STR Loophole Cost Seg

STR Loophole Cost Seg

Rental Property Investor · Queens, NY · Member since 2019 · 33 posts · 9 votes

I have a quad w/ 2 units on LTR (1 Unit needs Reno, once a tenant moves out) and 2 units on STR after conducting a cost-seg and using the STR loophole with material participation against my W2 income would the entire structure be used, or just the STR units. Would how would the Renovation come into play with partial asset disposition. The basement is unfinished, how would that come into play if I wanted to finish it and put two basement apartments in it. I know this is a lot but I can't seem to find an answer. Essentially would the cost seg active losses for the 2 STR unit business still be able to be used against the W2 income. Yes assuming all the material participation happens.

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
3y

@Joshua Taffe

I want to second what @Joseph Palmiero said: this is a grey area, and tax accountants do NOT have a consensus.

Some experts believe that you cannot use the STR loophole on a multi-unit property where only some of the units are STRs. Others believe that you can. It is open to debate.

Bottom line: find out where your CPA stands on this controversial issue, and understand the risk of taking a more aggressive position if you so choose.

See this reply in the discussion

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  • Accountant · Franklin, TN · Member since 2023 · 204 posts · 91 votes
    3y

    The cost segregation would cover the entire property. The firm performing the cost segregation will factor in components of the property including the basement. Once the cost segregation is complete, it will be allocated between STR and LTR use. You will need that allocation when your depreciation schedules are established at tax preparation time.

  • Joseph PalmieroBusiness Member
    CPA · PA · Member since 2023 · 151 posts · 115 votes
    3y

    The issue is meeting the requirement of an average stay of 7 days or less to qualify as a short-term rental.  How do you calculate this for a mixed-use property?  Experts have differing opinions on how to approach this. One possible solution is to divide the property into two distinct activities and keep separate records for each. The cost segregation would be on the whole property, but only the loss from the short-term rental activity could be used to offset your w-2 income, assuming material participation in that activity. Ultimately, the decision depends on your personal risk tolerance and the potential tax benefits.

  • Real Estate Broker · New York, NY · Member since 2020 · 2k+ posts · 1k+ votes
    3y

    Hey @Joshua Taffe - good question I'm commenting so I can follow this thread. 

    What did your CPA say?

  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    3y

    @Joshua Taffe

    I want to second what @Joseph Palmiero said: this is a grey area, and tax accountants do NOT have a consensus.

    Some experts believe that you cannot use the STR loophole on a multi-unit property where only some of the units are STRs. Others believe that you can. It is open to debate.

    Bottom line: find out where your CPA stands on this controversial issue, and understand the risk of taking a more aggressive position if you so choose.

  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    3y

    To add on to what others have said.

    Normally a cost segregation is to determine what is purchased.
    You don't necessarily need to do a 'post renovation' cost segregation study, especially if you have a detailed scope of work of what work was completed.

    Best of luck.

  • Rental Property Investor · Queens, NY · Member since 2019 · 33 posts · 9 votes
    3y
    Quote from @Basit Siddiqi:

    To add on to what others have said.

    Normally a cost segregation is to determine what is purchased.
    You don't necessarily need to do a 'post renovation' cost segregation study, especially if you have a detailed scope of work of what work was completed.

    Best of luck.

    Thank you Basit, 

    I wanted to hear what sentiment you can share on the allocation of STR vs LTR and using it the material participation for the STR to qualify for an active trade or business. Essentially do you believe it can be done in a multifamily or do you believe it's all or none situation. Thanks!
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