My Tax Pros Disagree: Should I depreciate my STR duplex house over 27.5 or 39 years?

Question

Does anyone know if a house hacked duplex STR should be depreciated over 27.5 or 39 years? In previous years my tax person used 27.5 but my new tax pro said it needs to be corrected to 39 years. It is an R2 zoned (upper,lower) duplex and I live in one of the units and rent the other as a short term rental.

Nick Vogel · Answer

If your average rental stay is under 30 days (transient basis), it should be treated as commercial/nonresidential property and depreciated over 39 years.

Michael Plaks · Answer

Sorry to disappoint you, @Stephen Nelson, this is not a requested challenge to you. I'm sort of agreeing with your point, but first...

1. Clarification on 27.5 vs 39 - for @Joseph Coleman and other investors

Your previous accountant who used 27.5 did so (I'm 99.9% sure) not because he went deep into an analysis of the tax rules, but because he was unaware that STRs were treated differently from regular rentals. He simply treated your STRs as LTRs. Your current accountant is certainly knowledgeable about STRs and is applying 39 which is a current consensus between accountants specializing in real estate.

My colleague Stephen Nelson took the discussion to a much higher level, almost certainly above the level of your old accountant.

2. Comments on Stephen Nelson's position. WARNING: this part is only for tax nerds and fellow tax professionals. Normies should stop reading past this point, for the sake of your own sanity.

Stephen brings up a valid argument that there is no black-and-white clarity on 27.5 vs 39. The issue has been debated between real estate CPAs on many forums, including here on BP. And we basically arrived at a consensus that 39-yr is the correct answer.

But it is true that there is room for dissent. To spare technical details and references to Code sections, Regulations, PLRs and CCMs, the crux of the debate is the legal definition of transient basis. It was defined in the old Regulations as a lease term of 30 days or less. However, these Regulations were removed back in 1993.If that dead definition from more than 20 years ago is still walking - then 39-yr wins. And we have some post-1993 tax documents that imply that the old definition still holds. But since the pre-1993 definition is technically cancelled, it leaves the door slightly open for 27.5-yr.

For the 2 or 3 people who are fascinated by such controversies, here are links to BP debates from several years ago. Good memories. Most of these colleagues of mine have left BP since.https://www.biggerpockets.com/forums/51/topics/756665-my-cpa...https://www.biggerpockets.com/forums/51/topics/527595-short-...

Stephen Nelson · Answer

This is a great question, and I think it’s fair to say that the answer is more nuanced than the common black-and-white takes you sometimes see online.

Regarding depreciation—27.5 years vs. 39 years—my view is that most short-term rentals still get treated as residential rental property under Section 168 and thus qualify for 27.5-year straight-line depreciation.

The key statutory test is whether 80% or more of the gross rental income comes from dwelling units. That’s it. There’s no requirement in the depreciation rules about how long someone stays. So even if your guests rent the place for just 3 or 4 nights, that doesn’t by itself turn a dwelling into a commercial building.

Some advisors point to Reg. §1.469-1T(e)(3)(ii)(A) and argue that short-term rentals (7 days or less) aren’t “rental activities,” so they must be depreciated over 39 years. But that regulation is about classifying activities for passive loss rules—not classifying the structure for depreciation purposes. I think it’s a mistake to conflate those.

There is a Chief Counsel Advice memo that leans toward 39 years for hotel-like operations, but in those examples, which I'm pretty sure were looking at Reg. §1.469-1T(e)(3)(ii)(B) short-term rentals (30 days with significant services), the taxpayer was providing full daily housekeeping, meals, concierge, the whole deal. Most 7-days-or-less short-term rentals aren’t doing that. Providing linens and charging a cleaning fee after checkout doesn’t make the place a hotel.

Thus, unless your short-term rental really is a hotel in substance—not just in average stay length—I think 27.5 years is still the correct treatment. That’s consistent with the statute, IRS guidance, and common sense.

Happy to be challenged on this—but I think the burden of proof should be on those trying to stretch the definition of nonresidential property to cover what are, in reality, furnished houses and condos.

BTW Section 168(e)(2)(A)(i), which defines what a residential property is, says this, “The term ‘residential rental property’ means any building or structure if 80 percent or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units."

Also when I asked ChatGPT to assess my thinking, it pointed out that IRS Pub 527 says even if a dwelling unit is rented on a short-term basis and reported on Schedule C, it may still qualify as residential rental property. (Er, I can't find that quote in a quick search.)

All that said, for the record, if/when the cost segregation study says its 39 year? I think we always use 39 years just to perfectly match what the study says.

Stephen Nelson · Answer

For the record, I am not very dogmatic on this.

The other thing is, with STRs I think we're always using cost segregation studies which invariably use 39 years. And I don't want to deviate from what @Sean Graham, @Julio Gonzalez or one of the other cost segregation experts say in their reports

I'm wondering something else though... how long has it been since you guys had an argument about Schedule C vs Schedule E? (Just joking.)

Dylan Brown · Answer

I agree with the above - should be 39 years if average rental period is <30 days.Also, it should still be reported on the Sch. E (likely where your last tax pro put it) unless the average stay was <7 days and/or substantial services were provided (such as daily cleaning, tour guides, concierge, etc.).

I agree with @Michael Plaks - technically they need to reverse the small portion of PY 27.5 year depreciation that essentially overstated the deduction, potentially causing you to recognize some taxable income in the current year.  To offset this, they may consider deploying a cost seg. strategy if you did not already do that in prior years and turn this into a strong opportunity to increase your deductions since you are already going in to make a correction anyway.

Joseph Coleman · Answer

Thank you everyone for your in depth replies. I discussed with my tax person and decided to use 39 years just to be safe. But it does sound like there is room for interpretation. I referenced the IRS documents and had some long discussion with ChatGPT and it also was saying 27.5 years would apply based on IRS publication 527. I know many investors who use 27.5.  It is hard to make sense of the requirement to treat a home that you live in as a commercial property.

Stephen Nelson · Answer

So I think ChatGPT is a good resource. Especially if you're using o3. You really want to interrogate the heck out of it, though. It also will regularly make errors. (This is not scientific but my gut sense is, it's maybe right 80% of the time about complex tax stuff. That's actually pretty good. And if that's even close, 80% suggests it's pretty useful to double-check what a human tax accountant says or recommends. 80% means it'll find 80% of the errors the human makes.)

The IRS publications... yeah, so those aren't "primary source authorities" like the statutes Congress writes, the regulations the treasury publishes, court decisions, etc. But the thing is, an IRS agent or auditor will defer to publications. Also, I don't think they usually aren't wrong per se but conservative or incomplete?

Jason Malabute · Answer

Since you live in one half of the duplex and rent the other half as a short-term rental (STR), only the rental portion is eligible for depreciation. And because STRs are generally not considered residential real estate under IRS rules (due to the average guest stay being less than 30 days with substantial services provided), they must be depreciated over 39 years, not 27.5.

This is one of those nuances that underscores why it’s so important to work with a CPA who specializes in real estate. Not all CPAs are aware of the distinctions between residential and nonresidential property when it comes to STRs, and that can lead to costly errors down the road.

Michael Plaks · Answer

You cannot rely on ChatGPT or on IRS publications. Both are well known to be ridden with mistakes.

My Tax Pros Disagree: Should I depreciate my STR duplex house over 27.5 or 39 years?

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