STR "Loophole" feasibility

[Lloyd Hussey]

Are there any good general guidelines for evaluating the relative attractiveness of an STR for the so-called Loophole strategy to shelter W2 income? Not sure if it's something that can be generalized, but curious to hear thoughts.

Also, is there a deadline by which it has to be put in service to be used for the 2025 return?  

[Kate Stoermer]

I have a several blogs on this on my website:

The key is to understand depreciation. A single family home can only be depreciated over 27.5 year - and only the value of the building is depreciable, not the land it sits on.  So some suggest a condo is better since the entire purchase price is often depreciable. 

The building and things afixed to it can not be bonus depreciated - they will be depreciated over the 27.5 years, so that limits the potential tax benefit. 

But personal property - furnishings, cosemic fixtures, some flooring, landscaping, fencing, concrete etc and systems all have a shorter life.  You can do a cost segregation study to identify and segregate some of the items, while others (furnishings appliances) are easily seperated. This is where you can create a bigger year 1 "loss".  

You need to have an average of less than 7 day stays and materially participate (most do the 100 hour + less than anyone else rule) in order to qualify for the STR Loophole.

I've known many folks to be very successful with this strategy - and since material participation is an annual test, after the first year turn it over to someone else to manage and pay the taxes from the profits while your asset appreciates in value.  

If you buy turn key, you may have a smaller depreciation expense and stuggle to get in the hours (but its often still more managable and doable than starting from scratch). 

Some CPA insist on having at least 3 stays prior to considering it "in-service", some insist on at least 1 stay. The IRS definition of in service is simply available as an STR before the end of the tax year. Clearly the more stays, the more defensible in an audit. But it definitely has to be an STR on/by 12/31/25 to count for the current year.

Hope this helps.