Bonus Depreciation 2023 STR

[Michael Sylver]

I've been reading threads... but getting confused. As a high W2 earner I am looking to apply the bonus depreciation in 2023 (my spouse will meet the 100 hour requirement). I'm considering buying 1 STR and 1 LTR. The tax benefit is not the primary driver for my purchase, however it certainly is a factor in the decision if I can deduct 80% depreciation in year 1. If so I may even consider 1 purchase 2023 and then the second in 2024 for the tax benefits.

I'm in process of switching CPA or I'd be asking him to validate.

Thanks all

[Ashish Acharya]

Not the entire purchase price is deducted. Only a percentage of the basis is bonus depreciated the first year. The depreciation is 80% by might be on the 25% of the purchase price. 

[John Duston]

The bonus deprecation doesn't apply to land or building but can be taken against shorter-life items. That would include furnishings, land improvements, appliances, etc.

[Clayton Silva]

I believe the bonus depreciation is going to be 80% in 2023 and 60% in 2024 if I'm not mistaken (not a CPA so definitely consult with them).  Most CPAs have told me there is almost no net tangible benefit on buying single family homes and trying to take bonus depreciation.  It is mostly intended for larger multifamily/commercial properties.  

Lastly, what 100 hour rule are you referring to?  If referring to real estate professional tax status, I believe the rule to be 750 hours of active participation per year not 100 but again check with your CPA to confirm.

[Basit Siddiqi]

When you purchase a property, and perform a cost segregation study completed, the study will determine a cost towards the building itself, land, and other assets that are identified as assets eligible for bonus depreciation.

The amounts identified eligible for bonus depreciation will be eligible for 80% write off in 2023.
The remaining amount identified towards the building itself will be eligible for depreciation over a longer period.

Also be mindful, that you may potentially also write off costs to furnish the STR such as furnishings and appliances.

best of luck.

[Bonnie Griffin Kaake]

Quote from @Michael Sylver:

I've been reading threads... but getting confused. As a high W2 earner I am looking to apply the bonus depreciation in 2023 (my spouse will meet the 100 hour requirement). I'm considering buying 1 STR and 1 LTR. The tax benefit is not the primary driver for my purchase, however it certainly is a factor in the decision if I can deduct 80% depreciation in year 1. If so I may even consider 1 purchase 2023 and then the second in 2024 for the tax benefits.

I'm in process of switching CPA or I'd be asking him to validate.

Thanks all

Hi Michael, You sound a bit confused. The 100 hours applies to a STR to make make  the income and losses active. It means you must spend at least 100 hours or more, more than anyone else. This is called material participation. Material participation is needed to be able to be able to deduct the losses of accelerated depreciation and Bonus against your W2 income. Otherwise, the depreciation can only be used against the income from that property or other passive investments. The long-term rentals are passive unless you are a RE Professional. Having a W2 i,s usually a red flag for the IRS to question if you are actually spending 750 hours or more on your real estate investments. Documentation, documentation, documentation is absolutely critical if you expect to pass an audit. 

[Mike Bend]

@Bonnie Griffin Kaake

My wife will qualify for the 750 hours with our short term rental since she manages, cleans, and takes care of all the day to day. How would she be able to document that she cleans the property? Also if her name isn’t on the title of the home and it’s just my name will that affect her status as real estate professional?

[Bonnie Griffin Kaake]

@Mike Bend There are too many unanswered questions in your situation. You will want to talk to a CPA/tax professional who is familiar with rental real estate and STRs in particular. There are only about 260 days/2,080 working hours in a year, not excluding holidays. meticulous records must be kept every day. It will be difficult for the IRS to believe that 750 hours are being spent on one STR. The property ownership may also be a tax/legal question. Do you file as individuals or jointly? Are you actually married or only living together? What state do you live in? To make a STR an active investment has nothing to do with being a "RE Professional". An owner only needs 100 hours or more than any other person/company, in actively managing the STR for the income and losses to be active.

On the other hand, if she only works in the real estate profession and qualifies as a RE Professional, her investment properties would be active, but she would still need to materially participate in each property each year to keep it active or group her properties and spend at least 750 hours total a year in the real estate profession. 

[Mike Bend]

@Bonnie Griffin Kaake

Thank you for taking the time to respond….

Yes we are legally married in Illinois, filing jointly. Our property is in Wisconsin. We’ve had roughly 100 bookings this year. She drives an hour each way to clean it. Also takes 5-7 hours per clean to the property and do all the laundry. Documentation should not be an issue. She’s spent time setting up the property with furnishing, decorating, setting up the social media on platforms etc.

but yes we will be working with our cpa on this topic. Only problem is he charges 75-150$ every phone call. So I was hoping to understand this before talking to him. He’s charged me 1500$ so far to reconcile our quickbooks and send a letter to IRS to pay annually and not quarterly. I’m not sure if that’s normal for CPA to charge or if we are over paying and should find a different CPA. He’s not a real estate CPA either just a regular one.

[Bonnie Griffin Kaake]

@Mike Bend and @Michael Sylver Sounds like you both are thinking correctly and learning. Again, I emphasize the need to document on a daily basis what your wives are doing. If you continue to invest in real estate, you may need to upgrade your tax professional. Since the income on your STR is active and you are in high -income brackets, you would likely benefit from a "quality" cost segregation study. Your wives sound like they are putting in the required number of hours for the short-term rentals to be an active investment so that it can offset your W2 income. If your wife is or can put in 750 hours between all your investment properties, talk to your CPA about getting her qualified as a "Real Estate Professional". Then, group your investment properties so that all of them can be active investments and income and losses (from cost segregation studies which create excess paper losses) can be used to off-set your W2 income. Let me know if I can be of service now or later.