Putting STR into service at end of year vs beginning of next year

[Marc Shin]

why do some investors try to put their new STR's into service towards the end of the year when there is very little active income to offset? what is the benefit of putting a new STR into service towards the end of the year vs the beginning of the next year?

[Nick Velez]

@Marc Shin

Primarily to capitalize on the higher bonus depreciation since it is declining by 20% every year at the moment until it phases out. The goal of a cost seg is typically not to offset the income from the property, but to offset income from your active income (potentially a high W2 job). I have a lot of clients who have had great income this year and thus they are rushing to purchase a property by the end of the year, so they can place it in service. The year it is placed in service, is the year you can utilize the cost seg. Placing a property in service in December of this year versus January of next year is a 20% delta. 

Investors in general, tend to be more active at the end of the year from what I noticed. There tends to be less competition from every day home owners who need to move in the spring/summer before the new school year starts and thus the possibility of having more leverage on sellers. On the flip side, inventory tends to be lower so it really depends on the inventory level in your specific market. 

[Joshua Thompson]

This is a good question and to keep the answer short and simple; it is typically for the tax benefits. If you place your rental (STR, LTR, or MTR) into service by the end of the year you can begin to depreciate the property and write off certain expenses. If you expect a large tax balance this is why people rush to get it into services ASAP

Edit: To also add if the taxpayer qualifies for the "STR loophole" as some call it, even if they don't have much rental income, they could use the losses produced by that STR to offset other income.

[Austin Cheatham]

You're able to take partial depreciation by placing it into service before the end of the tax year. So they could get some of those depreciation benefits this year rather than waiting to take those benefits in the following year. Dependent upon your tax situation, you could also be able to take some expenses in the current year as well which also provides more benefits than waiting for the next. Money now is always better than money later.

[Jason Malabute]

The main reason some investors put new STRs (short-term rentals) into service toward the end of the year is to take advantage of the tax benefits, especially if they have W-2 income they want to offset. If they have passive losses from the STR, they might be able to offset some of that W-2 income through the passive loss allowance or by qualifying as a real estate professional. This is where good tax planning really pays off—not only can it help you maximize these benefits and reduce your tax bill, but it can also help determine if paying for cost segregation is even worth it for your individual tax situation.

[Julio Gonzalez]

An uptick may be due to the decrease in bonus depreciation by 20% in the new year. A cost segregation study would be more beneficial this year. Here's an article with additional FAQs on cost segregation studies.

https://www.biggerpockets.com/forums/51/topics/1113749-cost-segregation-faq

[Basit Siddiqi]

If the STR is placed into service at the end of the year, they can use the paper-loss from the STR to 'potentially' offset other forms of income such as wages, interest, dividends, etc.

Best of luck

[Sean Graham]

Quote from @Marc Shin:

why do some investors try to put their new STR's into service towards the end of the year when there is very little active income to offset? what is the benefit of putting a new STR into service towards the end of the year vs the beginning of the next year?

It’s to take advantage of the 2024 bonus depreciation rules which include 60% bonus in year 1 for any life classes less than 20 years. Next year it goes down to 40%.