STR Depreciation/Bonus Depreciation Question

Rental Property Investor · NJ · Member since 2015 · 6 posts · 4 votes

Hi all, we bought a STR in 2022 for 380k, renovated it for 200k in 2023, and rented it out in July, August, September of 2023 with an average stay of just under 6 days. We're changing our plan for the property in 2024 and plan to rent it out for two of the summer months on a <7 day basis, but then also use it for a month ourselves. Not looking to rent it out in the off-season currently. This will probably be the situation in 2024 and beyond. We are not real estate professionals.

1) How would you handle the classification of the property in the 2023 tax year and would you utilize a STR depreciation strategy?

2) How would you classify the property in the 2024 tax year and beyond?

Thanks!

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Michael PlaksPro Member

Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes

@Jonathan B.

Assuming you pass the "material participation" test for 2023 and did not use the property yourself (or used very little), you should be able to treat it as an STR for 2023, including bonus depreciation. https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

For 2024, it will be a mixed-use personal/vacation property on which no losses are allowed at all. Unless you revise your plan and ensure that your personal use is under 10% of the rental use. The rules are more complex than we can fully explain in an online forum.

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
2y
@Jonathan B.
Assuming you pass the "material participation" test for 2023 and did not use the property yourself (or used very little), you should be able to treat it as an STR for 2023, including bonus depreciation. https://www.biggerpockets.com/forums/51/topics/1122635-the-s...
For 2024, it will be a mixed-use personal/vacation property on which no losses are allowed at all. Unless you revise your plan and ensure that your personal use is under 10% of the rental use. The rules are more complex than we can fully explain in an online forum.
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Laura Kreinbring
Member since 2023 · 21 posts · 4 votes
2y
been working to wrap my head around depreciation and I have had a puzzle I am still sorting just because I refinanced last year. I am going to create a different post about what the tax experts on my tax platform said and ask for feedback.

Accelerated and cost-segregated depreciation are tax deductions for other tax liabilities. If you are a REP, then it will deduct from active earnings. If you are not a REP, then it will deduct only from passive earnings. Passive earnings on that property in the future. The tax expert knows more about whether or not the future is affected by changing the use between 2023 and 2024.
If you are worried about paying taxes on rental income, you might consider that you can rent your home out tax-free for (I believe this is correct) 14 days of the calendar year.
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Heather Hall
Rental Property Investor · Fallbrook, CA (San Diego area) · Member since 2019 · 98 posts · 30 votes
2y
Hello, I have searched the forum but have been unable to find a sample "time log" for material participation purposes. I have seen a few apps mentioned, but I prefer to use excel and log everything that way. Does anyone have suggestions for retroactively estimating your time? I did not know of this time log requirement for STRs, so as a newbie I am going back through emails, texts, phone logs, invoices, etc. to determine how much time I spent on everything.
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Account Closed
Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
2y
Quote from @Heather Hall:

Hello, I have searched the forum but have been unable to find a sample "time log" for material participation purposes. I have seen a few apps mentioned, but I prefer to use excel and log everything that way. Does anyone have suggestions for retroactively estimating your time? I did not know of this time log requirement for STRs, so as a newbie I am going back through emails, texts, phone logs, invoices, etc. to determine how much time I spent on everything.

Hi Heather!

checkout this post here: https://www.biggerpockets.com/forums/51/topics/816680-real-e...
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
2y
For 2023, since your property was rented out with an average stay of under 7 days, it should be classified as a Short-Term Rental (STR). You don't need REPS for this. If you have material participation, you can benefit. If there was personal usage, the losses could be limited.

Looking ahead to 2024 and beyond, you can treat it as an STR if the average stay is still under 7 days. Just make sure your personal use doesn't exceed 14 days, or 10% of the rental days, to maintain its rental status for tax purposes. Remember to split the expenses and depreciation based on how much you rent it out versus using it personally.
Personal usage will negate the losses from the cost seg in the first year, so we suggest avoiding it. If the property cash flow starts in 2024, personal usage is not that impactful.

