My Tax Pros Disagree: Should I depreciate my STR duplex house over 27.5 or 39 years?

Question

Does anyone know if a house hacked duplex STR should be depreciated over 27.5 or 39 years? In previous years my tax person used 27.5 but my new tax pro said it needs to be corrected to 39 years. It is an R2 zoned (upper,lower) duplex and I live in one of the units and rent the other as a short term rental.

Michael Plaks · Answer

Sorry to disappoint you, @Stephen Nelson, this is not a requested challenge to you. I'm sort of agreeing with your point, but first...

1. Clarification on 27.5 vs 39 - for @Joseph Coleman and other investors

Your previous accountant who used 27.5 did so (I'm 99.9% sure) not because he went deep into an analysis of the tax rules, but because he was unaware that STRs were treated differently from regular rentals. He simply treated your STRs as LTRs.

Your current accountant is certainly knowledgeable about STRs and is applying 39 which is a current consensus between accountants specializing in real estate.

My colleague Stephen Nelson took the discussion to a much higher level, almost certainly above the level of your old accountant.

2. Comments on Stephen Nelson's position. WARNING: this part is only for tax nerds and fellow tax professionals. Normies should stop reading past this point, for the sake of your own sanity.

Stephen brings up a valid argument that there is no black-and-white clarity on 27.5 vs 39. The issue has been debated between real estate CPAs on many forums, including here on BP. And we basically arrived at a consensus that 39-yr is the correct answer.

But it is true that there is room for dissent. To spare technical details and references to Code sections, Regulations, PLRs and CCMs, the crux of the debate is the legal definition of transient basis. It was defined in the old Regulations as a lease term of 30 days or less. However, these Regulations were removed back in 1993.

If that dead definition from more than 20 years ago is still walking - then 39-yr wins. And we have some post-1993 tax documents that imply that the old definition still holds. But since the pre-1993 definition is technically cancelled, it leaves the door slightly open for 27.5-yr.

For the 2 or 3 people who are fascinated by such controversies, here are links to BP debates from several years ago. Good memories. Most of these colleagues of mine have left BP since.
https://www.biggerpockets.com/forums/51/topics/756665-my-cpa...
https://www.biggerpockets.com/forums/51/topics/527595-short-...

Stephen Nelson · Answer

This is a great question, and I think it’s fair to say that the answer is more nuanced than the common black-and-white takes you sometimes see online.

Regarding depreciation—27.5 years vs. 39 years—my view is that most short-term rentals still get treated as residential rental property under Section 168 and thus qualify for 27.5-year straight-line depreciation.

The key statutory test is whether 80% or more of the gross rental income comes from dwelling units. That’s it. There’s no requirement in the depreciation rules about how long someone stays. So even if your guests rent the place for just 3 or 4 nights, that doesn’t by itself turn a dwelling into a commercial building.

Some advisors point to Reg. §1.469-1T(e)(3)(ii)(A) and argue that short-term rentals (7 days or less) aren’t “rental activities,” so they must be depreciated over 39 years. But that regulation is about classifying activities for passive loss rules—not classifying the structure for depreciation purposes. I think it’s a mistake to conflate those.

There is a Chief Counsel Advice memo that leans toward 39 years for hotel-like operations, but in those examples, which I'm pretty sure were looking at Reg. §1.469-1T(e)(3)(ii)(B) short-term rentals (30 days with significant services), the taxpayer was providing full daily housekeeping, meals, concierge, the whole deal. Most 7-days-or-less short-term rentals aren’t doing that. Providing linens and charging a cleaning fee after checkout doesn’t make the place a hotel.

Thus, unless your short-term rental really is a hotel in substance—not just in average stay length—I think 27.5 years is still the correct treatment. That’s consistent with the statute, IRS guidance, and common sense.

Happy to be challenged on this—but I think the burden of proof should be on those trying to stretch the definition of nonresidential property to cover what are, in reality, furnished houses and condos.

BTW Section 168(e)(2)(A)(i), which defines what a residential property is, says this, “The term ‘residential rental property’ means any building or structure if 80 percent or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units."

