STR Tax Classification Help - Primary Residence in Year One

[Diana Mulvihill]

Hi Everyone,

Thank you all for the incredibly helpful advice you share here - it's been such a great resource for a newbie like me. I bought a home as my first STR and hope to buy another within the next year.

I could use some guidance on a tax classification issue. I run the STR under an LLC, and my plan was to treat it as a business using what's often called the "short-term rental loophole." My new CPA doesn't have much experience with STRs and says that because it was my primary residence during year one, we may need to classify it as a traditional rental instead of a business.

That doesn’t seem accurate. STRs aren’t occupied nearly as many days as traditional rentals, and as a startup, I had substantial upfront expenses furnishing and setting up the property. I actively manage it, meet all criteria for the short-term rental loophole, and planned to use it to offset my other income. From my understanding, the numbers simply won’t make sense under a standard rental classification - not just for my first year, but going forward as well.

For context, it being my primary residence is only temporary during this initial startup phase. When the property is rented, I stay nearby. My goal is to continue purchasing and operating more STRs, and I want to ensure I’m classifying and deducting expenses correctly and optimally from the start.

I’d really appreciate any insight or experience anyone has with this situation.

Thank you so much,

Diana

[Lauren Kormylo]

So you're living in the house in between guests?

The IRS has specific rules about that, there's a limit to use by you - 14 days/year or 10% of the days it's rented.  Above that, it won't be purely a rental.  It will be your residence also, and your rental deductions will be limited.  

https://www.irs.gov/taxtopics/tc415