All Forum Posts by: Malik Javed

The most recent data show that record momentum continues for the residential rental industry especially for the short-term rental industry, with year-over-year bookings now exceeding pre-pandemic levels.

The complexity of the problem hinges on the definitions of “short-term” versus “long-term” rentals for tax purposes. Depreciation rules for the two definitions are different.

A short-term rental (STR) is a dwelling unit that is used on a "transient" basis. If the unit is occupied more than half the days of a taxpayer/owner's tax year by a tenant(s) that stays for less than 30 days, it is considered a transient basis rental. (Note that this is the typical arrangement for Airbnb rentals and other temporary rental-type properties.)

Rental property used on a transient basis is depreciated over a 39-year period, not over 27.5-years as is the case with longer-term residential rental property (LTR). Long-term rentals typically derive at least 80% of their gross rental income from residential dwelling units. If any portion of the building or structure is occupied by the taxpayer, the gross rental income from the property must includes the fair rental value of the unit occupied by the taxpayer.

IRC 168(e) defines a dwelling unit as “a house or apartment used to provide living accommodations. A dwelling unit does not include a unit in a hotel, motel, or other establishment in which more than 50% of the units are used on a transient basis.”)

Benefits of a Cost Segregation Study

Capturing depreciation on STR property begins with a cost segregation strategy to maximize deductions. Cost segregation is a commonly used strategic tax planning tool that allows companies and individuals who have constructed, purchased, expanded or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.

When a property is purchased, not only does it include a building structure, but it also includes all of its interior and exterior components. On average, 20% to 40% of those components fall into tax categories that can be written off much quicker than the building structure.

A Cost Segregation study dissects the construction cost or purchase price of the property that would otherwise be depreciated over 27.5 or 39 years. The primary goal is to identify all property-related costs that can be depreciated over five, seven and 15 years. The studies can address current year assets as well as those placed in service in prior tax years without the need to amend prior tax returns.

Conclusion

Understanding the difference between short-term and long-term rentals is crucial for real estate investors, particularly when it comes to depreciation and tax planning. By correctly classifying your property, you can ensure that you’re complying with IRS guidelines and maximizing your tax benefits. Performing a cost segregation study on these types of properties can offer additional tax savings. While substantial financial benefits are available, it's essential to meet IRS criteria, keep meticulous records understand depreciation, and stay informed about local regulations.

When considering a Cost Segregation study, here are a few things to consider:

https://www.biggerpockets.com/forums/51/topics/1206189-cost-...

@Rachel Okwumabua Which area in SoCal are you?  I have a few in the area I can refer you to.  

When considering a Cost Segregation study, here are a few things to consider:

https://www.biggerpockets.com/forums/51/topics/1206189-cost-...

Feel free to reach out with any questions.

@Cameron Kolling  A mobile home that is transportable is considered personal property. According to the IRS guidelines, mobile homes set on concrete blocks and that are always capable of being moved from their sites on their own wheels are considered personal property (5 year).  

Austin is correct, a cost segregation can help you break down the depreciable basis of the property into personal property (5 year), land improvements (15 year), and buildings (if any such as clubhouses, laundry rooms, etc.).  

When considering a Cost Segregation study, here are a few things to consider:

https://www.biggerpockets.com/forums/51/topics/1206189-cost-...

Incurring losses every year will mean that the losses will be suspended and carried forward and will offset future passive income. Depending on the situation, a taxpayer could offset some of the passive losses with active income. Taxpayers should be aware of the criteria for this specific scenario. This deals with short-term rentals vs. long-term rentals.

Agree with @Basit Siddiqi.  The first thing you should do is speak to your accountant before deciding on a cost segregation study.  Once you decide, you want to have the services of a reputable cost seg firm. Visit www.ascsp.org to locate a firm near you. 

Feel free to reach out with any cost seg questions.

Hi @Timothy Mcleod, what area are you located at? When considering a Cost Segregation study, here are a few things to consider:

https://www.biggerpockets.com/forums/51/topics/1206189-cost-...

Feel free to reach out with questions!

