EXPLAINED: can I apply "STR loophole" strategy in December?

[Michael Plaks]

I'm writing this in December 2024, when every other question asked on the Bigger Pockets tax forum is about STRs. If you're not sure what the fuss is all about, read this older post first:
https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

Today, we're discussing a very specific question related to STRs:
Can you buy an STR in December and still catch all the tax benefits of the so-called STR loophole?

Maybe. Here is a scenario where it all works out nicely.
- You close on December 10th
- The property is in great shape and does not need any significant repairs
- It only needs some paint touch-up and changing a couple of broken fixtures, which you do yourself
- You spend the next week buying furniture, electronics and supplies and installing/arranging everything yourself
- You also roll up your sleeves and scrub the toilets and sinks and appliances
- You put it on AirBnB/VRBO and have your first guest renting it for the 3 days of Christmas
- You second guest rents it for the following weekend and leaves before NYE
- You personally clean and restock the place between these two guests

Congrats! Save for some unusual complications, you seemingly met all the conditions for your tax benefits.

Now, to traps and gotchas.

Trap 1. Minimum of two completed stays.

You have probably heard that rental property deductions, such as depreciation, start when the property is placed in service. And this date is usually before you get your tenant in. But not so with STRs! It is not enough to place your STR in service.

Why? Because one of the conditions is that your average stay must be 7 days or less. We had a recent court case which said in black and white: you cannot calculate an average if you do not have at least two numbers to average. Duh!

Lesson: if you do not have two separate guest stays completed in 2024, there is no way to meet your 7-day test. You have an SOL, not an STR.

1st warning: the stay must be finished in 2024. Which means that a guest who stays in your STR from December 30th of 2024 through January 1st of 2025 counts for 2025, not for 2024!

2nd warning: you cannot split one 6-day stay into two back-to-back 3-day stays. Nice try, but no cigar.

3rd warning: only paid stays count, and only full-price stays, not discounted favors for friends and family. Which brings us to...

Trap 2. Personal use.

You cannot have more than 14 days of personal use in December. Luckily, staying on the property in order to make repairs and prepare it for tenants is business use, not personal use. Sounds like you don't need to worry about personal use, right? Sorry, you do.

It is because of the definition of personal use. Guests staying for free is personal use, even if they are not related to you. Guests staying at a discount, technically called "below market rate" is ALSO personal use!

Even if you do not exceed 14 days of such "personal use", you still have a problem: these guests will not count towards your required two stays minimum. So if you let your buddies stay there one weekend for cheap, you still have to get two other guests during December.

Clarification: the test for personal use days is more complicated. I mentioned its simplified version of "no more than 14 days" only in the context of our specific scenario: buying a new STR in December. For all other scenarios, you will need to look up the full version of the rule.

Trap 3. Material participation.

I discussed STR material participation requirement in my other post, linked at the top of this one. Here, we will focus only on a December-specific question: how can I meet material participation if I buy an STR in December?

The straightforward method is to do everything yourself, as in my example above. You hired cleaners to clean the unit between tenants? Oops, game over, you lost. You hired a management company? You hired a plumber to unclog the drain? Any of the above kills the STR loophole under this "substantially all work" option for material participation.

Is there a way to qualify if all my outside help was a cleaning lady for 2 hours? Yes, there is. But then you personally will need to log at least 100 hours of hands-on work on the property, all in December. Reading Bigger Pockets posts does not count, sorry. Not even my posts. Real work only.

Any other workarounds? Maybe, but those would be super rare.

2024-specific consideration: should you even try?

There is a quirk this year, and an important one. New administration.

As of now, 2024 bonus depreciation rate is 60%. If you go out of your way to jump through all the hoops, all you can claim is 60% of cost segregation benefits. (Yes, there is a potential Section 179 alternative, but it is for a different post.)  

However, it is possible that the new administration might bring 100% depreciation back. 
- Is it guaranteed? Certainly not.
- If it happens - when? Your guess is as good as mine.
- If it happens - would it apply retroactively to 2024? Who knows?

Amidst this uncertainty, some people suggest that it may be wise to not rush the property in December but wait until 2025. The risk is missing out on the 2024 60% bonus and getting stuck with an even stingier 40% slated for 2025. The potential benefit is qualifying for a possible 100% in 2025 that may or may not be extended back into 2024. Decisions, decisions... Do you feel lucky, punk? (For the young and ignorant: this was a Clint Eastwood reference)