Accelerated bonus depreciation for short term rental
New to Real Estate · San Francisco, CA · Member since 2023 · 12 posts · 10 votes
Hi all,
I am looking for some expertise from STR landlords or accountants. I currently have W-2 earnings and realize that I can buy a STR, spend 100 hours fixing it up and staging it, and perhaps manage to get a few guests before the end of the year. Then I could accelerate the bonus depreciation (at 60% for 2024).
I am trying to figure out how much of the property value can be used for bonus depreciation.
Purchase Price - $100,000 (land - 20%, building - 80%)
So, the building value is $80,000.
Can I claim the deduction of $80,000 * 0.60 = $42,000 against my w2 income in the first year?
Some already good advice in this thread...
I'll try and add a few more tidbits.
It looks like you are going for the material participation test where you do 100 hours and no single individual is going to exceed that. In the case of an audit, not only do you have to prove that you did at least 100 hours but you also need proof from your vendors that they did not do more than you. One good way to do that is to purchase towards the end of the year and put the property into service. That way, you will likely already have hit your 100 hours of material participation, but your cleaners, for example, would not have exceeded you since you would have only had a few bookings before the end of the year.
Also, another good one, is that material participation does not count until you are in contract on a property.
I'll echo @Alyson Gordon's that the bonus depreciable items (less than 20 years depreciation schedule) will most likely be 15 to 20% of the 80K. You multiply that with your tax rate to see your tax savings.
You can target larger homes with cheaper land to get a bigger cost seg. For example, I have a cabin near the smokies that I purchased for about 1.1M, the land cost was only 50K, but had a lot of bathrooms/fixtures, 2 kitchens, window coverings, etc., and my cost seg firm was able to hit 30%, so I got to write off about ~300K against my W2.
There will be depreciation recapture when you sell, but it is a lower tax rate (25%) than what you are at currently, I assume. You can always 1031 exchange to kick the can down the road.
Also, bonus depreciation is a tax strategy. It is not free money. You are borrowing against your future depreciation (in year 2 onwards), as future depreciation will be less since you took a huge chunk in year 1.
There are some complicated rules regarding the circumstances in which you can qualify for the STR deduction against your W-2 income.
A cost segregation study will assess that value of the components of the property you purchase. As you noted the land is removed from the equation. So is any asset that has a useful life of more than 20 years, such as the building.
What you can deduct are things like wiring, plumbing, window treatments, cabinets, windows, etc. During a cost set study and expert will document and assess the value of every component of the property and produce a report that itemizes the value by asset life.
You will need a cost segregation study done by an expert, who will break out all of the components of the building into different buckets of useful life. Those with a 20-yr or less can be included for bonus depreciation (60% for 2024, unless Tax Relief Act of 2024 gets passed, fingers crossed!!). Definitely recommend getting guidance from a real estate CPA and a cost segregation expert, to see if what you can save is worth the cost and effort of doing this for this property price range.
Ditto. You need to get with a CPA to find out if it is worth it
You wouldn’t be able to accelerate the entire $80k it would be more like 15-20% of the $80k depending on your exact property and as determined through a cost segregation study.
If you’re not going to keep the property for at least 5 years or have a specific exit strategy in mind it may not be worth it to you.
You wouldn’t be able to accelerate the entire $80k it would be more like 15-20% of the $80k depending on your exact property and as determined through a cost segregation study.
If you’re not going to keep the property for at least 5 years or have a specific exit strategy in mind it may not be worth it to you.
Will there be an issue if I change it to LTR or MTR after a year?
You wouldn’t be able to accelerate the entire $80k it would be more like 15-20% of the $80k depending on your exact property and as determined through a cost segregation study.
If you’re not going to keep the property for at least 5 years or have a specific exit strategy in mind it may not be worth it to you.
Will there be an issue if I change it to LTR or MTR after a year?
No, you can convert it in a future tax year but not the same year. At least that's the advice I got from my CPA and also from the Cost Seg consultant that I worked with so I'll of course advise that you get your own advice! :)
Some already good advice in this thread...
I'll try and add a few more tidbits.
It looks like you are going for the material participation test where you do 100 hours and no single individual is going to exceed that. In the case of an audit, not only do you have to prove that you did at least 100 hours but you also need proof from your vendors that they did not do more than you. One good way to do that is to purchase towards the end of the year and put the property into service. That way, you will likely already have hit your 100 hours of material participation, but your cleaners, for example, would not have exceeded you since you would have only had a few bookings before the end of the year.
Also, another good one, is that material participation does not count until you are in contract on a property.
