Tax deductions on a remodel for a future STR while living in it.

Colorado Springs, Colorado
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Tax deductions on a remodel for a future STR while living in it.

Derek Buehner
Colorado Springs, CO · Member since 2016 · 4 posts · 5 votes

I currently live in a single-family primary residence. Next year, I plan to purchase a second home and move into it. I intend to rent out my current home as a short-term rental. Before listing it on an STR platform, I need to make some improvements to my current home.

How can I maximize tax write-offs for these improvements? It seems that investing in improvements while I still live in the home wouldn't be tax deductible. Is there a way to take advantage of these deductions while I'm still residing in the home?

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Michael BaumPro Member
Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
1y

Get with your CPA on this. No way I would trust this to chance.

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

    Separate the work into 3 separate categories: 1) Those that are specifically related to the future STR usage, 2) Those that benefit you while living in the house and have zero bearing on the future STR, 3) those that benefit both you and the future STR....assign a percentage to the usage.

    Be specific and complete. Take these to your CPA.

    1Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    1y

    Get with your CPA on this. No way I would trust this to chance.

    3Reply
  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
    1y

    Agreed with Bruce. Ultimately, all the costs would be added to your basis in the property and depreciated when you place the property in service as a short term rental. One way to get tax benefits while you're living there could be installing solar panels or upgrading the energy efficiency of the home. 

    Purchase price + improvements = basis

    From there, you would need to meet the requirements of the STR Loophole. The main one being material participation. You will want to talk to a CPA to see which hours count and which hours don't as there is a lot of gray area with your situation.

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  • Jeremy Jareckyj
    Real Estate Agent · Salt Lake City, UT · Member since 2020 · 490 posts · 205 votes
    1y

    I did this a few years ago. My CPA instructed me to list my repairs as CAPEX or repair items , furnishings were supplies for the rental.

    There was a certain way we had to break it off from it being my primary residence but I can't remember exactly.. Good post and forsure get with a CPA

    1Reply
  • Jake BakerBusiness Member
    Flipper/Rehabber · San Diego, CA · Member since 2020 · 1k+ posts · 695 votes
    1y

    @Derek Buehner

    The timing of your improvements plays a big role in determining their tax deductibility. Since you're currently using the property as your primary residence, the cost of improvements made before it's placed into service as a rental wouldn’t typically be immediately deductible. However, these costs can often be added to your property's basis, which helps reduce capital gains tax when you sell the home.

    Once the property is officially a short-term rental, subsequent repairs and maintenance would likely qualify as deductible expenses. It’s always a good idea to consult a tax professional or real estate bookkeeper to ensure you maximize your deductions while staying compliant. STRs have unique tax considerations, so setting up the right systems early will save you headaches down the road!

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  • Andrew SteffensBusiness Member
    Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes
    1y

    It seems like you already have a few CPA's chiming in so that is good.  This is too important and also sort of a personal question depending on your state and specific circumstance and I suspect not a one size fits all answer would suffice.  Good luck!

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    1y

    @Derek Buehner Repairs made to your primary residence while living there generally aren’t tax-deductible. Improvements are added to the basis and can be later depreciated.

    Improvements that qualify as QIP, make improvements you make and rent it out. QIP can be bonus depreciated.

    To maximize deductions, consider waiting to make improvements until after the property is converted to a rental. Repairs made after conversion may be deductible, while capital improvements can be depreciated over 27.5 years or bonus depreciate depreciated. A cost segregation study could also help accelerate depreciation once the home is rented.

    This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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  • Sean GrahamBusiness Member
    Investor , CPA · Detroit, MI · Member since 2016 · 583 posts · 248 votes
    1y
    Quote from @Derek Buehner:

    I currently live in a single-family primary residence. Next year, I plan to purchase a second home and move into it. I intend to rent out my current home as a short-term rental. Before listing it on an STR platform, I need to make some improvements to my current home.

    How can I maximize tax write-offs for these improvements? It seems that investing in improvements while I still live in the home wouldn't be tax deductible. Is there a way to take advantage of these deductions while I'm still residing in the home?

    The improvements will go towards your depreciable basis. It will all be depreciated once you start renting out the property. A cost segregation study will help maximize these properties depreciation expenses in the early years. What kind of improvements are you making? 

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