Cost segregation study on a property from 2022

[Michael Mackney]

Hey everyone, I'm starting to dive deep into the tax benefits of REI and I had a question regarding a cost segregation study and accelerated depreciation.

I purchased a long term property in 2022 that has been run by a property manager this last year. Hypothetically, if in 2023, I plan on turning it into a STR with self management to meet the the material participation, how would the accelerated depreciation work?

From what I understand, you obtain the accelerated depreciation benefit based on the year the rental property went into service.

For example, if it was put into service in 2022, I would achieve 100% of the benefit even though during that year I did not start self managing, rather than 80% for 2023. 

Let me know if I am understanding this properly, thanks!! 
 

[Bonnie Griffin Kaake]

Quote from @Michael Mackney:

Hey everyone, I'm starting to dive deep into the tax benefits of REI and I had a question regarding a cost segregation study and accelerated depreciation.

I purchased a long term property in 2022 that has been run by a property manager this last year. Hypothetically, if in 2023, I plan on turning it into a STR with self management to meet the the material participation, how would the accelerated depreciation work?

From what I understand, you obtain the accelerated depreciation benefit based on the year the rental property went into service.

For example, if it was put into service in 2022, I would achieve 100% of the benefit even though during that year I did not start self managing, rather than 80% for 2023. 

Let me know if I am understanding this properly, thanks!! 
 

Hi Michael, I can answer most all your questions and more. I keep CPAs updated on this complex area of tax laws and regulations and did an hour Continuing Professional Education (CPE) class on STRs for 253 CPAs just last week. 

First, your long-term rental was likely depreciated over 27.5 years if it is a residential rental. To change it into a STR, you will need your CPA/tax professional to do a 3115 change of accounting form to file with your taxes because all STRs must be done on 39-year depreciation. If you haven't done your 2022 taxes yet, I would recommend you do a cost segregation study on your current property for 2022 before you make the change to a STR. That will give you 100% bonus depreciation. If you can't use all of it for 2022, you can always roll it forward to following years.

Keep in mind that in order to qualify for material depreciation on your STR, your average rental number of days has to be 7 days or less. And, you must put in more hours than anyone else for managing the property. Regardless whether you meet the average of 7 days or are over that, a STR is still depreciated over 39 years. A good cost segregation study will bring your taxes up-to-date and make it easier on your tax pro. 

There are a lot more considerations for your CPA/tax professional but that would be getting too far into the weeds for your current questions. I am here if you need more guidance.