All Forum Posts by: Bonnie Griffin Kaake

Quote from @Todd Goedeke:

@Bonnie Griffin Kaake I had prefaced earlier that I was referring to the ability to use cost segregation to offset W-2 earnings or self employment income for high income earners.

There is no advantage to using cost segregation for 6-7 figure earned income earners unless they can use bonus depreciation to offset income immediately.

Many high income earners like STRs for that exact reason. Often it is a spouse that puts in 100 hours in a year managing the STR (and more than anyone else) which makes it active rather than a passive investment. As an active investment with the material participation, the benefits of cost segregation and bonus can be taken against their W2 income. 

Quote from @Todd Goedeke:

@Bonnie Griffin Kaake understand that in regards to STVRs in order to have cost segregation and bonus depreciation apply one of the standards that must be met is material participation. A high income professional can have material participation in year one of the construction phase of a STVR but be unable to materially participate in the following years during the management and operations phase. Therefore although desiring to use the rest of bonus depreciation from the segregation study immediately they are unable to do so and must resort back to straight line depreciation.

What you are saying is not correct. Cost segregation and bonus depreciation are not dependent on material participation or active status. Passive properties can also use these benefits. And, losses from one passive property can be used to offset taxes on another passive property. Active properties, whether they be materially participating STR owners or RE Professional owned properties can also use the benefits of cost segregation and bonus depreciation. We have been doing this for over 20 years and have NEVER triggered an audit. The difference you may be thinking of is that STRs with material participation (active) can use the benefits of Cost Segregation and bonus depreciation against their W2 income. Whereas, it is difficult for a RE Professional to claim RE Professional/active if they have W2 earnings. 

@Priscilla Avery You are getting some good information here. What I can add is that you should strongly consider getting a no-cost estimate on cost segregation. Especially, if you anticipate owing taxes or purchase a property for at least $200K. These estimates usually give you about 6%-8% of your property's purchase price in cash-flow (taxes you do not have to pay up front) you can reinvest in ways that will give you far better returns than straight-line depreciation over 27.5 or 39 years.  

Quote from @Todd Goedeke:

@Connor Dahl you can receive the tax benefits of cost segregation and bonus depreciation thru active management . You can always switch the following year to being a passive investor and still continue to take straight depreciation on the types of property you did not take bonus depreciation on.

There is a misunderstanding here in this post. Whether you are an active or passive owner/investor in a property, STR or LTR, you are still most likely entitled to cost segregation and bonus depreciation. Using straight-line depreciation is NOT a benefit to an investor who plans to keep a property for at least 2 years. Yes, it is easier for a CPA/tax professional but not likely to your benefit taxwise. Think "time value of money". Do you want to be able to leverage that extra cash-flow now or wait 27.5 or 39 years? 

@Tim Bee This is not about capitalism or communism. It is about what is fair and in the best interests of all. We do not have to go to extremes and scare tactics in either direction. 

Quote from @Mel Adams:

Hey Cynthia - I used a second home loan and started it as a STR, but have transitioned to MTR. Been working fine for me and I personally prefer it over STR.

Like Joey said, less turnover, less wear on the property (travel nurses are hardly home and when they are they're sleeping lol), less replacing towels and pots and pans when STR guests inevitably ruin them, and still good returns if you're in a market with demand for MTRs. And you don't have to deal with STR regulations!

I'm still relatively new in the MTR space, but I'm noticing new travel nurses come in waves and it's cyclical, so depending on your market you could probably time it to where it's vacant when you want to spend time there. Happy to help if you have other questions.

and @Cariza Abinguna You may want to know that if you change from a STR to a MTR/LTR that you must have your CPA/tax professional do a 3115 Change of Accounting form to change from either 29.5 year depreciation schedule as a MTR/LTR to or from a 39 year depreciation schedule as a MTR/LTR. The last thing you want to do is cause an IRS audit. There are also limits to how much time you can spend in your "rental" to keep it as a rental property.

Keep in mind that MTRs are actually a subset of long-term rentals and get depreciated over 27.5 years. STRs get depreciated over 39 years. If you switch from one to the other, you will need your tax professional to do a 3115 Change of Accounting Method to stay IRS compliant. Or, if I do a cost segregation study for you, I include the 3115 in our study.  

You most likely can qualify for cost segregation studies on STRs, MTRs and LTRs. This usually generates about 25% to 35% of your purchase price plus improvements in tax benefits. And, no, you do not have to do the study in the first year of ownership. Although, it is best to do it sooner than later. It is usually most beneficial on properties purchased or built for $200K or more. Don't leave money on the table that you could be investing elsewhere. 

@Mitch Davidson Good post! I once lived in beautiful Ashville years ago. I have own commercial properties in years past. Now, I have a MTR and I also allow pets. I allowed one tenant (relative) to bring two big dogs...big mistake. One was too much of a puppy and damaged rugs and a Lazy Boy reclining loveseat. Now I only accept small pets and limit it to one. I never worry about having it rented. The unit is very close to three hospitals and a dialysis center. 

If you haven't done a cost segregation study on your rental, STR, MTR, or LTR, you may be leaving money with the US Treasury that you could be using elsewhere to re-invest. Estimates are free and give you enough information to decide if it is worth doing.

@Evan Kline Your observations about the differences between STRs and MTRs is good. Most STR tenants are not as challenging as the one you had though. If you are new to this STR to MTR switch or the other way around, be sure your CPA/tax professional is up-to-date with the regulations. Most are not. STRs are depreciated over 39 years and MTR are considered LTRs (residential) and are depreciated over 27.5 years. A quality engineering-based cost segregation study can not only get you back on track and update your tax filing, it can also keep a significant amount of money in your bank account that you would ordinarily pay in taxes. Yes, this works for condos and single family rental properties as well as small to large commercial properties.

@Curtis Lipsey The term MTR is a relatively new concept. From an IRS perspective, it is a long-term rental LTR since it is 30 days or more. If you start as a LTR/MTR and then want to change or get approval to change to a STR of less than 30 days, your tax professional will need to do a 3115 Change of Accounting form to change from a 27.5 depreciation schedule to a 39 year depreciation schedule.

Be sure to check any HOA regulations, most will not allow a STR even if the city or county approves it. You will also want to know if the HOA will allow a rental of the property at all. Some will only allow one family to rent/live in a property under single family zoning. If you were planning on creating more than one rental unit in a single family zoning area or under an HOA, you want to know this BEFORE you invest in a property.