All Forum Posts by: Bonnie Griffin Kaake

@Daniel DeBruin I have encountered this terminology in HOA documents when doing cost segregation studies for the owners. "All leasing of Units shall be exclusively for single family use for not less than one-month periods." This usually means you cannot rent by the room or use for STRs. What you can do is own and lease the property to one family. The "...not less than one-month means you can rent to a nurse and spouse or someone in the middle of a move to a new home, or maybe a work from home professional and his/her family. The 30-days means a long-term rental whether you want to call it a mid-term rental or long-term rental. For tax purposes, it means a long-term rental from the IRS' and the HOA's perspective.

Quote from @Annette Hibbler:

"Leasing for gainful occupation, profession, trade or other non-residential use is not permitted." That statement alone would give me great pause. Seems like they saying you cannot run it as an income property at all. I would get some more clarification on that statement in writing.

Annette, You bring up a good point and it caught my eye as well. My interpretation is that they are referring to running a business out of the rental property which would likely cause an increase in traffic in and out of the property: hair salon, cooking school, insurance business, etc. I too would ask for more clarification.

@Kelly Cochran One thing you may be missing is that when you switch from STR to MTR or LTR, you will need to do a 3115 481a Change of Accounting Form to switch from 39 year depreciation schedule to a 27.5 depreciation schedule. Another concern is that most depreciation schedules we see from CPAs/tax professionals have done the STRs on a 27.5 year depreciation schedule instead of the IRS' required 39 year schedule for STRs. If this is the situation, you will find that you have taken too many deductions and will owe money to the IRS for under-reporting. Let me know if you or your CPA/tax pro have questions or I can help you defer this tax problem.

Quote from @Olivia Leija:

Hello Maria,

Were you successfull on your strategy with the purchases of rental property and utilizing 100 % bonus depreciation for 2022?  I had a similar tax strategy with short term rental as I am not a real estate professional.  I would need a CPA knowledgeable on bonus depreciation to amend my 2022 tax return 

Hi Olivia, You don't need to amend your return. A quality estimate for a cost segregation study will give you and your CPA/tax professional the information you need. The actual study will bring your depreciation schedule up-to-date. Let me know if I can help.

@Deborah R. If you are using a cost segregation company that provides an engineering-based study with inside and outside site reviews, you should have no worries about getting audited. We are the largest cost seg company in the country, only provide engineering-based studies and cover you with audit protection for our studies for as long as you own the property plus 3 years. That is how long the IRS can come back and audit your depreciation schedules. If you haven't done cost seg studies yet on your 2022 purchases, you are still entitled to get 100% Bonus Depreciation. Let me know if you have additional questions or I can be of assistance. 

@Nathaniel C. Be sure the company you choose does an engineering-based study which is the IRS’s preferred methodology and requires an on-site review of your property inside and out by a qualified professional. Check the fine print regarding audit protection. IRS audits are expensive and time consuming. 

@Oscar Ledezma Vazquez  You are correct, there are 7 ways. The easiest one to meet is #3, the 100 hours. I didn't want to make the post any longer. ;-)

Bonnie

Quote from @Brad Gibson:

Howdy everyone. I'm considering the purchase of a small home in Western Washington as a STR. One of the intriguing things about adding this home to our portfolio would be the potential tax benefits of doing a cost segregation study and receiving the 80% bonus depreciation this tax year. What I'm not clear on is approximately how much an average cost segregation study will show as available for that immediate depreciation.

Here are the numbers:

Sale Price $300,000 

Value of the land per the county assessor: $9.000.

Value of the structure including fixtures and contents: $291,000

Current tax bracket: 32%

The wifey and I both have high paying W-2 jobs and it would be nice to count that depreciation against her or my salary.  I know the rules for ensuring that the "loss" counts against W-2 income in a short term rental.

Is the standard estimate about 25% of the structure and contents what would be yielded as an immediate depreciation based upon a cost segregation study.  I'm also aware that in 2023, only 80% can be bonus depreciated.

