All Forum Posts by: Bonnie Griffin Kaake

@Swathi Vangari and @Josh Lifton  There are companies out there that do true Engineering-based Cost Segregation Studies that will let you sleep at night. In addition, they are reasonably priced and will pass an audit with no extra cost to you. If you haven't done a study, you are likely leaving a considerable amount of money on the table that could be getting leveraged into another property. As the IRS is gearing up with additional auditors, the low hanging fruit are depreciation schedules. The cost of an audit and lost opportunity for extra cash-flow, will cost you much more than the IRSs preferred methodology for a cost seg study. 

@Franky Davis  Not all CPAs or accountants are aware or familiar with these specialty areas of tax and cash-flow benefits for RE investors. If you want moe information, let me know. I am here to help. 

@Josh Lifton   There are several things to consider, as Julio Gonzalez mentioned above. Also, you will want to consider what you paid for the property and if it is enough to warrant a study. Then, you need to know that the year you turned it into a rental is the year your able to do a cost segregation study. Your best bet is to get a quality engineering-based study estimate before deciding if it is going to be of value based on your specific tax situation. One more thing, you need to get it done for your 2022 tax filing so you don't incur an extra charge for the IRS form 3115 to Change from Straight-line to expedited depreciation. 

@Bob Foglia  Yes, you need egress windows in any basement room used as a bedroom. To not put them in is a liability issue that could cost you much more than putting in a window that meets code. I recently had 3 done on basement rentals. This is not just an international building code issue. I am in Jefferson County, CO and each county has codes as well and they can be quite different from county to county. What passed as an OK basement window for a bedroom years ago, will not today. The building inspectors will not pass a remodel for occupancy if this is not done. CYA and get it done on any below grade room that could be used as a bedroom. It will also help your house sell down the road. 

@Mike Bend and @Michael Sylver Sounds like you both are thinking correctly and learning. Again, I emphasize the need to document on a daily basis what your wives are doing. If you continue to invest in real estate, you may need to upgrade your tax professional. Since the income on your STR is active and you are in high -income brackets, you would likely benefit from a "quality" cost segregation study. Your wives sound like they are putting in the required number of hours for the short-term rentals to be an active investment so that it can offset your W2 income. If your wife is or can put in 750 hours between all your investment properties, talk to your CPA about getting her qualified as a "Real Estate Professional". Then, group your investment properties so that all of them can be active investments and income and losses (from cost segregation studies which create excess paper losses) can be used to off-set your W2 income. Let me know if I can be of service now or later.

@Jerry W.  Are you aware that you can likely do a cost segregation study on those 1031 properties as well? And, you may have been able to expense some of the improvements that were capitalized in the past on your relinquished properties. If I can help you or your CPA/tax professional, let me know. 

@Jenifer Rezende Sullivan  There are special considerations and tax benefits for owners of STRs that you need to know. The majority of CPAs do not have the time or experience with commercial or residential rentals. Those that do are in great demand. There is a high demand for CPAs/tax professionals and not enough students are choosing that profession. Some of us who work in the lesser-known areas of RE investment provide these specialty services to CPAs and their clients.  We teach at no-cost Continuing Professional Education classes to CPAs and offer webinars to educate groups of investors as well. 

The sooner you can get a pre-analysis/estimate for your STR properties, the better. If you purchased them between 2Sept, 2017 and Dec. 31, 2022, you have the extra benefit of 100% Bonus Depreciation. It sure beats waiting 39 years to depreciate the entire STR. You could reinvest the money that you don't have to pay in taxes rather than letting it sit in the Treasury where you earn no interest on it. And remember that there is still Bonus Depreciation for properties purchased after 2022 but it decreases each year by 20%. You can still accelerate all the depreciation that is identified with a cost segregation study, some with Bonus and the rest will take a little longer to do ...5-15 years.

Quote from @Keith Gilad:

Hello, I recently sold our long term rental property in Los Angeles and then purchased another property in North Carolina through a 1031 exchange. Am i able to turn the new property into an Airbnb/VRBO without being penalized? After the closing we rented the property for about 7 months, now we want to explore short term vacation rental options but still want to follow all the rules within the exchange. Is this possible and are there any rules we need to be aware of?

Keith, A 1031 exchange is not the problem it once was. You can exchange into quite different properties now. Your challenge is going to be going from long term rental on a property you own to short-term or vice versa. You will need an IRS Change of Accounting Form 3115. A long-term residential rental is depreciated over 27.5 years whereas a short-term rental must be depreciated over 39 years. CPAs/tax professionals strongly dislike doing these forms. My corporate team and I provide these as part of our cost segregation studies when they are needed. BTW, they are needed for cost segregation studies done on properties that have had at least one tax filing as well. Let me know if you have additional questions or I can be of help.

@Mike Bend There are too many unanswered questions in your situation. You will want to talk to a CPA/tax professional who is familiar with rental real estate and STRs in particular. There are only about 260 days/2,080 working hours in a year, not excluding holidays. meticulous records must be kept every day. It will be difficult for the IRS to believe that 750 hours are being spent on one STR. The property ownership may also be a tax/legal question. Do you file as individuals or jointly? Are you actually married or only living together? What state do you live in? To make a STR an active investment has nothing to do with being a "RE Professional". An owner only needs 100 hours or more than any other person/company, in actively managing the STR for the income and losses to be active.

On the other hand, if she only works in the real estate profession and qualifies as a RE Professional, her investment properties would be active, but she would still need to materially participate in each property each year to keep it active or group her properties and spend at least 750 hours total a year in the real estate profession. 

Quote from @Michael Sylver:

I've been reading threads... but getting confused. As a high W2 earner I am looking to apply the bonus depreciation in 2023 (my spouse will meet the 100 hour requirement). I'm considering buying 1 STR and 1 LTR. The tax benefit is not the primary driver for my purchase, however it certainly is a factor in the decision if I can deduct 80% depreciation in year 1. If so I may even consider 1 purchase 2023 and then the second in 2024 for the tax benefits.

I'm in process of switching CPA or I'd be asking him to validate.

Thanks all

Hi Michael, You sound a bit confused. The 100 hours applies to a STR to make make  the income and losses active. It means you must spend at least 100 hours or more, more than anyone else. This is called material participation. Material participation is needed to be able to be able to deduct the losses of accelerated depreciation and Bonus against your W2 income. Otherwise, the depreciation can only be used against the income from that property or other passive investments. The long-term rentals are passive unless you are a RE Professional. Having a W2 i,s usually a red flag for the IRS to question if you are actually spending 750 hours or more on your real estate investments. Documentation, documentation, documentation is absolutely critical if you expect to pass an audit.