27.5 or 39? PAL limitation of $25k or not?

[Michael Meegan]

In 2022....

I renovated 23% of the square footage of my primary residence (addition on the house that has a private entrance) and launched that space as an STR.

The average daily use was/is less than 7 days.

I kept/have accurate time logs for me and all other individuals during the renovation and after the launch. I participated more than 100 hours and more than any other individual.

I did not use or make of use of the space for personal use.

It operated/operates as a STR using the AirBNB platform.

My expenses were $28,000 for the renovation, furnishings and all other costs associated with launching and operating the STR.

My revenue from the STR was $1,500.

I earned $109,000 of non-passive income at my W2.

1. Do I depreciate over 27.5 or 39?

2. Am I limited to the Passive Activity Loss Limitation of $25K and the phase out, or do I have an exception whereas I can take all of my STR loss towards my non-passive W2 income?

[Mike Kee]

Hey Michael,  

You should definitely call your CPA to confirm.  My wife and I are going through the same process this year and are currently working through a Cost Segregation.  Your describing material participation and average stay less than 7 days sounds like you should be ok.  You definitely want to have the accurate time logs as well.  Check with your CPA and don't hesitate to reach out to another CPA that specializes in this area.  This is the last year to deduct 100% of the assets identified in a cost segregation so if you're not already pursuing that ... you're running out of time.