First Duplex Financed with FHA... STR in other unit

[Alec Sherman-Brown]

Hello,

I'm 23 years old, buying my first investment property (a duplex in Ferndale, MI) as an owner-occupant to take advantage of FHA financing. My strategy is a house-hack, but the other unit will be a short-term rental to maximize monthly revenue. I have a couple questions for more experienced investors.

1. With my property being financed with FHA, my name must be on the title and thus it cannot be in an LLC. Obviously, this is not preferable. My long-term strategy will be to have each property in their own LLC to minimize my personal risk. With that in mind, I wanted to clarify on taking advantage of the STR Loophole:

a. Despite the property not being officially within an LLC, can I still claim its expenses, depreciation, etc. to offset my own taxable income from my W-2?

2. For the lender, I needed basic residential homeowner's insurance... More experienced investors, what type of insurance do you recommend on a property like this when operating an STR out of it?

3. Any and all other advice you have would be great.

Thanks a lot,

Alec Sherman-Brown

[Christopher Tile]

Quote from @Alec Sherman-Brown:

Quote from @Christopher Tile:

@Andrew Steffens

Thanks for looping me in. 

Regarding the tax treatment, if it's a single member LLC it will be treated as a "disregarded entity". Essentially what this means as it's reported the same way if it was under your name or under an LLC.

So, to answer your question, yes, you will be reporting this rental on a schedule E regardless of the LLC. This is where you claim all expenses including depreciation.

HOWEVER - in order to make this work properly I'd highly suggest you speak to a real estate CPA. You are walking a thin line with part of the home being a STR and the other part being a primary residence. Capitalizing the property correctly (just the business use) is important in this scenario and involves a larger conversation. There are absolutely scenarios on the forum that walk through this situation and the nuances.

In my honest opinion, the STR portion of the residence in MI is likely a small value. Of that value, the bonus depreciation is probably going to be small. In order to break out the bonus depreciable assets you need to pay for a cost seg. Will the benefit outweigh the cost of doing the whole STR loophole/exception (and paying a CPA that knows how to record it properly - ton on the tax forum here on BP)? Probably not, but I would have no way of knowing unless we took a deep dive into the exact property you are looking into and your W2.

Also, odds are your taxable income is not way into the 37% tax bracket. I'm making assumptions of course, but essentially what I'm trying to say is that your tax savings won't be as much as someone in their 30's with a very high W2 income. 

 This is really good advice. Thanks a ton. If the tax savings are as little as you expect they might be, switching my strategy into medium-term rental (which has high demand in the market I'm purchasing in) would likely be a better option, though I think a brief conversation with a CPA like yourself would be very informative.

You are correct in assuming that I'm not taxed into the 37% bracket haha

Got it - then to be completely honest, don't worry about the STR loophole. House hack with a MTR/LTR is going to be your move long story short. The ROI at a lower tax bracket isn't really worth it.

Especially since you are 23 and are looking for a primary residence.