Question on the "STR Loophole" vis-a-vis California tax

[David Brooks]

I've received advise that our friendly STR loophole can not be used to characterize STR income/loss as non-passive on a California tax return.

I can see an explicit exception in CA Tax Code § 17561 that says you can not use the qualifications in Section 469(c)(7) (Real estate professional) to render that income as non-passive, but I see no callout for 1.469-1T and, as such - as a non-CPA - I do not (yet) see a reason why we cannot follow the same rules for CA that we do for our federal taxes; e.g., if the business is not a "rental" business per tax code, we count that income as non-passive and offset other income (W2, etc) similarly.

Does anybody else have some guidance (or opinions) on this matter? Thanks!

[Michael Plaks]

Quote from @David Brooks:

I've received advise that our friendly STR loophole can not be used to characterize STR income/loss as non-passive on a California tax return.

I can see an explicit exception in CA Tax Code § 17561 that says you can not use the qualifications in Section 469(c)(7) (Real estate professional) to render that income as non-passive, but I see no callout for 1.469-1T and, as such - as a non-CPA - I do not (yet) see a reason why we cannot follow the same rules for CA that we do for our federal taxes; e.g., if the business is not a "rental" business per tax code, we count that income as non-passive and offset other income (W2, etc) similarly.

Does anybody else have some guidance (or opinions) on this matter? Thanks!

Real Estate Professional status is explicitly not recognized by California, among many other beneficial tax rules that exist on the Federal level. You can explore the list of California "non-conforming" rules here:
https://www.ftb.ca.gov/forms/2022/2022-1001-publication.pdf
Why did CA decide to not conform to (in other words, ignore) so many Federal tax rules? Because it's California.

That said, REPS has nothing to do with STRs, so your reference is not relevant. STR loophole works under different rules, and you can read more about it here:
https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

While REPS is clearly not recognized by CA, their conformity to the STR loophole rules is unclear. As far as I know, they do not specifically say that CA will not allow this loophole, and they do not specifically say that they will. It remains controversial, and if you want to become the first taxpayer to take CA FTB to court over this, godspeed. 

Let's assume that you do want to venture into this unchartered territory and claim the STR loophole on your CA return. The real obstacle is not the STR loophole itself but the tax benefit that it's based on. This tax benefit is bonus depreciation. Guess what? California is non-conforming when it comes to bonus depreciation, i.e. it does NOT allow bonus depreciation. And that part is black-and-white, no debate.

Even if you claim the STR loophole on your CA return, despite it being controversial, you still cannot claim bonus depreciation. Which probably defeats the purpose of the STR loophole, making it pointless to even attempt to claim STRs on CA returns.