STR Cost Seg/Bonus Depreciation Buying with Partner & other non-RE related income ?'s

[Nick O.]

Previous post got deleted/moved by BP so apologies if you have already responded. Have some more complex questions was hoping to get some help with:

1. Is it possible to take advantage of the bonus depreciation if buying multiple STR properties with a business partner? If so what's the best way to structure or creative ways to structure if purchasing multiple homes?

2. Is this only useful for W2 income? Does other non-real estate related business income affect this?

3. If I'm understanding this correctly it mainly makes sense if you either plan on holding the property or doing a 1031 exchange in the future? Otherwise you have to pay back the years of depreciation not used if you sell?

4. If you have an existing property that you've been renting out long term and want to switch it over to an STR to take advantage of this, is the IRS using the full calendar year to avg out the 7 day avg stay?

5. If using co-host to help manage, do you just rotate several so you don't allow them to surpass your 100 hours?

Appreciate the help!

[Nick O.]

Quote from @Account Closed:

Hey Nick, 

1. Yes, you can take advantage of bonus depreciation when you partner, typically through a simple LLC or partnership agreement. In a 50/50 partnership, each partner generally receives 50% of the tax benefits. However, if you are pursuing Short-Term Rentals (STRs), each partner must qualify individually for "material participation," which can be more challenging when there is a partner. Material participation usually requires that you work more hours than anyone else involved, including your partner, making this qualification tricky in partnerships.

2. Bonus depreciation is highly beneficial because it can be used to offset any income, not just passive or real estate income. It applies to both W-2 income and other forms of active and passive income, meaning that the STR loophole allows you to leverage depreciation beyond just real estate activity.

3. When selling a property, you will have to recapture the depreciation you've used to offset income, but you don’t pay taxes on suspended depreciation. Suspended losses can be carried forward and used to offset capital gains or depreciation recapture upon the sale of the property. If you perform a 1031 exchange, you may avoid immediate recapture taxes, but long-term holding strategies must account for eventual recapture.

4. Depreciation benefits for a property switching from long-term rental (LTR) to STR apply based on the entire calendar year. Mid-year conversions do not qualify for a partial year calculation of STR depreciation; you must meet the full-year requirements to utilize this tax advantage effectively.

5. To meet the "material participation" rules for STRs, there are multiple ways to qualify, but careful structuring is important. Using co-hosts might help distribute management tasks, but this can complicate your ability to meet the material participation requirements, especially the 100-hour rule. Rotating co-hosts for tax purposes may not make business sense, as it is difficult to find reliable management only to replace them quickly.

Hope that helps! 

 Hey Zachary, thanks for the response. on #1 I keep seeing "challenging" "difficult" and "tricky" but are you able to share the best way to do this?