if you have a str, the first conversation should be with an accountant to see if you can treat the property as active instead of passive.If it is active, you will be allowed to offset the rental losses with your income such as wages, interest, dividends, etc.Best of luck!

Or would the IRS treat this as a partial exchange due to the owner-occupied unit?

It also matters if it's a Deed of Trust or if it's a Mortgage or if it's a Sheriff's sale.Frankly, an HOA Sheriff's sale is treated much differently than a Tax Sheriff's sale.And, In fact, one strategy is to purchase a discounted 2nd from a lender, who believes the 1st will be foreclosed and the 2nd will be wiped out anyway.

This is a business and you should treat it as such.

From a tax angle, this idea can work, you need to understand how the IRS treats it.A residential assisted living home is a business, not a normal house hack.

Hey @Laura Heald, I’ve got a buddy who actually built financial freedom doing co-living, but it only worked because he treated it like a real strategy, not some magic cash-flow hack.He’s got 7 places in Florida — all tweaked to fit 6–8 rooms — furnished everything, used PadSplit’s structure for rules/tenant issues, and had someone local handle the hands-on stuff.

You lose access to long term capital gains rates, and the gain is treated as ordinary business income.

Business owners are not employees, they should really be treated as a partner. 

But once you subdivide the lot and develop or sell the new back units, those are likely treated as separate properties for tax purposes—and they won’t qualify for the same exclusion.

. • If the average stay is fewer than 7 days, and you materially participate in the activity, the STR can be treated as non-passive even if you are not a Real Estate Professional. • This is often called the “short-term rental loophole.”Based on what you shared, the short-term rental route may be the relevant path here.There are very specific requirements to document material participation, average stay duration, guest interaction levels, etc., so the details matter.