short term rental loophole question about existing rentals when purchasing

[Berry Starnes]

Question: If you were to purchase a STR to close in November and the seller negotiated that the buyer must honor existing rentals with the current rental company/property management until January of 2025….

1- does this negate the short-term rental loophole for the 2024 if you aren’t managing it yourself for these months in 2024? I believe you just need to have it rented for 1 week in the year to use the bonus depreciation after the cost seg, correct? Does it matter that a property management company is doing this for the first few months? 

2-if you started to self-manage in January 2025 and managed for the remainder of the year would you not satisfy the 100 hr rule and participate more than any others? The bonus depreciation goes down to 40% next year, so I want to make sure I would still qualify for the 60% bonus depreciation by purchasing the property in 2024, renting it out, but then taking over the managing of it for the remainder of the life of it.  

Should I just negotiate to only honor the existing rentals until Mid December of 2024 and rent it out for the last few weeks myself?

Thanks!

[Mike Fingleton]

Hey, that's a great question and definitely a smart one to ask when you're diving into the details of STR (short-term rental) investments.

Let me break this down from both a tax and practical standpoint based on what I've seen with clients in similar situations. I had a client in Scottsdale last year who faced a similar dilemma—they were purchasing an STR in December, with existing rentals in place, and they wanted to take full advantage of bonus depreciation for that year.

So, for Question 1, the short answer is no, it doesn't necessarily negate the STR loophole for 2024 just because a property management company is running the show for a few months. You're right that you typically just need to rent it out for at least one week in the year to potentially qualify for that bonus depreciation after you do the cost segregation study. From what I've read recently in the Wall Street Journal, the IRS doesn't seem too picky about who manages the property initially.. what matters is that it's actively being rented out.

Now for Question 2, the key part to keep in mind is whether you hit that 100-hour rule in terms of participation for 2025. If you start self-managing in January and continue through the rest of the year, you should definitely be able to satisfy that requirement as long as you’re more involved than anyone else (including contractors and property managers). I've seen investors, including one who I worked with in Austin, comfortably meet the 100-hour rule once they took over management.

Funny enough, a friend of mine had a similar deal in Scottsdale a while back, where they had to honor existing rentals. They ended up renegotiating halfway through so they could take over management earlier and maximize their deductions. The flexibility worked out better for them in the long run.

Here's the thing though.. if you're really gunning for the 60% bonus depreciation in 2024 before it drops to 40%, you might want to negotiate with the seller to honor those existing rentals only until mid-December, like you mentioned, and take over self-management for the last few weeks of 2024. That way, you'll have control over the operation and might be able to squeeze in a few extra bookings to pad your numbers. From what I've heard, a lot of STR owners are doing the same thing to maximize their tax benefits.

If you need help working through this or setting up the STR management side of things, feel free to reach out. I've helped plenty of investors navigate these tricky tax and management questions, especially with properties in popular STR markets like Phoenix and Austin.

Good luck with the purchase—sounds like you’ve got a great opportunity on your hands!

 Jasper / Pat Aboukhaled

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