Help me validate a hypothesis for STR taxes

[Mayank Jain]

Hi everyone, I'm a rookie, trying to validate the following hypothesis...

To offset W2 income, buy an STR (have rentals of avg 7 days or less + use my 100+ hrs/yr to manage property) THEN use cost segregation + depreciation as an active loss on W2 and THEN sell the property through a 1031 exchange and repeat every year.

Does this seem logical? Is there any obvious point that I'm missing?

I know this looks like the tax tail wagging the investor, but I would still love to know.

Thank you!

[Michael Plaks]

Buying a new STR every year and using cost segregation on it is workable as a tax strategy. Whether it's sensible as a business strategy is another conversation, like you mentioned.

However, your mention of a 1031 is unclear in the context of your question. I suspect that what you had in mind is buy an STR A in 2023, apply cost segregation and then exchange it for an STR B in 2024 and repeat. If this is your tax plan, it's faulty. If STR B is acquired via a 1031, it will have very little left for cost segregation, because it will inherit the tax attributes of an already cost segregated STR A. You cannot "repeat" the tax magic of your STR A with your STR B.

Another issue is whether a 1031 is legitimate in such a scenario, but it's also a different conversation. 

Bottom line: building an STR portfolio - yes. Recycling a single STR - no. Some combination - maybe, but it requires careful planning.