STR Bonus Depreciation Rules

Karen Kushner · 2024-05-01T05:53:05-07:00

Hi All,Looking to buy a STR at the Jersey Shore this year, meet the material participation requirement/100 hrs, and take bonus depreciation on the unit for 2024. I have a few questions regarding this strategy:1. What is the minimum number of stays/time needed to satisfy the STR requirement? If we purchase in the fall, we may only be able to get 1 or 2 weeks rented. I know the average length of stay needs to be 7 days or less.2. Can we qualify for a full year of depreciation if we only own the property for part of the year?3. 60% Bonus Depreciation in 2024: Does this apply to the building only?4. If bonus depreciation is taken in 2024, how is the remaining 40% depreciated? Is this over an expedited timeline?5. Is a cost segregation study even necessary to get bonus depreciation?Looking ahead to 2025, our strategy would be to buy a second STR. My plan would be to actively manage the new property and hire a property management company to manage the first property. Essentially we would actively manage each new property for the first year in service, take bonus depreciation on it, then 1031 exchange for another. 1. Is this strategy allowed? Is there anything prohibiting me from doing this tax-wise?Thanks so much!

Kelly O'Keefe

Accountant · NC · Member since 2023 · 123 posts · 163 votes

2y

Hi @Karen Kushner

There while I do not know the specifics of your situation I can answer generally

1. The property needs to be placed in service before the end of the year and this will allow you to benefit from a cost seg

2. Was this property your primary residence?

3. Land cannot be depreciated but the building, land scaping and other capital expenses can be.

4. Bonus depreciation allows you to take all depreciation for items with a useful life of less than 20 years in a single year. The remaining Items will be depreciated based on the life span of the item and according to the depreciation schedule

5. A cost segregation study breaks the property into smaller pieces based on useful lifespan and shows what can be taken on an alternate depreciation schedule. Without a cost seg the property will remain on straight line depreciation.

Your strategy is possible but I would still recommend speaking with a CPA to ensure you understand depreciation recapture and intricacies of a 1031

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Karen Kushner

OP

Member since 2022 · 9 posts · 7 votes

2y

Thank you Kelly!

1. Ok, so it would have to be purchased, fixed up, and placed on AirBnb, etc before the end of the year if I'm understanding that correctly.

2. This would be an investment property.

3-5. Gotcha, thank you.

Yes, we are actively speaking with our CPA to check on if this strategy would work for us! I appreciate the BP community weighing in as well!

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Kelly O'Keefe

Accountant · NC · Member since 2023 · 123 posts · 163 votes

2y

One common strategy is to place the property in service by listing the property on a site such as Airbnb. Then any expenses, such as purchasing linens and furniture, can be written off. Expenses prior to the property being placed in service will not be as beneficial from a tax standpoint

If it is a business, bonus depreciation will be available in the first tax filing if there is a cost seg

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Michael PlaksPro Member

Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes

2y

@Karen Kushner

In your two messages, you're basically asking to learn several highly complicated topics and then figure out how they apply to your specific situation. Sorry, this is impossible to accomplish. It would take several hours of general explanation and then another couple of hours of custom analysis by an experienced accountant.

I can only give you a few starting pointers, but each one really has a LOT more to it than a short sentence.

1. Minimum 2 stays.

2. Bonus depreciation does not change whether you operate a property for the entire year of just 2 weeks. Regular depreciation gets prorated.

3. Bonus depreciation does not apply to buildings at all. It applies to certain components only, such as carpets, appliance, fences etc.

4. The other 40% is depreciated over whatever the official "life" of the corresponding property is. 5 years for cabinets, 15 years for driveways, and so on.

5. It's necessary to determine what is eligible into bonus depreciation.

6. Your strategy of 1031 after one year is possible but it will backfire on you. It does not work the way you think it does.

7. (from your other post). STR and LTR losses have unrelated requirements to be deductible against W2. STRs mostly needs material participation, while LTRs mostly need REP status.

Again, all of the above is very complicated, and if you believe that you figured it out after reading responses from two tax pros on this thread, you're mistaken.

More reading on these topics:
https://www.biggerpockets.com/forums/51/topics/1121063-expla...
https://www.biggerpockets.com/forums/51/topics/1122635-the-s...
https://www.biggerpockets.com/forums/51/topics/1075919-five-...
https://www.biggerpockets.com/forums/51/topics/1136752-expla...

