STR bonus depreciation when purchasing with an LLC?

[Marc Shin]

I work a W2 job and pay a lot of taxes. If I purchase an investment property with an LLC can I still take advantage of the STR bonus depreciation? or do I need to purchase in my personal name in order to take advantage of the STR bonus depreciation?

[Joshua Thompson]

If you materially participate and the rental qualifies as a STR you should be able to take advantage of bonus depreciation on a STR. Keep in mind this year bonus depreciation is 60%. You do not need to have the property in your personal name, it can be owned by an LLC you're sole owner of without having to file a separate tax return.

[Michael Plaks]

Quote from @Marc Shin:

I work a W2 job and pay a lot of taxes. If I purchase an investment property with an LLC can I still take advantage of the STR bonus depreciation? or do I need to purchase in my personal name in order to take advantage of the STR bonus depreciation?

A completely separate question is whether you need an LLC.

But if you decide to use an LLC, it changes absolutely nothing for taxes. Same exact tax benefits with or without an LLC, as long as you're the only owner. (Or you and your spouse in one of the community property states)

[Sean Graham]

@Marc Shin don't worry about the LLC. It's about material participation from you. Happy to answer any specific STR loophole questions for you as well

[Account Closed]

Quote from @Marc Shin:

I work a W2 job and pay a lot of taxes. If I purchase an investment property with an LLC can I still take advantage of the STR bonus depreciation? or do I need to purchase in my personal name in order to take advantage of the STR bonus depreciation?

Hey Marc! 

If you work a W-2 job and want to take advantage of short-term rental (STR) bonus depreciation, you can do so whether the property is purchased through an LLC or in your personal name. An LLC is a passthrough entity for tax purposes unless you make a C corp election. The key factor is ensuring the property qualifies for favorable tax treatment by adhering to IRS rules regarding short-term rentals and material participation.

For the 7-day rule, the IRS requires that:

The average guest stay must be seven days or less for the property to qualify as a short-term rental.

If the average stay is 30 days or less, you must provide substantial services similar to what hotels offer, such as daily cleaning or concierge services.

Regarding material participation, to further classify the income as non-passive, you must meet one of the following criteria:

You spend more than 500 hours actively managing the rental in a year.

You manage the business yourself and spend at least 100 hours, with your involvement exceeding that of any other person involved in the rental.

Please note there are actually 7 ways to qualify, the above two are the most common. Hope this helps! 

[Ashish Acharya]

@Marc Shin You can take advantage of bonus depreciation on a short-term rental (STR) even if you purchase it through an LLC, as long as the LLC is a not C-corp or S-corp. 

The depreciation will flow through to your personal tax return. To offset your W2 income, you'll need to meet material participation requirements.

[Marc Shin]

@Ashish Acharya  thanks for the response!  Can I offset my W2 income by using the Short Term Rental Tax loophole and reclassify the rental income as non-passive by having average duration of stays to be 7 days or less?  Or do I need to really spend 500 hours or more actively engaged in managing the property?  

[Marc Shin]

@Account Closed thanks for the response! For spending at least 100 hours in managing the business myself, can it be a combined 100 hours between my wife and myself or does it have to be 100 hours for myself and 100 hours for my wife? We are both listed on the LLC as members.

[Marc Shin]

@Joshua Thompson thanks! when you say "Sole owner", is it ok if my wife and I are both "Sole owners" of the LLC? and is sole owner and sole member the same thing? I don't think i specified a sole owner in the LLC, only sole members

[Account Closed]

Quote from @Marc Shin:

@Account Closed thanks for the response! For spending at least 100 hours in managing the business myself, can it be a combined 100 hours between my wife and myself or does it have to be 100 hours for myself and 100 hours for my wife? We are both listed on the LLC as members.

the 100-hour requirement can be met collectively by you and your wife if both of you are materially participating in the business. The IRS generally allows spouses to combine their hours for the purpose of meeting material participation requirements, especially when both are members of the LLC.

[Account Closed]

Quote from @Marc Shin:

@Ashish Acharya  thanks for the response!  Can I offset my W2 income by using the Short Term Rental Tax loophole and reclassify the rental income as non-passive by having average duration of stays to be 7 days or less?  Or do I need to really spend 500 hours or more actively engaged in managing the property?  

 Yes you can you need to pass both tests. 7 days or less and the material participation test which I have outlined above 

[Joshua Thompson]

Quote from @Marc Shin:

@Joshua Thompson thanks! when you say "Sole owner", is it ok if my wife and I are both "Sole owners" of the LLC? and is sole owner and sole member the same thing? I don't think i specified a sole owner in the LLC, only sole members

 Hi Marc,

Great questions! To be clear sole owner and sole member are typically the same thing. If you and your wife own it together, then you have options to determine how to handle this. This would be better answered in a private setting with your tax professional to determine the best steps moving forward and structure.