Prorated depreciation for str

[Jonathan Cooper]

Purchased a STR in February. Worked on the remodel until the end of August. Once the cost segregation study is complete, will I be able to take a full year of depreciation or only a prorated 4 months? I have seen a tax attorney on YouTube specifically saying you can take a full year of depreciation even if you buy in December but all I see in the IRS publications indicates that you have to prorate based upon the time it was available to rent.

is there a rule I am missing?  

Thanks for your time.

[Collin Hays]

Super question, and welcome to the forum. Hopefully a CPA here can comment. 

[Andrew Steffens]

Do you have a CPA currently?  That is a tricky question, I would only rely on a CPA for the answer

[Jonathan Cooper]

I do, but he is not experienced with short term rentals and cost segregation studies.  His initial opinion is that it has to be prorated but that is contrary to what I have heard on YouTube. 

[Garrett Brown]

Welcome to the forums! 

I see you said you have a CPA, which would have been my first response to ask. Some companies specialize in cost segregation, which may be worth exploring or directing this question. BiggerPockets also has a Tax Pro Finder that may be able to help find  someone if not! https://www.biggerpockets.com/business/finder/tax-and-financ...

[Malik Javed]

Quote from @Jonathan Cooper:

Purchased a STR in February. Worked on the remodel until the end of August. Once the cost segregation study is complete, will I be able to take a full year of depreciation or only a prorated 4 months? I have seen a tax attorney on YouTube specifically saying you can take a full year of depreciation even if you buy in December but all I see in the IRS publications indicates that you have to prorate based upon the time it was available to rent.

is there a rule I am missing?  

Thanks for your time.

@Jonathan Cooper - 
Sounds like a short-tax year is involved. Depending on when the STR was placed-into-service, depreciation will be prorated based on the amount of months remaining the tax year. Definitely talk to your CPA and feel free to reach out for more insights.

[Bill B.]

And obviously yoru cpa would have told you to NEVER use a cost seg to make yoru income zero, that would be a waste.  

Ps. Also remember, you aren’t creating deductions. In the future you will have smaller deductions each year than you would have had if you didn’t do this. AND, if you ever sell without a 1031 before you die you’ll probably end up paying higher taxes in the end. It’s an interest free loan but it’s not a gift unless you die in less than 27 years while still owning it or it’s 1031 exchanged property. 

Pps. Please switch to a different CPA if you are already beyond your current CPA’s experience level. The new CPA will probably be similarly priced and definately pay for themselves. You’re basically paying a music teacher that isn’t as good as you. 

[Basit Siddiqi]

The good thing about bonus depreciation is that you can take the amount eligible for bonus depreciation in that given year.

For example - if you place a $50,000 item under 5 Years MACRS on December 31st, it would be eligible for bonus depreciation which as of right is now 60%. The remaining 40% has to be prorated.

If you are not working with an accountant focused on real estate and you are focused on real estate, it may not be a good fit.

[Jonathan Cooper]

Quote from @Basit Siddiqi:

The good thing about bonus depreciation is that you can take the amount eligible for bonus depreciation in that given year.

For example - if you place a $50,000 item under 5 Years MACRS on December 31st, it would be eligible for bonus depreciation which as of right is now 60%. The remaining 40% has to be prorated.

If you are not working with an accountant focused on real estate and you are focused on real estate, it may not be a good fit.

 Thank you.

[Andy Lanyi]

@Jonathan Cooper

The regular depreciation over 27.5 years will be prorated. If doing a cost segregation that can all be taken at once. That is what I have done in the last three properties I have done, with no problems.

[Sean O'Keefe]

Quote from @Andy Lanyi:

@Jonathan Cooper

The regular depreciation over 27.5 years will be prorated. If doing a cost segregation that can all be taken at once. That is what I have done in the last three properties I have done, with no problems.

STR standard depreciation is 39 years @Andy Lanyi

@Jonathan Cooper even if you take Bonus Depreciation as @Basit Siddiqi highlighted the remainder 40% will be prorated using the Half-year convention or Mid-quarter convention used in line with what you read in IRS Pub 946

[Bill Hampton]

@Jonathan Cooper

@Jonathan Cooper

If your current accountant is not familiar short term rentals and/or cost segregations, it's time to get a new accountant.

I recommend finding an accountant who specializes in real estate taxation and tax planning.

You may want to consider working with your accountant remotely to expand your options.

I would also recommend looking for a accountant willing to work with you throughout the year. You want an accountant who can help you strategize and who is responsive when you want to know the consequences of the financial decisions you are making throughout the year.

There are over 20 real estate accountants on this site. Reach out to a few and see who you like.

You can also ask members of your local real estate investors association for real estate accountant recommendations.

Good luck.

[Ashish Acharya]

For short-term rentals (STR), the IRS requires you to prorate NORMAL depreciation based on the time the property is available for rent, not when you purchased it. In your case, since the property was under remodeling until the end of August, you would start depreciation when it was available for use as a rental, likely in September. So, you would only be able to take about four months of depreciation for this year.

However, the bonus depreciation is not prorated.

[Account Closed]

Hey Jonathan, 

it sounds like its time for a new accountant. I cant tell you how many messes we have had to untangle from non-real estate-focused accountants. Yes, you can use the entire allotted bonus depreciation amount in the year you take it, even if its December 30th. Right now, its 60%. 

[Jonathan Cooper]

Quote from @Ashish Acharya:

For short-term rentals (STR), the IRS requires you to prorate NORMAL depreciation based on the time the property is available for rent, not when you purchased it. In your case, since the property was under remodeling until the end of August, you would start depreciation when it was available for use as a rental, likely in September. So, you would only be able to take about four months of depreciation for this year.

However, the bonus depreciation is not prorated.

 "However, the bonus depreciation is not prorated" is a very clear answer.  Does the tax code say this directly or is this inferred from the mechanics of the bonus depreciation calculation?

[January Johnson]

@Yonah Weiss is the Cost Seg King.  Definitely give him a shout.  I think he has a free consultation as well.

[Yonah Weiss]

Quote from @January Johnson:

@Yonah Weiss is the Cost Seg King.  Definitely give him a shout.  I think he has a free consultation as well.

 Thanks so much for the mention! I should check here more often...🙄