Does the STR "Loophole" work for Cost-Seg, if not self-managed?

Question

Hey Everyone,NJ investor here, looking to buy my first STR in the Orlando/ Winter Park Area in the next few months. Curious if anyone has had success (or failure) qualifying for RE Professional status with an STR, even if not self managing? (My assumption is it may be tough to prove enough material participation if using someone local to manage.)

Two things worth noting:

1- I'll be discussing with my CPA in-depth soon, but would like to hear other's experiences on this.

2 - The main reasons I'm looking to STR's is the tax benefits (Cost-Seg) & appreciation that comes with buying in these areas opposed to the mid-west where I look for long-term rentals.. Not saying I would abandon this if I can't qualify for the material participation, but it is a factor.

Any input is much appreciated!

Michael Plaks · Answer

@Michael Buska

STR tax benefits are not related to the REP status. You do not need REPS to get tax benefits from STRs, and qualifying for REPS does not help you with STRs. Two completely separate things.

Read this: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

Michelle Schrader · Answer

@Michael Buska I sent you a DM and am curious what ended up happening? I have successfully used the str loophole and can provide some insight how I achieved it.

Basit Siddiqi · Answer

The first question is 1) Will the STR be considered active and eligible to offset other income such as wages. Based on your information, it may appear no2) The second question is whether the property will generate positive rental income over a 3-5 year period, after normal depreciation.If it is, and it is significant, it may be worthwhile to get a cost segregation.

Sean O'Keefe · Answer

@Michael Buska congrats on getting started with the hunt for STR!

This is the right time to begin asking these questions. I think the question you are asking is how can I qualify to offset non-passive income (e.g. W-2, 1099, etc.) with passive income/loss from my rentals (STR, LTR).Answer

There are a few ways, but the most common for real estate investors is to own a rental that 1.) meets the IRS requirements to be considered an STR and 2.) fulfill the material participation requirements (this doesn't require Real Estate Professional Status or REPS). There are 7 material participation tests and these are the 3 most common for real estate investors AND you need to meet one of them:

• Spend more than 500 hours on your rental business
• Do substantially everything for the rental business
• Spend more than 100 hours on the activity and no one other individual spends more time than you do

Another way to offset non-passive income (e.g. W-2, 1099, etc.) with passive income/loss from my rentals (STR, LTR) is to meet the IRS requirements for Real Estate Professional Status or REPS (this also requires material participation in addition to specific requirements to be considered a REPS).Very unlikely that you will qualify for REPS with only an STR and a local property manager. This leaves the other options I mentioned -> STR that meet IRS requirements and #3 from the list of material participation above, but it will be tough to prove that no one other individual spends more time than you do since this is probably not true. ...*This post does not create a CPA-client relationship.  The information contained in this post is not to be relied upon.  Readers are advised to seek professional advice.

Does the STR "Loophole" work for Cost-Seg, if not self-managed?

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