All Forum Posts by: Bonnie Griffin Kaake

@Aron Rodriguez That is a beautiful area! Years ago I lived in Ashville about 6 blocks from the Blue Ridge Parkway. I only wish I had invested in RE back then! 

Be sure to do cost segregation studies on all your properties as soon as possible. The tax benefits are incredible and, for many investors, cost segs allow them to leverage the extra cash-benefits in additional properties. Estimates/pre-analyses cost you nothing! 

@Armen Ter Avetisyan  You are not alone in asking these questions. Many CPAs/tax professionals are still struggling with the same questions. There are situations, depending on your tax rate, where you can take up to $25K in losses against your W2, even if you don't materially participate or have to be a RE professional.

And, as long as you are using the STR for personal use 14 days or less per year, you can still use cost segregation to lower your taxes and increase your cash-flow.

STR tax issues are complex and you will want a very qualified cost seg company working with your CPA/tax professional to maximize your benefits. FYI, I just finished doing a 1-hour Continuing Education Class (CPE) last week on STRs to 253 CPAs.

1. Yes
2. You can do a cost segregation study on your property and take bonus depreciation depending on the year you purchased and put it in service. You do not have to have material participation to do that. But, unless you are materially participating more than anyone else or a real estate professional, it will be passive losses that can only be used against passive gains. 
3. Yes
4. Most do not use or focus on using local companies. The most experienced companies are national and are very competitively priced. What is the cost of an audit? The difference in price (if any) between a quality engineering-based study with audit protection and the cheapest, is not worth the risk. 

Free: ask questions and get estimates. Understanding what you are getting for the cost of the study is well worth the small amount of time you need to invest.   

 If you are getting a study done by the "desktop" method, that is not a "quality" cost segregation study which requires an on-site inside and outside property review. You can get an engineering-based study for about the same price and it will be done in the USA with audit defense at no extra cost. 

@Spencer Dixon  Yes, Spencer, you can do cost segregation and accelerate that depreciation going forward, most likely as a RE Professional. And, the best part is that if you started renting the property between late 2017 and Dec. 2022, you will get 100% of that depreciation up-front/first year the study is done. You will need the change of accounting form 3115 481a completed to change from straight-line to accelerated but we do that for you and your CPA/tax professional. 

On the other issue, local for cost seg studies, it may not be in your best interests. The most experienced companies that do "quality" engineering-based studies work nationally, not locally. 

@Michael Mackney  There are additional considerations regarding doing the cost seg for 2022 versus 2023. Depending on your tax rate, if the paper loss created by a cost segregation study is $25K or less, you may take it against your active income as well for 2022. And, in that situation, you do not have to be a Real Estate Professional or materially participating. Your best option is to get the no-cost estimate and then discuss the results and how it fits your specific tax situation with a knowledgeable CPA/tax professional. This makes your decision easier and more clearly in your best interests. 

@Kevin Kittilsen  You cannot get a cost segregation done until you have listed the property for rent or have it occupied with a tenant. The benefits involved with cost segregation are significant and should never be overlooked. Estimates cost you nothing and the studies prepare you for additional tax benefits during your ownership years. A good engineering-based study makes doing your taxes easier for your tax professional as well. 

Hi Michael, I can answer most all your questions and more. I keep CPAs updated on this complex area of tax laws and regulations and did an hour Continuing Professional Education (CPE) class on STRs for 253 CPAs just last week. 

First, your long-term rental was likely depreciated over 27.5 years if it is a residential rental. To change it into a STR, you will need your CPA/tax professional to do a 3115 change of accounting form to file with your taxes because all STRs must be done on 39-year depreciation. If you haven't done your 2022 taxes yet, I would recommend you do a cost segregation study on your current property for 2022 before you make the change to a STR. That will give you 100% bonus depreciation. If you can't use all of it for 2022, you can always roll it forward to following years.

Keep in mind that in order to qualify for material depreciation on your STR, your average rental number of days has to be 7 days or less. And, you must put in more hours than anyone else for managing the property. Regardless whether you meet the average of 7 days or are over that, a STR is still depreciated over 39 years. A good cost segregation study will bring your taxes up-to-date and make it easier on your tax pro. 

There are a lot more considerations for your CPA/tax professional but that would be getting too far into the weeds for your current questions. I am here if you need more guidance.  

Hi Bhushan, on Wednesday of this week I did a Continuing Professional Education (CPE) class for a group of 253 CPAs on STRs. We are finding that the majority of depreciation schedules are being done incorrectly on these. The options and limitations on STRs and strategy for maximizing the ROI while minimizing the tax liability and audit risk is complex. If you need guidance, I am here to help.

@January Johnson My reference is to Federal taxation. Each state has different rules and regulations for their state taxes. Some states don't allow bonus depreciation. An investor's CPA/tax professional will know how to apply the benefits.