Active VS Passive and Cost Segregation

[Stefan Hirniak]

Hi BP!

Happy Friday.

I’ve got a 2 part question for the forum:

1) Can I take bonus depreciation through a cost seg study if I’m not classified as an active investor?  Doing a mid term rental in Texas with solar and was hoping to take the depreciation before the % decrease.

2) Any suggestions on becoming active VS passive. I have a W2 but my wife doesn't work and we are looking to scale. We currently manage our 7 SFH alone but our CPA isn't comfortable with it yet.

Not looking for tax advise just suggestions and opinions.  Thanks everyone and have a great weekend!

stefan

[Ashish Acharya]

Stefan, good questions. 
- Bonus deprecation is not optional. Everyone gets it (passive and non-passive investors). The losses will be limited under PAL if you don't meet the REPS requirement for the long-term property.

- You need to work with your tax advisor on your planning on how to meet the rules and potentially use them for your benefit. 

[Chris Turek]

Quote from @Stefan Hirniak:

Hi BP!

Happy Friday.

I’ve got a 2 part question for the forum:

1) Can I take bonus depreciation through a cost seg study if I’m not classified as an active investor?  Doing a mid term rental in Texas with solar and was hoping to take the depreciation before the % decrease.

2) Any suggestions on becoming active VS passive. I have a W2 but my wife doesn't work and we are looking to scale. We currently manage our 7 SFH alone but our CPA isn't comfortable with it yet.

Not looking for tax advise just suggestions and opinions.  Thanks everyone and have a great weekend!

stefan

 I believe the previous point correctly answer the cost seg question.  As for the other question I think it deserves more time.  It is very possible your wife meets the requirement of an active investor already, however, only you and her would know.  You can and should get advice from a professional but here's the free advice I will give you.  Always remember you can write whatever you want on your tax returns, it is what you can prove in an audit that will matter.  If you really meet the criteria for an active investor but do not adequately document things you might still loose in an audit.  You might not actually qualify but have great creative documentations skills and pass an audit.  However, in either case you need to really know the rules and work on building the proof that you do.  Find an accountant who specializes in real estate, has worked with many active investors and successfully been audited.  I'm guessing their are plenty on here who can help you.

Good Luck

Chris

[Daniel Murphy]

Ashish is correct, bonus depreciation is not optional. If you do a cost seg study, you get bonus deprecation. How it flows through to your tax return is the next set of questions / situations. 

First, either you or your wife must materially participate, AND, your average rental day must be 7 days or less to have the deprecation go against your active income for the "str loophole."  

OR, like you say you're a mid term rental, you must provide substantial services.  IE- daily linens, food service etc. 
OR, you must be a real estate professional. My understanding is that if you have a regular job, it's almost impossible to sufficiently claim REPS.  

I'm not a CPA, but I have been digging into cost segs very deeply recently.  

My experience with CPA's, cost segs & interpretations: Tax code & tax forms are fairly formulaic.  "multiply line 6 by 50% & enter on line 7" type of thing.  However, when you get to forms 8582 & 4562, Passive Activity Losses & Deprecation, this is when the formula's tend to stop and tax professional interpretation steps in. As a result, you'll likely get a different answer from multiple CPA's on deprecation & active/passive rules.  
You may consider getting a second opinion (or third). 

[Greg O'Brien]

@Stefan Hirniak re #2 you’ll want to ask your CPA/advisor to explain exactly what the rules are and what you need to do if thats the goal. This should be a proactive exercise. When I hear “not comfortable” that means they may not 100% be clear on the laws and regs.

[Julio Gonzalez]

@Stefan Hirniak 

As others have confirmed, yes you are able to utilize bonus depreciation without REPS status. However, if you're doing a cost segregation study, you will typically find the most benefit if you do have REPS status so that your passive losses aren't limited. Since you have a W2 job, obtaining REPS status would be challenging since you'd have to prove that you work more on your real estate business than you do at your other job. If it's a possibility, I would highly recommend your wife obtain REPS status. This would be a huge tax benefit.