Opinions: LTR switch to STR & eligibility to apply passive losses to W2 income

[William C.]

Purchased a home in 2022. Lived in it as primary home. In 2023, moved out and converted it to LTR.

It has been a LTR between then and now. Tenants are solid. No cost seg study has been done to date. Have a lease in place which ends May 2027. 

At that time I am considering switching the property to a STR (avg stay of 7 days or less). Once converted to STR, and assuming we hit all other STR loophole requirements, could we then complete a cost seg study and have those potential losses offset our W2 income?

I expect opinions to vary on this unique situation, but what would you all say about this approach? Please poke holes. Thanks.

[Michael Plaks]

Quote from @William C.:

Purchased a home in 2022. Lived in it as primary home. In 2023, moved out and converted it to LTR.

It has been a LTR between then and now. Tenants are solid. No cost seg study has been done to date. Have a lease in place which ends May 2027. 

At that time I am considering switching the property to a STR (avg stay of 7 days or less). Once converted to STR, and assuming we hit all other STR loophole requirements, could we then complete a cost seg study and have those potential losses offset our W2 income?

I expect opinions to vary on this unique situation, but what would you all say about this approach? Please poke holes. Thanks.

My colleagues addressed several important points, but just to make it clear:

1. Conversion mid-year does not work. You could convert to an STR in 2028, not mid-2027.

2. At that point yes, you could do cost segregation and apply it retroactively under 2023 rules which was 80% bonus. 

3. There're other issues to be aware of, in order to qualify for the STR loophole and execute your plan. You might want some professional guidance at that point.

4. Your savings will help you for one tax year only, 2028. In 2029 it's back to the old tax situation and actually even slightly worse.

Read this post: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...