STR for SFH: Does it make sense?

Question

Hello everyone,

I have some questions about STR (Short-Term Rentals) and would greatly appreciate your help. Let's consider the Seattle Metropolitan area; an SFH (Single Family Home) would cost around $1M, and the taxable income is $500k.

My questions are as follows:

1. How crazy is the idea of buying an SFH for STR with accelerated depreciation?
2. Would a Cost Segregation Study work well for an SFH?
3. If we purchase this year, would accelerated depreciation apply only to the remaining part of the year or for the entire year?
4. Is it nearly impossible to obtain a mortgage and operate an STR? Would I need to plan to live in the property for one year as my primary residence to qualify for such a mortgage?
5. Would a second home mortgage work for STR? For instance, Rocket Mortgage mentions that a property may qualify as a second home if rented for no more than 180 days in a calendar year. Could I do STR with a second home mortgage?
6. If I am the only one materially participating in STR, can we deduct STR depreciation from my spouse's income if we file taxes jointly?
7. If I opt for a two-unit house instead of an SFH, residing in one unit and using the other for STR, would accelerated depreciation apply only to one unit?

John Underwood · Answer

The 10% down second home loans are much more difficult to get now.You will likely need a 20% down investment property loan.Yes you can do a cost seg study for this property.I'd be more wary about finding a property that can cash flow and be allowed as a STR than tax breaks.

Michael Baum · Answer

Hey @Alex Yakubovich, everyone covered things pretty well, but I would get with a good CPA to go over these. You don't want to buy something based on our online advice and get stuck.Personally I am not sure you would profitable in Seattle. That would really depend on where you buy it. There are regs to watch for.Frankly I wouldn't buy there myself. There are always rumblings about housing availability and it being affordable. People think (wrongly) that STRs keep people from finding a place to live. STRs in most areas make up less than 5% of the housing but they consider it low hanging fruit.With that in mind, I wouldn't be surprised that the new city council would start to look at restricting STRs. There are a lot of new folks on the council and they would want to look like real change makers and this would be something that could resonate.

Alyson Gordon · Answer

If you do plan to go for the bonus depreciation then make sure you’re committed to the property for at least 5 years.There are still lenders doing 10% down second home loans as well as 15% investment - I just talked with one last week that served most of the country. I just recommend you choose the house/market carefully to prevent regret in the long term. You’re definitely thinking about this the right way :)

Brooklyn McCarty · Answer

First with a metro market you need to check the regulations and then also run your numbers and make sure it's profitable. Regional, drivable markets are where I like to invest. All of these questions work for SFH STR, yes you can cost seg, yes you can have a mortgage. I would highly recommend reading Bigger Pockets Book written by Avery Carl called Short Term Rental, Long Term Wealth. It will help guide you with all of this.

Alyson Gordon · Answer

There actually was a bill to extend it at 100% through 2025...this episode did a good job of breaking it down though I'm not sure if the final decision has been made yet. At 100% it makes the decision to keep your property at least 5 years that much more important to avoid recapture taxes. https://www.biggerpockets.com/blog/on-the-market-187 https://twitter.com/bhallcpa/status/1752871966808170841

Alex Yakubovich · Answer

Max bonus depreciation in this year is 60%, and in the next, it's 40%. So, do I understand correctly that it is possible to spread it over two years and then just use the property as a permanent residence? Or am I missing something?

Julio Gonzalez · Answer

@Alex Yakubovich Everyone pretty well covered the answers to your questions. Here are some additional FAQs on cost segregation to help you take a deeper dive. Feel free to reach out if you have any questions. https://www.biggerpockets.com/forums/51/topics/1063073-what-...

Sarah Kensinger · Answer

Most of your questions the answer could be yes, if everything was done correctly. First you would need to check and see if the area isn't restricted for STR, and the market is there to support a STR. From there you can purchase a property that fits the tax benefits and depreciation you're looking for. It would be beneficial for you to connect with @Christopher Price since he is in the Seattle area and knows the STR market well!