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

2y

@Karen Kushner, as long as your replacement property contains an equivalent amount of the same type of property that was segregated then the depreciation will be deferred in the 1031. However, the depreciation doesn't restart with the new purchase. But if you purchase more than you sold (say you used the proceeds to buy two replacement properties totaling twice what you sold). Then you would gain the additional depreciable basis on the amount you purchased more than you sold.

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Account Closed

Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes

2y

Hey Karen! Congrats on diving head first into STRs.
I would also suggest the minimum 2 stays That Michael mentions above.
Yes,To benefit from cost segregation, the property needs to be put into service before the year ends. It needs to be a short
A cost segregation study breaks down the property into smaller components based on their useful lifespan, indicating what can be depreciated on an alternate schedule. When you do this study, you can take advantage of the bonus depreciation on the property, you can do it on land.

Yes, its over the remaining timeline.

Yes you need to do the study.

Your plan seems viable, but it's advisable to consult with a real estate focused accountant to fully grasp depreciation recapture and the complexities of a 1031 exchange.

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Karen Kushner

OP

Member since 2022 · 9 posts · 7 votes

2y

Thanks for the response! If I’m understanding the bonus depreciation correctly, is it true that it only applies to the personal property and NOT the building or land? On average, is it about 25% of the purchase price (x60% for 2024)? Working these numbers to get an idea of what to expect!

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Jason WatsonBusiness Member

CPA · Colorado Springs, CO · Member since 2024 · 98 posts · 83 votes

2y

Quote from @Account Closed:

Hey Karen! Congrats on diving head first into STRs.
I would also suggest the minimum 2 stays That Michael mentions above.

Where are you getting the 2 stay minimum to be considered placed in service?

This is from the IRS "a house purchased for use as rental property is placed in service when it is ready and available to rent, even if it is not actually rented at that time."

Treasury Regs read-

Regs. Sec. 1.167(a)-(11)(e)(1)(i) provides that property is
considered to be placed in service when it is “first placed in a
condition or state of readiness and availability for a
specifically assigned function” (emphasis added).

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Michael PlaksPro Member

Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes

2y

Quote from @Jason Watson:

Where are you getting the 2 stay minimum to be considered placed in service?

Welcome to Bigger Pockets tax forum!

2 stay minimum is not required to place property in service.
2 stay minimum is required to establish the average customer use of 7 days or less in order to qualify the property as an STR.

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Jason WatsonBusiness Member

CPA · Colorado Springs, CO · Member since 2024 · 98 posts · 83 votes

2y

Agreed in a mathematical sense. Is there specific guidance suggesting that you must have 2 stays in that tax year? Or could you demonstrate that it was always a short-term rental from the beginning simply based on your listings + the several guest stays in the following year(s) during audit

Without specific guidance, I would take a risk-based approach, and call it an STR if the intent and preponderance of the subsequent actions suggests it from the service date.

Is there a tax court case that establishes this? Perhaps I am missing the authority. A quick Casetext seaerch didn't yield anything.

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John Malone

Attorney · Boston, MA · Member since 2023 · 139 posts · 75 votes

2y

@Jason Watson there actually are quite a few STR cases. Most are back in early 2000s and 90s. We covered some in our STR course so will tey to post one... In reality, the IRS has WON in tax court converting passive LTR to STR!

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Jason WatsonBusiness Member

CPA · Colorado Springs, CO · Member since 2024 · 98 posts · 83 votes

2y

Okey doke, do you have some citations?

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John Malone

Attorney · Boston, MA · Member since 2023 · 139 posts · 75 votes

2y

@Jason Watson a good one is Lucero. Judge said: “However, an activity that involves the use of tangible property is not a rental activity if "[t]he average period of customer use for such property is seven days or less" in a taxable year (short-term rental). Sec. 1.469-1T(e)(3)(ii)(A), Temporary Income Tax Regs., supra. On average the Sea Ranch property was used for short-term rentals in both of the years in issue, so petitioners' short-term-rental activities were not rental activities under the statute.”

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STR Bonus Depreciation Rules

STR Bonus Depreciation Rules

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