All Forum Posts by: Stephen Nelson

As long as you don't run afoul of Section 183 (which is chunk of law that says you need to be doing STR thing to make profit) and don't get torpedoed by Section 280A (which provides the mixed used dwelling rules), sure, STR still works.

But my guess is, based on question, that one of the above chunks of tax law probably does blow deduction in your situation.

I'm just sharing percentages I've seen cost segregation consultants produce in their reports. And FYI I see a lot of them.

But to think about getting $200K deduction on a $550K property. Hmmm. Some chunk of that $550K would be land. So say 80% or $440,000 would be the depreciable component? Something like that? I calculate $200K would more like 45%.

That seems high to me. But I would defer always to the cost segregation experts. That's not my area of domain expertise. It's theirs.

I agree with @Michael Plaks that you don't need to "go local." Many of the taxpayers a tax accountant serves have large multi-state footprints. Thus, many tax accountants operating from another state will have clients in your state. (This is particularly true if you're in a big state like California. But Indiana is pretty big too.)

I also agree with @Bill Hampton about just trying to buy a bit of planning or an hour of consulting... in fact I'll say that because there are terrible shortages of good tax accountants now and probably will be for years, I think you'll find it very hard to find someone good if you're looking to just buy an hour or two here or there.

If your situation is such that you do need to really limit any spending on outside professionals? I'd say you want to keep your investment as simple as possible. And then accept that a DIY approach will let you save money on fees at the expense of missing tax planning opportunities.

I'm wondering if the reason for the gifting idea here is the heirs haven't considered the Section 1014 adjustment that's occurred?

I.e., @Andreas W.? If you two guys inherited a $300,000 property and a $400,000 property, even if mom or dad bought those properties decades ago for (say) $50,000? Your bases in the properties are $300,000 and $400,000.  Thus if you sell your half of the $400,000 property to your brother for $200,000? No taxable gain. And if your brother sells his half of the $300,000 property to you for $150,000? Again no taxable gain.

The 500-hour material participation test is the hardest. But six other methods exist too.

For STRs, the "more than 100 hours between you and your spouse AND no one else participates more" is often the sweet spot. That threshold is actually pretty easy to achieve.

Also for a supremely well-timed and cleverly structured investment you can often use the "substantially all the participation" method which means you can materially participate with a few hours. Like the time you spent looking for the property plus a couple of hours of housekeeping? That may be enough.

Waiting decades to take a depreciation deduction isn't cost free.

With 3% inflation, for example, a deduction worth $50K in year 1 is worth maybe $20K in year 30?

Also we serve a lot of physicians so know the salaries some make. And they're often easily saving 37% plus state taxes on $200K or $400K or more of income.

@Matthew Samson, so I think you probably need to be buying something that's more than $1,000,000 to get close to $200K of first year depreciation. (Bonus depreciation in 2025 is 40% right?)

FYI, you want to look at short-term rentals as another alternative. That would let you keep your job and then get the giant deductions with relatively few hours. (With short-term rentals, you just need to average rental intervals of 7 days or less and then usually either carefully time the investment for late in the year or spend more than 100 hours to get material participation.)

Two other comments:

1. I'd connect with @Sean Graham to see his calculator. I know we've got those at our blog (JavaScript written by ChatGPT interestingly!). So it is absolutely possible to get actionable planning insights from a calculator.
2. My rough estimate above is based on the sorts of study results @Julio Gonzalez 's team has repeatedly done for our clients. (We've worked with his crew a lot over the recent past.)

Two shoot from the hip comments:

1. I don't know why you wouldn't go to effort and expense of setting up an LLC and writing an LLC operating given your other option is to by default form a general partnership and end up writing a partnership agreement. I can't see how that's less effort.

2. I think it'll be hard for you to get material participation. Think about some of the issues here. Contractor and designer will combine their hours because they're spouses so they will have more hours than you do thus you'll be looking at the more than 500-hours material participation test. I don't think you'll be able to group this minority interest in a STR with your other STR activities, will you? BTW I'm also not confident even the contractor or designer will be able to get a grouping to work. But they could be incented to make decisions that de-passive-fy the losses but then make them unavailable for you. E.g., if the contractor's business makes him a REP, he'll have an incentive to let the average rental interval rise above 7 days because that'll give him and his wife the ability to use losses.

The cost segregation consultants here are the experts to consult about loading up your first year (or years) returns with depreciation. But I think they could put large deductions into your first year, yes.

But I defer to them...

 Here's some more stuff to think about:

1. Your $40K of furnishing will probably mostly be expensed using not bonus depreciation but the Section 1.263(a) tangible property regulations that say you can just write off as supplies expense anything that costs less than $2500.

2. Your building if you get a cost segregation study will probably generate a $60K-ish first year depreciation deduction. (Poke around for online calculators that estimate this. I bet the cost segregation consultants have rough approximators. And we even have simple JavaScript calculators that do this at our blog which not I'm not linking to so and so really not promoting. Just mentioning that you want to look for. Surely lots of these exist.)

3. I would guess that after the two above expenses, your rental income and expenses probably initially roughly break even in first years for tax return purposes. Thus, your tax shelter probably equals close to $100K deduction in year one?

4. Adding a $100K STR deduction to a tax return that shows $400K of income will save quite a bit of tax because you pay a lot on that last $100K. But you'd save less if you put another STR into service with another $100K tax loss in the same year so as to push the income down further from $300K to $200K. What's probably optimal is to do one STR in the years when you have income.

5. Your property will probably also generate a big deduction in year 2 if you do a cost segregation study. Maybe $25k?