STR to Primary Conversion Pro and Cons? Can it be done?

Question

Hello BP Family,

I'm posting this for a friend..My friend owns a few STRs in Bay Area and has done well for the most part.

One of his STRs is not going so well and he has spent ~100k on upgrading and making it operable on Airbnb and VRBO.. He also did costseg and took bonused depreciation in 2022. He has nothing left in this property to offset his active income.

Appears this property losing on STR steam and hasn't done well in 2023 and now he's thinking of converting it into his primary. Also, he's been wanting to move out of his current primary and rent that out for LTR.
I believe that would work out ok as he's looking to offset some income from the LTR of his current residence.
I wanted to ask for some feedback or fro/cons or inputs on whether it's a good idea or not.

Thanks in advance for your thoughts/advice/input.

Adam Windham · Answer

Make sure that he knows what kind of loan he has on an STR...if its a investor / DSCR / Business Purpose loan then it has a non-owner occupant component and it would be a violation of the loan document for him to occupy as his primary. If his existing lender finds out, they can call the note or force a refinance.

Bill B. · Answer

Unfortunately he created a huge future tax bill by doing the cost seg, all that depreciation is going to have to be recaptured some day. AND, because this property was a rental first he’ll never qualify for 100% tax free sale on the appreciation side. (I assume the main reason to buy in a really expensive area.)

Maybe do a 1031 out of the area to an “affordable” area? Also unfortunately, California will chase him for those taxes if he ever sells even out of the state. Maybe sell his primary and do a 1031 with this property in to an expensive duplex and live in half? I assume he can’t take his income with him out of the state and have the income tax savings buy him another property?

Good luck.

Andrew Steffens · Answer

Does he have a CPA? Unfortunately I think this question can truly only be answered by CPA and best by the CPA who did his taxes.  Sorry!

Sangam Baligar · Answer

Thanks all for the feedback. I found the answers here and thru my CPA. Cheers!

Jeremy Jareckyj · Answer

Agreed ! A good  CPA will be his best bet!

Michael Baum · Answer

Hey @Sangam Baligar, it's going to be a tough row to hoe.

Get with a CPA and they can help him/her go over the options/

STR to Primary Conversion Pro and Cons? Can it be done?

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