Thanks in advance for the insight.

Hi Brad,

You may not qualify for "material participation" unless you do the majority of the management and day-to-day operations along with your W2 jobs. You would have to put in 100 hours per year and more than anyone else. Don't lose hope...most STR in good areas return very nice ROIs. The cost segregation benefits can be applied to the income from that STR property.

Be careful, you have to use this property as an investment and not a frequented vacation home for you or your family. A good RE savvy CPA will help keep you on the right side of the IRS in this situation. Another red flag is if the "vacation property" is in a different state and you try to claim it as being materially participated. You had better keep some meticulous records if you try that.

Another thing you mentioned is the assessor's land value. The land value is not the number you can use unless your CPA has a good reason for using it. In most situations, you need to use the percentage difference between the total assessed value and the land value to determine what percentage of your purchase price is land.

This stuff can get very complex and you don't want to guess. There is no cost to get a good engineering-based estimate. This will give you everything you need to make a good decision about how a cost seg study can help you. 

Quote from @William C.:

Hoping to gather some opinions. For SFH's that are LTR's (home values approx. $280k with land value backed out) what are the advantages and disadvantages to conducting a cost segregation study when bonus depreciation is unavailable? If the cost seg study will cost approx. $3k, is it worth the cost to bring that depreciation forward on an accelerated timeline. Cost seg in a bonus depreciation setting appears to be a no-brainer, but when bonus depreciation is not possible the advantages seem more murky. Thanks in advance for opinions here.

Hi Nathaniel, Your best best, rather than guessing, is to get a no-cost estimate for an engineering-based cost segregation study from a reputable company. That will give you all the information you need to decide how you can or cannot take advantage of cost segregation. There are too many moving variables that can effect the specific property...no two are alike.

As for purchasing the property in 2017 and offering it for rent in 2018, you will most likely qualify for 100% bonus depreciation. Any property over about $250K purchase price is usually viable. The sooner you get the study done the better. You are losing valuable time and money by waiting.

Quote from @Oscar Ledezma Vazquez:

Hi,

My wife and I both have a W2 job and purchased a vacation home in big bear, CA in late 2022 that is being used as a short term rental. I am looking for a CPA that knows the STR Loophole and can help us with offsetting our W2 income and is taking new clients. The CPA I been using isn't versed in real estate and isn't aware of the STR loophole.

i also wanted to consult with a CPA, If it's worth doing a cost segregation for our situation and what are the tax implications.

Thanks!

Hi Oscar,

RE savvy CPAs are not the norm. Doing thousands and thousands of cost segregation studies puts me in contact with these CPAs on a regular basis. Also, keep in mind that most CPAs do their work electronically now. This means that they do not have to be in your state to do a good job for you. They do need to be up-to-date on the nuances of your state taxes.

Short-Term (STR) are a unique niche of the tax laws and require more knowledge. This is not what I would call a "loop-hole" since it is in the tax code as a viable and legal depreciation method. It is just different. Most depreciation schedules are not being done correctly for STR and not catching the tax benefits available or are taking too much straight-line depreciation by putting them on 27.5 year schedules instead of 39 year depreciation schedules.

There are only two ways to off-set your W2 income with STRs. First, you have to actively participate ("material participation") in the management of the property more than any other entity/person, and at least 100 hours/per year. Second, you or your spouse have to qualify as a Real Estate Professional. If you spend more than 2 weeks or 10% of the actual rented days in the property for your personal use, there are additional issues to address with your CPA. If your "rental property" is in another state and you are claiming you materially participate in the management of this property, you may have difficulty convincing the IRS.

To maximize your tax benefits and cash-flow, it is recommended that you do a cost segregation study the first year you purchase the property. Some investors get cost seg estimates on their potential purchases before actually purchasing because the benefits can be very different even if the properties look the same or are at the same price.