Converting a Duplex into a single-family + ADU in Denver

[Matthew Van Koevering]

Hello!

I am not a real estate professional but I recently learned that I can still use tax deductions generated from an STR to offset my taxable W2 income by showing material participation in the STR. The issue is that Denver only allows STRs in primary residences. An obvious solution would be to have a single-family home with an ADU but these are rarely for sale, they're really expensive, and with construction costs as high as they are, I'm not eager to build one myself.

There are, however, a few more duplexes/multi-family homes that are reasonably priced, but even if I'm living in one unit, I cannot rent the others as STRs since they won't be considered my primary residences. I can of course rent them as LTRs but this won't give me any tax deductions toward my W2 income until I become a real estate professional, which likely isn't any time soon.

Question for the community:
Is there a way to convert a duplex into a single-family home with an ADU, e.g. one unit becomes primary residence and the other the ADU?

By doing this conversion, living in one unit and managing the other unit (ADU) as a STR, I'll be able to show material participation and use the tax deductions generated from the ADU to offset both the rental income and my W2 income. I think :)