Quote from @Jason Malabute:

Yes, you can still deduct the expenses of the rehab even if you received rent before starting the capital improvements. The fact that it’s a major rehab over six figures makes it worth considering a cost segregation study. This could allow you to take advantage of bonus depreciation, which can significantly accelerate the depreciation deductions in the year you place the property into service

If you're considering a Cost Segregation study, here are a few things to consider:

https://www.biggerpockets.com/forums/51/topics/1206189-cost-...

Feel free to reach out with questions!

Quote from @Sean Graham:

@Rashad George I have a couple tax CPAs I am happy to introduce you to. Also, I highly recommend looking into cost segregation on your LTR if you haven't already

Agreed with @Sean Graham.  Definitely look into cost seg if you haven't yet.  

Cost Segregation is a great tax planning tool. I recommend that you seek out a Certified Cost Segregation Professional so that you are confident in the quality of the work performed and the deliverables produced. Here are some key criteria for evaluating a Cost Segregation provider:

- Seek out a Certified Cost Segregation Professional

- Consider their experience with tangible property regulations. Will they be prepared to address retirements and disposition? Repairs vs. capital expenditures.

- Find out how long the provider has been doing cost segregation studies and how many they have performed

- Consider the resources available to the provider. Are they a nationwide firm? Do they have the necessary resources to stay on top of all the tax issues such as 1031 exchanges, 754 Step-Ups, etc.

Let me know if you have any questions about Cost Segregation

https://www.biggerpockets.com/forums/51/topics/1206189-cost-...

@Salvatore D'Agostino 

When choosing a cost segregation firm, it's crucial to hire a reputable company. A great resource is www.ascsp.org, where you can find certified firms.

Always check the bio and credentials of the person conducting your Cost Segregation study. Look for the Certified Cost Segregation Professional (CCSP) designation, which indicates certification by the American Society of Cost Segregation Professionals (ASCSP). This designation ensures you are working with a highly qualified professional. Just as you would trust a CPA for your taxes, you should trust a CCSP for your Cost Segregation study.

Feel free to reach out with any question!

Quote from @Josh Green:

Quote from @Andrew Galloway:

Hello Bigger Pockets CFL community. I am looking into the STR and STR/bonus appreciation strategy as a way to offset W2/short term income. Since the market pre-May 2022 just is not comparable anymore I am interested in anyone who has done this in CFL from around May 2022 onward successfully and how it went.

The goal would be to aquire a STR that would cash flow itself, or at worst break even and also use that to maximize deductions to lower W2 federal income tax. I've read about strategies to do this and bonus depreciation and how the 1 year bonus depreciation is being phased out. While Orlando is a huge STR market, I'm also aware that it is currently a tough and saturated market.

If anyone has successfully done this in CFL, please give as much detail about how you did it and how it went. Or if you tried it and it failed also let me know. Another caveat: there are a lot of STRs out there that are breaking HOA/local government/state/federal laws or strongly bending the rules, and I'm looking for people who did not do that or who mitigated risk there.

For myself, I am a high income W2 earner and I currently have FEIE foreign income tax exclusion but at some point I have to be able to return to the USA fully or at least hedge against that possibility. So I am looking at this as a way to decrease my federal income tax if I lose FEIE. Otherwise I would start getting hit with very nasty taxes. I also am looking at this strategy for a family member who is in the area with W2 income.

Thank you!

As Ray mentioned - I do this a lot for many clients that are out of state. I've purchased at least 20+ in the last 12 months and I've bought 3 myself. I used bonus depreciation on 2 I bought last year and wrote off over $350k. I'm a real estate pro so material participation isn't an issue, but the majority of my clients are in the $300k-$900k/yr gross household income range and so using STRs is not only the best way to get great ROI on real estate nowadays but the tax benefits are the primary driver for most including myself. Feel free to DM and we can see if you'd be a good fit the market I work and if not, at least I can give you a few pointers as far as STR fundamentals and a couple resources for cost segregation.

One thing to add regarding cost segregation:
You should always read the bio and resume of the persons signing your Cost Segregation study. Make sure they are certified with the American Society of Cost Segregation Professionals (ASCSP). The designation for Certified Cost Segregation professional is CCSP and comes after the engineer’s name. Any designation less than that is substandard. Just like you would only use a CPA to file your tax return, you should only use a CCSP to conduct your Cost Segregation study.