"Purchase STR End of Year - Bonus Depreciation - Pivot to MTR" Questions

[Shawn Regnier]

Hello Everyone,

I recently heard a guest on Brandon Turner's newest podcast discuss their STR strategy when working with Doctors. The gist is that their clients (primarily doctors) purchase homes at the end of the year, turn them into short-term rentals, and switch them to mid-term rentals at the turn of the new year. This allows them to bypass the REP status since they are full-time doctors and cannot meet the standard. Then their clients do a cost segregation study because they benefit from being high-income earners. Yes, I know bonus depreciation is 60% for 2024.

My questions:

1) Does this sound valid, or are there many more complicated steps for this to work?

2) What would happen if someone used the above steps, and instead of transitioning to an MTR, they got out of the rental gamer and turned their property into a vacation home? Would they still be able to cost seg the property because it was an STR for a few weeks in December?

Sorry for my cluelessness on this topic. I've read many other posts, but none fully answered my questions.

[Michael Plaks]

I did not want to chime in, but @Shawn Regnier targeted me specifically and even reached out offline, so I guess I have to. :)

First, I wrote this loooong post on tax strategies and on abusing them. It is relevant. Then, let me apply the concepts from that post to this specific issue.

If you bought an STR in 2024, and it qualified in 2024, you can claim the benefits for 2024. If something unexpectedly changed in 2025, do you lose the benefits claimed in 2024?

This is not a simple question. If your STR no longer qualifies as an STR and is now operated as an MTR/LTR - I'd say no problem. If you moved in yourself and used a 100% Section 179 depreciation for 5-yr property (furnishings, appliances, carpets etc) - you have to recapture depreciation now. For 60% bonus depreciation (2024 rate), there is no recapture requirement. Which also means no problem, most likely.

Now, complication. This is not a change of circumstances but your pre-mediated plan. You want to milk bonus depreciation and STR loophole, with no intention to operate it as an STR after a brief period.

I'm certain that it does go against the intention of the law, as discussed in my post linked  earlier. On the other hand, I'm almost certain that it is not explicitly prohibited by the law, either. I also do not think that it has been tested in court yet. If someone has seen a court case where this situation was addressed, please chime in.

So if you are the first person to face IRS scrutiny over this - how solid is your position? Roll a dice. I'm not recommending that you take one position or the other. If you decide to go with it, understand that you're taking some risk.

And, speaking of risk, the main risk is the IRS focusing on this strategy at some point and identifying it among "abusive tax strategies" as they did, for example, with notorious conservation easements. What happens in situations like this is they start by going after the promoter and then go after every customer of the promoter.