Renting rooms in Primary Residence and using STR Loophole

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Renting rooms in Primary Residence and using STR Loophole

Shubham Agrawal
Member since 2023 · 1 post · 0 votes

Hello,

I am new to real estate investment and recently found out about offsetting W2 income using Short Term Rentals. If I buy a residential property, start living in it (let's say occupy one room) and rent the rest of the property (other rooms and maybe basement) for 30 days or less, will I still be able to offset my active income using depreciation, cost segregation and bonus depreciation?

Are people using this route often?

Thanks in advance!

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Joseph PalmieroBusiness Member
CPA · PA · Member since 2023 · 151 posts · 115 votes
3y

You would have to allocate your expenses based on personal and rental use of the property considering both days rented and the actual space rented.

In order to deduct losses with an average stay of 30 days or less, you would have to provide substantial services.  This would be like hotel type services.  You would also have to meet one of the tests of material participation.

If you don't provide substantial services under your fact patern, you may be able to deduct up to $25k in losses if your income is less than $150k.

You could potentially deduct losses If you kept your average guest stay at seven days or less and you materially participate.

This is not a strategy for DIYers.  Consult a qualified real estate tax CPA.

[email protected]814-720-2493
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  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    3y

    First off @Shubham Agrawal, it isn't a loophole. It is the IRS rules around STRs.

    I am not a CPA or attorney, but I am pretty sure that there will be restrictions. You are not using the entire property as a rental so you would have to prorate the deductions, depreciation, etc.

    I would expect that you would hit the 50% area on usage. It is hard to tell so get with your CPA to discuss.

    2Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    3y

    Scarry to rent out rooms under the same roof as you to strangers. Hopefully none will be serial killers.

    1Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    3y

    Easier ways to lower your taxes than this.....

    0Reply
  • Joseph PalmieroBusiness Member
    CPA · PA · Member since 2023 · 151 posts · 115 votes
    3y

    You would have to allocate your expenses based on personal and rental use of the property considering both days rented and the actual space rented.

    In order to deduct losses with an average stay of 30 days or less, you would have to provide substantial services.  This would be like hotel type services.  You would also have to meet one of the tests of material participation.

    If you don't provide substantial services under your fact patern, you may be able to deduct up to $25k in losses if your income is less than $150k.

    You could potentially deduct losses If you kept your average guest stay at seven days or less and you materially participate.

    This is not a strategy for DIYers.  Consult a qualified real estate tax CPA.

    [email protected]814-720-2493
    Palmiero CPA, LLC51 Review
    WebsiteView Page
    3Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    3y

    You also only want to do this in a falling or at least stagnant market since you’re going to make any appreciation taxable. 

    Ps. Don’t forget. The only way this helps is if you’re losing money or showing a lot of depreciation. If it’s just depreciation you’re going to owe that money back. 

    0Reply
  • Colleen F.Pro Member
    Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
    3y

    @Shubham Agrawal Yes you can do this and many people do it with longer term tenants to start out but I am not sure STR rooms are very popular. You need to look into rent by the room strategy and consult a CPA. You can decrease issues by doing background checks if you do longer or mid-term rentals. You can also look for a duplex or something with an in law suite. The % of the home you use for rental would be depreciated. Make sure this is allowed in your area. Some areas have an unrelated persons ordinance that could kick in depending on the number of rooms for rent.

    1Reply
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