Buys hosue to get depreciation and remodel in following year

[Ryan Lamanna]

We found a house we’d like to purchase to rent but we’re not confident that we could get top rent in its current condition. Regardless it could be ready and available to rent by year end. Can we cost seg and take bonus depreciation in 2023 and do an extensive remodel in 2024 if it doesn’t rent without jeopardizing ability to depreciate in 2023?

[Account Closed]

This is only possible with the "short term rental loophole". 

For individuals navigating the demands of a w2 job and grappling with substantial tax obligations, exploring the potential of short-term rentals unveils a compelling avenue to mitigate tax burdens. A noteworthy tax loophole, particularly beneficial for those yet to attain Real Estate Professional Status, offers a strategic approach to potentially offsetting OR EVEN ELIMINATING the impact of high job-related taxes.

At its core, this tax loophole revolves around discerning between passive and non-passive activities within the realm of rentals. Those whose rental pursuits fall under the non-passive umbrella may find solace in this tax-saving provision. The federal tax code establishes stringent criteria, including guest stays limited to seven days on average and the provision of basic hotel-like services, to qualify for this advantageous tax treatment.

Understanding the mechanics of the short-term rental tax loophole is imperative. Section 469 of the federal tax code initially classified all rental properties as passive. However, an essential exception emerged in the 1990s, allowing specific rental income to be categorized as non-passive. To leverage this benefit, prospective property owners must engage in short-term rentals and provide substantial services to guests, such as daily cleaning, meal provisions, or transportation services.

Additionally, navigating a material participation test becomes crucial. This entails dedicating a significant amount of time and effort to the short-term rental business. Meeting the test criteria, which includes working over 500 hours in the business, overseeing all necessary tasks personally, or substantially participating alongside a partner, facilitates the strategic utilization of the short-term rental tax loophole. For individuals tethered to a W-2 job, this presents an opportunity to judiciously manage their tax liabilities while exploring supplemental income avenues.