Mix Use Duplex as STR and LTR for Tax Filing

[Shyd Coloma]

Looking for anyone who has a duplex that is mix of STR & LTR and claim material participation for the STR side for the "STR loophole" to offset active W2 income? I recently had an email exchange with my CPA regarding my investment property that is a duplex where one side is operated as a LTR and the other side is a STR. 2022 is my first year with this investment property.

The average length of stay for the STR side for the year came out to 5.5 days so it does meet the STR criteria. We meet the material participation criteria as well since we self-manage the unit and set it all up in person ourselves. We have tracked and logged more than 500 hours and materially participated more hours on the property than the rest of our team (cleaner, handymen, etc.) and would like to try and exercise the "STR Loophole" to offset W2 income for 2022. My CPA is telling me that because this is a duplex, it might be "aggressive" to file half of the property as a STR and the other half as a LTR and I could be targeted for an audit since this is a gray area of the tax code. They haven't had clients with this type of situation arise yet. All their client's properties are clear LTR or STRs and not a mix. Recommendation from my CPA is that we file the whole duplex as a LTR, but then we obviously couldn't offset my W2 income if we went that route. We aren't able to claim REPS at this time. Looking to see if others have encountered this situation before.

I am reaching out to 2 other CPAs for a consultation as well, but looking for some anecdotal data from others to see if they have run into this issue in the past.

[Natalie Kolodij]

I actually ran into this with a client last year. 

I paid for a consultation with a colleague who was the IRS technical advisor on code 469 for 25 years to offer some feedback and clarity because it is so unique. 

The long and short of it is this: 

There are two things your tax professional is going to need to consider and could provide nuance with set up. Deprecaition for a rental vs. non rental activity is based on specific rules. That is determined at the BUILDING level. There's an 80% of income rule, so even though you have both short and long term activites- the entire building may be depreciated at either 39 or 27.5 years, depending on analysis. 

Second- it is possible to have two activities within the same building. And they could be treated accordingly. You could utilize the STR loophole just connected to that specific unit. Your records and tracking will need to be impecable.

This is allowable because unlike the depreciation test, the rules here tie to the activity, with is not defined as an entire building. Think of other mixed use properties: storefront on level 1 with apartments above. 

Like Michael said above it defintiely COULD be seen as a red flag potentialy, just because it may look odd. But is defendable. So work with a good tax professional and see how plausable and beneficial it actually would be.