I'll echo @Alyson Gordon's that the bonus depreciable items (less than 20 years depreciation schedule) will most likely be 15 to 20% of the 80K. You multiply that with your tax rate to see your tax savings.
You can target larger homes with cheaper land to get a bigger cost seg. For example, I have a cabin near the smokies that I purchased for about 1.1M, the land cost was only 50K, but had a lot of bathrooms/fixtures, 2 kitchens, window coverings, etc., and my cost seg firm was able to hit 30%, so I got to write off about ~300K against my W2.
There will be depreciation recapture when you sell, but it is a lower tax rate (25%) than what you are at currently, I assume. You can always 1031 exchange to kick the can down the road.
Also, bonus depreciation is a tax strategy. It is not free money. You are borrowing against your future depreciation (in year 2 onwards), as future depreciation will be less since you took a huge chunk in year 1.
Some already good advice in this thread...
I'll try and add a few more tidbits.
It looks like you are going for the material participation test where you do 100 hours and no single individual is going to exceed that. In the case of an audit, not only do you have to prove that you did at least 100 hours but you also need proof from your vendors that they did not do more than you. One good way to do that is to purchase towards the end of the year and put the property into service. That way, you will likely already have hit your 100 hours of material participation, but your cleaners, for example, would not have exceeded you since you would have only had a few bookings before the end of the year.
Also, another good one, is that material participation does not count until you are in contract on a property.
I'll echo @Alyson Gordon's that the bonus depreciable items (less than 20 years depreciation schedule) will most likely be 15 to 20% of the 80K. You multiply that with your tax rate to see your tax savings.
You can target larger homes with cheaper land to get a bigger cost seg. For example, I have a cabin near the smokies that I purchased for about 1.1M, the land cost was only 50K, but had a lot of bathrooms/fixtures, 2 kitchens, window coverings, etc., and my cost seg firm was able to hit 30%, so I got to write off about ~300K against my W2.
There will be depreciation recapture when you sell, but it is a lower tax rate (25%) than what you are at currently, I assume. You can always 1031 exchange to kick the can down the road.
Also, bonus depreciation is a tax strategy. It is not free money. You are borrowing against your future depreciation (in year 2 onwards), as future depreciation will be less since you took a huge chunk in year 1.
Thanks for this answer. It is really helpful.
I am not sure what you mean when you say - material participation does not count until you are in contract on a property. Can you please elaborate? Thanks a lot
Some already good advice in this thread...
I'll try and add a few more tidbits.
It looks like you are going for the material participation test where you do 100 hours and no single individual is going to exceed that. In the case of an audit, not only do you have to prove that you did at least 100 hours but you also need proof from your vendors that they did not do more than you. One good way to do that is to purchase towards the end of the year and put the property into service. That way, you will likely already have hit your 100 hours of material participation, but your cleaners, for example, would not have exceeded you since you would have only had a few bookings before the end of the year.
Also, another good one, is that material participation does not count until you are in contract on a property.
I'll echo @Alyson Gordon's that the bonus depreciable items (less than 20 years depreciation schedule) will most likely be 15 to 20% of the 80K. You multiply that with your tax rate to see your tax savings.
You can target larger homes with cheaper land to get a bigger cost seg. For example, I have a cabin near the smokies that I purchased for about 1.1M, the land cost was only 50K, but had a lot of bathrooms/fixtures, 2 kitchens, window coverings, etc., and my cost seg firm was able to hit 30%, so I got to write off about ~300K against my W2.
There will be depreciation recapture when you sell, but it is a lower tax rate (25%) than what you are at currently, I assume. You can always 1031 exchange to kick the can down the road.
Also, bonus depreciation is a tax strategy. It is not free money. You are borrowing against your future depreciation (in year 2 onwards), as future depreciation will be less since you took a huge chunk in year 1.
Thanks for this answer. It is really helpful.
I am not sure what you mean when you say - material participation does not count until you are in contract on a property. Can you please elaborate? Thanks a lot
@Vikranth Biradar
Here's an article with additional FAQs on cost segregation studies that you may find helpful. Feel free to reach out if you have any questions!
https://www.biggerpockets.com/forums/51/topics/1113749-cost-segregation-faq
@Vikranth Biradar, all the time spent looking for houses, talking with lenders, getting quotes…none of that time counts, until after you are officially under contract.
I used DIY Cost Seg to do my study. My numbers were similar to the ones mentioned above: $1.2M purchase and about $300k for bonus accelerated depreciation. I am probably not going to own this property for 5 years, and am awaiting CPA advice regarding using that accelerated depreciation.