Short-Term Rental Strategy for 2022 (Only 90 days left...)

[Jon Fletcher]

A buyer client asked me about the following scenario. Any advice? 

Two partners want to purchase a 2-family in their personal names or an LLC and close on December 28th  

Unit 1 comes with a long-term tenant

Unit 2 is vacant for short-term rentals

The second unit will be listed on AirBnB and rented for three nights: December 29-31. They'll do a cost segregation study for accelerated depreciation.

The Short-Term Rental (for only three nights) creates a significant loss for 2022 that can offset their W2 taxes. 

During 2023, they decide that AirBnB is too much effort and they want to rent Unit 2 on a 12-month lease

Questions: Do you foresee any issues with this scenario from a tax planning perspective? Can both partners take advantage of the losses for their W2 taxes? 

[Bonnie Griffin Kaake]

@Jon Fletcher This arrangement is going to cost more for the accounting aspect. First, Unit 1 will be depreciated over 27.5 years. Unit 2 will be depreciated over 39 years. You will have to keep two sets of depreciation records. Next, the short-term rental can only be active if the owner puts in more hours than anyone else by materially participating in the management of the property. With a 50:50 ownership, it may have to remain a passive investment for you both. If one of you is a RE professional, that could make that person an active investor but even that is unlikely if either or both of you have W2 incomes. IRS red flag. Regardless, of whether either side is STR (39 years) or LTR (27.5 years), you will get the same bonus depreciation. Please contact a good CPA/EA or a tax attorney who understands the ins and outs of owning rental properties. My expertise is in the area of tax benefits and increased cash flow on commercial buildings. I work with CPAs/EAs and other tax professionals, including tax attorneys.