Short term rental loophole then long term rental in the future

Tax, SDIRAs & Cost Segregation
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Short term rental loophole then long term rental in the future

Brett Dudley
Investor · Oakley, CA · Member since 2019 · 3 posts · 1 vote

Hello, 

just closed on a new house. If i were to airbnb it out for the last few weeks of December, would i be able to use the short term rental loophole to do bonus depreciation on the property (with a cost seg of course)? Would i be able to do this if later on I decided to use the house as a long term or mid term rental ?

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Sean O'KeefePro Member
CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 871 votes
2y
Quote from @Brett Dudley:

Hello, 

just closed on a new house. If i were to airbnb it out for the last few weeks of December, would i be able to use the short term rental loophole to do bonus depreciation on the property (with a cost seg of course)? Would i be able to do this if later on I decided to use the house as a long term or mid term rental ?

@Brett Dudley Since we are so close to the end of the tax year (Jan - Dec) one of your biggest challenges will be meeting the material participation requirements. This is one of a few requirements to qualify for what you are referring to as the "short term rental loophole".

To be considered as materially participating in an activity, an individual must, under Sec. 469(h)(1), have "regular, continuous, and substantial" involvement in the activity. This isn't the same thing as REPS (but is required for REPS).

These tests determine whether you qualify based on your involvement in your rental property(ies). You need to meet one of them to be considered materially participating.

  1. Spend more than 500 hours on your rental business
  2. Do substantially everything for the rental business
  3. Spend more than 100 hours on the activity and no one other individual spends more time than you do
  4. Significant participation activity for more than 100 hours, and your combined activity in all significant participation activities exceeds 500 hours
  5. Participating in the business for five of the 10 previous taxable years
  6. Personal service activity (non income-producing) for three of the previous taxable years
  7. Regular, continuous, provable participation in the business for more than 100 hours

The first three are the ones the majority of real estate investors will evaluate and attempt to qualify for.
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*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

[email protected]628-241-0888
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  • Account Closed
    CPA · NY · Member since 2023 · 891 posts · 157 votes
    2y

    Bonus depreciation is a tax incentive provided by the U.S. government to encourage business investment in tangible property. Typically, it's applicable to certain types of property, and the rules can change.

    Regarding short-term rentals and bonus depreciation, the Tax Cuts and Jobs Act (TCJA) introduced favorable changes for businesses, including bonus depreciation for certain qualified property, but the specifics can depend on your situation.

    Using your property for short-term rentals may affect your ability to qualify for certain tax benefits, and the classification of your property (personal residence, rental property, business property, etc.) can impact the tax treatment.

    The IRS has guidelines regarding the depreciation of rental property, and bonus depreciation may not always be applicable to residential rental property.

    Additionally, if you decide to switch the use of your property (from short-term rental to long-term or mid-term rental), there could be implications for tax treatment.

    Given the complexity of tax laws and the potential impact on your specific situation, it is strongly recommended that you seek advice from a qualified tax professional. They can provide guidance based on the latest tax laws, regulations, and your individual circumstances.

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  • Sean O'KeefePro Member
    CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 871 votes
    2y
    Quote from @Brett Dudley:

    Hello, 

    just closed on a new house. If i were to airbnb it out for the last few weeks of December, would i be able to use the short term rental loophole to do bonus depreciation on the property (with a cost seg of course)? Would i be able to do this if later on I decided to use the house as a long term or mid term rental ?

    @Brett Dudley Since we are so close to the end of the tax year (Jan - Dec) one of your biggest challenges will be meeting the material participation requirements. This is one of a few requirements to qualify for what you are referring to as the "short term rental loophole".

    To be considered as materially participating in an activity, an individual must, under Sec. 469(h)(1), have "regular, continuous, and substantial" involvement in the activity. This isn't the same thing as REPS (but is required for REPS).

    These tests determine whether you qualify based on your involvement in your rental property(ies). You need to meet one of them to be considered materially participating.

    1. Spend more than 500 hours on your rental business
    2. Do substantially everything for the rental business
    3. Spend more than 100 hours on the activity and no one other individual spends more time than you do
    4. Significant participation activity for more than 100 hours, and your combined activity in all significant participation activities exceeds 500 hours
    5. Participating in the business for five of the 10 previous taxable years
    6. Personal service activity (non income-producing) for three of the previous taxable years
    7. Regular, continuous, provable participation in the business for more than 100 hours

    The first three are the ones the majority of real estate investors will evaluate and attempt to qualify for.
    .

    .

    .

    *This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

    [email protected]628-241-0888
    1Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    2y

    First question
    Is the airbnb activity considered passive or active?
    If the activity is considred active, then there is an opportunity to increase the loss through the purchase of a cost segregation study which would increase the depreciation into the earlier years.

    [email protected]917-280-8544
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  • Nate MeekerBusiness Member
    Real Estate CPA | California · Member since 2020 · 544 posts · 251 votes
    2y

    @Brett Dudley - we have yet to see any court cases for what happens when an STR becomes a LTR, but the IRS looks at facts and circumstances... since you are on public record by posting here that your main concern is the tax benefit, it may not fall in your favor during if you were ever audited.

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  • David RandolphPro Member
    Investor · St. Louis Missouri · Member since 2023 · 38 posts · 9 votes
    2y

    @Brett Dudley It seems to me that the poster has asked two consecutive questions about how the tax rules are affected by the short term (7 days or less - ie his reference to airbnb) and long term (31 days or more). By definition he has to consider short term rental since there are less than 31 days left in the calendar year.   

    I think it is a normal business decision to decide to utilize the remaining time to rent (hence being less than 31 days and perhaps less than 7 day stays and how his options are more open coming into a full calendar year.

    I am curious though how changing from 7 days or less this year is effected by going 31+ days next year. The cost seg (80%) and depreciation has already been taken in 2023. Doesn't that remain and only leave the purchase price minus the already depreciated values as the amount for depreciation in 2024 and beyond?  Even switching back to 7 days or less (airbnb) in say 2025, doesn't all that do is just cause the income to switch back to active and hence FICA taxable? We are not really talking about taking a passive loss on active income (hence the choice by most of #3 100 hours and no one more) since most of the depreciation was captured in 2023.

    Thank you for your input.

    [email protected]636-685-2990
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  • Michael Margarella
    Investor · New York City · Member since 2020 · 164 posts · 75 votes
    2y
    Quote from @Nate Meeker:

    @Brett Dudley - we have yet to see any court cases for what happens when an STR becomes a LTR, but the IRS looks at facts and circumstances... since you are on public record by posting here that your main concern is the tax benefit, it may not fall in your favor during if you were ever audited.

     @Nate Meeker can a commercial multifamily (8+ units) complex qualify for the STR loophole (assuming all units are rented for less than 7 days, etc.)?

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  • Nate MeekerBusiness Member
    Real Estate CPA | California · Member since 2020 · 544 posts · 251 votes
    2y

    @Michael Margarella - Why do you think it wouldn't? The IRS looks at use and facts versus the asset's generic description. 

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  • Michael Margarella
    Investor · New York City · Member since 2020 · 164 posts · 75 votes
    2y
    Quote from @Nate Meeker:

    @Michael Margarella - Why do you think it wouldn't? The IRS looks at use and facts versus the asset's generic description. 

    That is helpful! I did not have a position either way but couldn’t find any authority supporting using a commercial MF in this scenario. 
    0Reply
  • John Malone
    Attorney · Boston, MA · Member since 2023 · 140 posts · 75 votes
    2y

    @Michael Margarella yes. We have multiple clients with multi family STRs.

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