Accelerated bonus depreciation for short term rental then switch to long term rental

[Roger Pearce]

I'm looking for some expertise from STR landlords or accountants. I came into an extra $200K this year! The problem is it's going to be taxed as W-2 earnings. I only have long-term rentals and a full-time job so I come nowhere close to qualifying as a real estate professional and all my losses are passive. I realized the other day that maybe I could buy a house to use as an STR, spend 100 hours fixing it up and staging it, and perhaps manage to get a few guests before the end of the year. Then I could accelerate bonus depreciate (at 80% for 2023) hopefully about 1/4 of the amount I pay for the house. A $450K house should give me about $112K of depreciation for this year, which I can deduct from the extra $200K of active income I made this year. At a 35% tax bracket, that should save me about $39K in taxes. If I put down $150K on this house my mortgage payments on my $300K loan would be about $38K. This means that even if no one rents my house for the whole of next year the only money I will be out of pocket would be Insurance, taxes, and whatever it costs me to furnish the place.

Am I correct? I know my numbers are ballpark, but should I assume differently? Is it OK that the house will only be available as an STR for probably less than a month of 2023 and still claim accelerated bonus depreciation?

Part 2...

How long does it need to be a STR in order to legitimately claim accelerated bonus depreciation? Can I switch it to a furnished long term rental January 1st and not owe the IRS the money I saved on taxes in 2023?

Thanks in advance for your help and advice.

Roger

[JD Martin]

Part 1: yes, even if it's only part of the year you can do a cost segregation and get accelerated depreciation. 

Part 2: I believe you will treat it as a new acquisition and start the depreciation schedule over at 27.5 but your basis will be whatever is left over from what you've already depreciated. IE using your example lets say your 450k house is 90/10 building/land basis, which makes your basis 405. You do a cost segregation study and get 140k in bonus depreciation at 80% = 112k, which you take off your basis making it 293k over 39.5 years ($7240). When you rewrite your schedules after turning it into a LTR you're going to start your basis at $285580. 

You definitely want to discuss all of this with a CPA who specializes in real estate. I think you might be on some shaky ground if you tried this with a month left in 2023 and then claimed to turn it around to a LTR on 1/1/24. 

The other thing is make sure you really want to do the cost seg & accelerated depreciation. If you sell, you'll owe all of that tax back as ordinary income. The general best use of deferred taxes (like depreciation) is defer till you die, and clear the slate with your heirs. That can be a hindrance but it's also a pretty big benefit.