personal use rather than a true rental. When that happens, key tax benefits—such as depreciation—may be limited or disallowed entirely.

Business Vehicle Deductions Explained

The investor also uses a vehicle across multiple business activities, including the dealership, equipment rentals, and short-term rentals. Certain vehicles over 6,000 pounds GVWR may qualify for accelerated depreciation, including trucks, SUVs, and vehicles like the Mercedes G-Wagon. If business use exceeds 50%, bonus depreciation may be available on the business-use portion. However, commuting miles do not count toward business use.

Section 179 vs. Bonus Depreciation

The discussion also covers the difference between Section 179 and bonus depreciation. While both allow accelerated deductions, Section 179 is limited by business income, whereas bonus depreciation can create taxable losses. For high-income businesses, bonus depreciation is often the more powerful planning tool.

A Major Missed Opportunity: Electing Out of Bonus Depreciation

One of the biggest issues identified is that the equipment rental business has been electing out of bonus depreciation despite purchasing millions of dollars of equipment each year. Instead, the assets are being depreciated on standard schedules. For a profitable business, this decision could be costing hundreds of thousands of dollars annually in lost tax savings. While electing out can make sense in certain situations, it should not be the default approach.

Why Proactive Tax Planning Matters

Another major concern is the lack of proactive tax planning. The business owner attempted to engage their tax advisor for planning guidance but received limited support. Effective tax strategy requires forward-looking planning before year-end, not just reactive tax preparation after the fact. Working with a knowledgeable advisor can help identify and implement strategies in time to create meaningful savings.

The Top Three Tax Fixes for This Investor

Thomas summarizes the three biggest opportunities for improvement. First, optimize the short-term rental strategy by ensuring the properties meet requirements and considering self-management in the first year to establish material participation. Second, stop electing out of bonus depreciation in the equipment rental business to unlock immediate deductions. Third, confirm that the real estate and operating business are properly grouped to allow losses to offset active income.

Book a free discovery call with our team.

Disclaimer: This podcast summary was generated from the transcript and may contain some errors or miss key points from the audio recording.