All Forum Posts by: Bonnie Griffin Kaake

@Aaron Lay From experience, I can tell you that you can also do cost segregation on the rental unit or portion of a property and not the one you are occupying. Be careful with the depreciation schedules for short-term rental versus medium-term rental. The STR is depreciated over 39 years and the medium-term 30-days or more is on a 39-year depreciation. If you change from one to the other, your CPA/tax professional will need to file a 3115 Change of Accounting Form. Of course, if 80% of the rental time is one or the other, use that associated depreciation calculation.

 @William Beck and @Maria Checchin Let me clarify...You are not alone...this is a common misunderstanding by both tax professionals and investors. STR must be depreciated over 39 years like a hotel. Think of it this way, even if a hotel/motel is owned by an investor and he/she has managers who run it on a daily basis, it must be depreciated over 39 years. Same for a STR. Long-term rentals of residential properties is over 27.5 years and are treated as such. Therefore, if you are going from a STR to LTR or the other way around, a 3115 Change of Accounting Form is needed to switch from one to the other.

You are right that if you are not providing significant services yourself, it is passive. It still needs to be depreciated over 39 years. Whether or not your tax professional is filing on a schedule C or not depends on whether you are materially participating in the on-going intensive management of the property. Schedule C and 39-year depreciation are mutually exclusive.  

The following excerpt from Accounting Today explains it well: 

Depreciation considerations of short-term rental ownership | Accounting Today

"The second issue that short-term rental owners need to consider is the correct depreciable life to utilize. Most owners assume their rental will be depreciated over 27.5 years as residential rental property. However, this is often not the case. According to the IRS, 27.5-year assets are reserved for assets in which 80% or more of the income is being generated from dwelling units. To get the 27.5-year life, these dwelling units cannot be utilized on a “transient basis.” The IRS traditionally defines “transient” as stays of 30 days or less. This means most short-term rentals would be considered nonresidential and have a depreciable life of 39 years, similar to a hotel."

As for whether to use Schedule C or E, see the clip below, it should help. You can also find more detailed information at 
Short-Term Rentals: Schedule E or C? – Tax Smart Real Estate Investors (taxsmartinvestors.com)

"To determine whether a short-term rental is reported on Schedule C or E, we ask: did the landlord provide services to the tenants that trip Sec. 1402?

If the answer is yes, report the short-term rental on Schedule C. If no, Schedule E."

Short-Term rentals must be depreciated over 39 years like a hotel/motel. They need to be filed on a Schedule C for taxes. 

Short-Term rentals can be active investments without being a RE Professional. Therefore, even if you have a W2 job, you can deduct the losses from cost segregation against that income. The owner or spouse must be actively materially participating in the management of the property at least 100 hours per year and more than any other person or entity. 

Long-Term residential rentals are depreciated over 27.5 years. They are usually less management intensive and unless you are a RE Professional (don't have to be a licensed RE agent) they are passive investments. 

If you switch from STR to LTR or from LTR to STR, your CPA/tax professional must file a 3115 change of accounting form with the IRS.

@Eli Madden I am in Colorado Metro Area and I work with CPA's that are up-to-date on real estate investing. It is true that you don't have to have a CPA in your own state because most work over the Internet nowadays. Nevertheless, sometimes you do just want to sit down in a meeting face-to-face. 

@Dainen VanGorkom The West Highlands area in Denver is booming with total renovations and scape and rebuilds. I would make your offer generous and contingent on certain due diligence items to your satisfaction. Maybe have a heart-to-heart with the Denver Building Department as soon as possible. It sounds like you would be improving the property either way. 

Don't forget that you would be very wise to look at a cost segregation estimate based on your purchase and what you intend to do with the property. There are some great tax benefits that you don't want to miss. 

@Travis Reed You would be well advised to take the advice of both @Julio Gonzalez and Chris Picciurro and work with an experienced engineering-based cost segregation company. Your time is better spent on doing what you do best. A quality cost segregation company will cover you if ever audited. If you get audited by doing it yourself, you will spend a lot more money defending yourself than the small cost of getting a professional study done on your $500K investment. I have done studies or hoped to do studies on properties that only had 5% of the purchase price that could be cost segregated and others where 90% could be depreciated. This is not as easy as it might appear, even for someone with your background. The tax considerations are complex and change from year-to-year and quarter-to-quarter. 

@Michael Hutchinson  Many people leverage cost segregation studies to get extra cash-flow to purchase additional properties. You can usually count on 6% to 8% of your purchase price in taxes you don't have to pay until you sell or postpone if you do a 1031 exchange. There are many creative ways to leverage your current property, it just takes exploring. Some do cost segregation studies and get loans on equity. If I can help, let me know. 

@Alex Jacobson  I agree with @Colleen F. in that you would be best off with commercial machines since they will hold up to the use in an apartment complex. Having these available will increase the attractiveness of your property as well. No tenant likes to go out in snow and ice to go to a laundromat. I am also in Colorado. I have done many site reviews and cost segregation studies on multi-family properties. The tenants I have had the opportunity to talk to, love this feature. They can help you with your taxes as well.