Also when I asked ChatGPT to assess my thinking, it pointed out that IRS Pub 527 says even if a dwelling unit is rented on a short-term basis and reported on Schedule C, it may still qualify as residential rental property. (Er, I can't find that quote in a quick search.)

All that said, for the record, if/when the cost segregation study says its 39 year? I think we always use 39 years just to perfectly match what the study says.

Nick Vogel · Answer

If your average rental stay is under 30 days (transient basis), it should be treated as commercial/nonresidential property and depreciated over 39 years.

Michael Plaks · Answer

IRS Publications are fine for basic tax questions. For example, if you want to find out whether you can claim your mother as a dependent or what records you need to keep in order to prove your charitable donations.

When we deal with controversial and highly technical topics such as the question you posted  - you need professional expertise. Ironically, you witnessed that asking your professionals did not produce a clear answer, and even asking specialized tax professionals on this forum resulted in a bit of a disagreement.

Now you seem to be asking - if tax professional don't agree, where can I find the ultimate answer myself? Let's reflect on this. You're hoping to find a resource that has more definitive answers than professionals specializing in the field. They (we) must have overlooked such a resource. This expectation sounds to me a little too... contemporary?

Ashish Acharya · Answer

@Joseph Coleman In your situation, a house-hacked duplex where you live in one unit and rent the other as a short-term rental (STR), the correct depreciation period for the STR portion is generally 39 years, not 27.5. That’s because most STRs are treated as nonresidential property for tax purposes under IRS rules.

Here’s why:

• Even though the property is zoned residential (R2), the use, not the zoning, determines the depreciation classification.
• If the STR unit has an average stay of 7 days or less and you provide no substantial services (like daily maid service), it is not considered a rental activity under IRC §469, and instead is treated as a nonresidential commercial activity for depreciation purposes.
• As such, the STR portion is depreciated over 39 years, not 27.5.
• The unit you live in is your primary residence and is not depreciated.

To be clear:

• 27.5 years applies to residential rental property, typically long-term rentals or STRs that average longer stays and meet rental activity criteria.
• 39 years applies to nonresidential property, which includes STRs that are not considered rental activities due to short average stays and lack of tenant services.

To confirm this classification, consult a real estate CPA and ask for documentation based on how the STR portion is used, how guests are serviced, and average stay duration. Getting this classification right is essential for compliance and for taking the correct bonus or accelerated depreciation.This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Michael Plaks · Answer

@Joseph Coleman

You now have two tax professionals, and it seems that you do not trust the competence of either one of them. Kinda defeats the purpose of working with a tax professional, no?

And you are also hoping to understand it better than tax professionals by some quick reading and - the least useful route of all - calling the IRS. Not going to work this way, sorry.

Also, you cannot switch from STR to MTR mid-year. The average days of use is an annual calculation. Your property either qualifies as an STR for an entire year, or it does not. No going back and forth.

Stephen Nelson · Answer

For the record, I am not very dogmatic on this.

The other thing is, with STRs I think we're always using cost segregation studies which invariably use 39 years. And I don't want to deviate from what @Sean Graham, @Julio Gonzalez or one of the other cost segregation experts say in their reports

I'm wondering something else though... how long has it been since you guys had an argument about Schedule C vs Schedule E? (Just joking.)

Dylan Brown · Answer

I agree with the above - should be 39 years if average rental period is <30 days.Also, it should still be reported on the Sch. E (likely where your last tax pro put it) unless the average stay was <7 days and/or substantial services were provided (such as daily cleaning, tour guides, concierge, etc.).

I agree with @Michael Plaks - technically they need to reverse the small portion of PY 27.5 year depreciation that essentially overstated the deduction, potentially causing you to recognize some taxable income in the current year.  To offset this, they may consider deploying a cost seg. strategy if you did not already do that in prior years and turn this into a strong opportunity to increase your deductions since you are already going in to make a correction anyway.

Joseph Coleman · Answer

Thank you for your input @Stephen Nelson!@Michael Plaks Et al, If the IRS publications are ridden with mistakes, what do you consider the source of truth for tax filing requirements?

My Tax Pros Disagree: Should I depreciate my STR duplex house over 27.5 or 39 years?

Most Popular Reply