Talk to your CPA if renovation counts as QIP for bonus depreciation.
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Corby GoadeBusiness Member
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
2y
Already plenty of good advice above, but there's one piece that is missing.
Does a cost seg or bonus depreciation actually help you in any way? You need to have the income and tax liability to support the depreciation. In my experience, 75% of the time, the tax payer doesn't have a large enough liability to justify the accelerated depreciation anyhow- depending on your income and tax bill, it might not matter at all. As a matter of fact, you might be losing future depreciation by accelerating it now.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
2y
Quote from @Ashish Acharya:

Looking ahead to 2024 and beyond, you can treat it as an STR if the average stay is still under 7 days. Just make sure your personal use doesn't exceed 14 days, or 10% of the rental days, to maintain its rental status for tax purposes.
This is what the OP said:
We're changing our plan for the property in 2024 and plan to rent it out for two of the summer months on a <7 day basis, but then also use it for a month ourselves. Not looking to rent it out in the off-season currently.

Based on that, their personal use kills the STR loophole from 2024 forward.
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George Taylor
Member since 2024 · 8 posts · 1 vote
2y
Quote from @Corby Goade:

Already plenty of good advice above, but there's one piece that is missing.
Does a cost seg or bonus depreciation actually help you in any way? You need to have the income and tax liability to support the depreciation. In my experience, 75% of the time, the tax payer doesn't have a large enough liability to justify the accelerated depreciation anyhow- depending on your income and tax bill, it might not matter at all. As a matter of fact, you might be losing future depreciation by accelerating it now.

Cost segregation and advancing depreciation has its pros and cons depending on what the individual investor's goal is. It works for some and not for others. I have clients who are increasing their cash flow by between $19k and $55k and their cost basis is between $145k and $200k. It really does depend on timing of being put in service, that bonus it qualifies for (if any) and the life cycle of the elements that can be advanced.
A con would be that a cost segregation strategy was implemented, and the investor sells it within 5 years with no intention of doing a 1031. If that investor hadn't planned it carefully and re-invested that money into the property or even the purchase of another then a recapture fee would hit them hard.
On the other hand, pros include increased cash flow, engineer-based data for the clients CPA, audit protection (with the right firm) and the ability to deflect that recapture fee with a 1031 transaction. I'm with CSSI and we've completed over 45k studies, and this is what we specialize in.
Best thing on looking for info on a cost segregation study is to go directly to a firm that specializes in it. You'd be amazed at the number of CPAs that I come across who have never even heard of this strategy and are doing their clients an injustice. We run a free predictive analysis for anyone that wants one to see if it even makes sense for them and approach it in a consultative manner and we welcome our clients to have their CPA's join the conversation.
I'm not an expert in this field, yet. However, what makes sense for one might not for the other. Hope this helps.
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
2y
Quote from @Michael Plaks:

Quote from @Ashish Acharya:

Looking ahead to 2024 and beyond, you can treat it as an STR if the average stay is still under 7 days. Just make sure your personal use doesn't exceed 14 days, or 10% of the rental days, to maintain its rental status for tax purposes.
This is what the OP said:
We're changing our plan for the property in 2024 and plan to rent it out for two of the summer months on a <7 day basis, but then also use it for a month ourselves. Not looking to rent it out in the off-season currently.

Based on that, their personal use kills the STR loophole from 2024 forward.
Personal usage will limit the loss in 2023, as mentioned in the reply. The second year (2024) might not be a loss because there is no cost segregation, so personal usage doesn't matter that much.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
2y
If you plan to use the property for a month, you will likely not be able to utilize the losses since it will be deemed a personal use property.
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Laura Kreinbring
Member since 2023 · 21 posts · 4 votes
1y
Quote from @Heather Hall:

Hello, I have searched the forum but have been unable to find a sample "time log" for material participation purposes. I have seen a few apps mentioned, but I prefer to use excel and log everything that way. Does anyone have suggestions for retroactively estimating your time? I did not know of this time log requirement for STRs, so as a newbie I am going back through emails, texts, phone logs, invoices, etc. to determine how much time I spent on everything.
I have been using an app called Toggl Track and I'm using it right now
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