"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.

[Sean Graham]

@Shawn Regnier these questions are great! Here is my take:

1. The STR loophole is all about "material participation". If the owner is truly materially participating and meets the requirements and it is short term rental then I believe it is a valid strategy. The IRS looks at your situation on a year-by-year basis. So if all requirements are met in year 1 then I don't see the issue

2. If the property is taken out of service and is no longer used as a STR rental or a MTR rental, then the depreciation benefits would end

[Account Closed]

Hey Shawn happy to help chime in here: 

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

The strategy you're referring to could work in principle, but there are a few important considerations. By using short-term rentals (STRs) at the end of the year and switching to mid-term rentals (MTRs) afterward, your clients could indeed bypass the Real Estate Professional (REP) status requirement. This works because, for short-term rentals, the IRS rules allow income to be treated as non-passive if certain conditions are met, such as offering substantial services and meeting material participation tests. Since REP status is difficult for full-time doctors to achieve, this approach allows them to take advantage of the tax benefits (e.g., cost segregation studies and bonus depreciation) without qualifying as real estate professionals. However, for the strategy to be effective, clients must ensure that they meet all the IRS requirements, such as maintaining the short-term rental for a sufficiently long period and passing one of the material participation tests (e.g., 100+ hours of active participation).

2. What would happen if someone used the above steps, and instead of transitioning to an MTR, they got out of the rental game and turned their property into a vacation home?

If the property were transitioned into a vacation home after a short period as an STR, this would likely complicate the situation regarding tax benefits like cost segregation and depreciation. The IRS distinguishes between rental property and personal-use property. For depreciation and cost segregation benefits, the property must be used in a trade or business (i.e., generating rental income). If you switch the property to personal use as a vacation home, you would no longer be eligible to claim rental-related tax deductions, including depreciation. The period during which it was rented as an STR may allow for partial deductions, but transitioning it to personal use would limit the amount of depreciation you can claim going forward. It's also important to keep track of personal versus rental days, as too much personal use can disqualify the property as a rental for tax purposes.

[Shawn Regnier]

Thank you @Sean Graham and @Account Closed

Zachary, regarding your statement: "However, for the strategy to be effective, clients must ensure that they meet all the IRS requirements, such as maintaining the short-term rental for a sufficiently long period and passing one of the material participation tests (e.g., 100+ hours of active participation)."

Let's assume they do not transition to a vacation home, but opt to turn it into a mid-term rental. Would your statement above still qualify them? You said "maintaining the short-term rental" so I want to make sure mid-term works also in their case.

[Account Closed]

Quote from @Shawn Regnier:

Thank you @Sean Graham and @Account Closed for your responses.

Zachary, regarding your statement: "However, for the strategy to be effective, clients must ensure that they meet all the IRS requirements, such as maintaining the short-term rental for a sufficiently long period and passing one of the material participation tests (e.g., 100+ hours of active participation)."

Let's assume they do not transition to a vacation home, but opt to turn it into a mid-term rental. Would your statement above still qualify them? You said "maintaining the short-term rental" so I want to make sure mid-term works also in their case.

So its not very clear in the pubs anywhere... the exact time between making it an STR then converting to a MTR is at minimum 1 year.

[Shawn Regnier]

Thank you, @Zachary Jensen

Can you shed any light on this? @Michael Plaks

The guest from the podcast I mentioned above transitions her "doctor" clients from STR to MTR at the turn of the new year, right after they purchased/converted to STR the previous year right before the year ended. She's not waiting a full year to turn them into MTR's.

[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.

[Shawn Regnier]

Thank you @Michael Plaks

Sorry for dragging you into this thread, but in retrospect, I'm glad I did! :)