All Forum Posts by: Bonnie Griffin Kaake

@Frederick Lee  Welcome to Bigger Pockets. You can learn a lot on this site from experienced investors and other RE professionals. 

My theory is that educated investors and tax professionals make better decisions. There are too many great tax benefits for RE investors 

that are overlooked by tax professionals who do not have the time, knowledge or ability to be strategists for investors. 

@Rashid Khalil  and @Jon Fletcher Jenny Zhang has some great points above. Also, be sure to check the city, county and HOA to be sure a STR is allowed. Many do not.

In addition, keep in mind that just because you have or change to a STR, does not mean the depreciation can be used against your W2 income. It is not automatically an active investment. There is a lot of work required of an owner of a STR to qualify as materially participating in the management of that property. You have to put in at least 100 hours per year and more than anyone else who maintains that property. Next, you need to know that if you change from STR to LTR or vice versa, you will have to have your CPA/tax professional do a 3115 Change of Accounting form, which they hate doing, to switch from 39 year depreciation (STR) to 27.5 year (LTR). 

@Jeff Costa  and  @Basit Siddiqi   Basit is correct. You may have to upgrade your CPA/tax professional to one who is familiar with how cost seg studies are actually done and the other benefits available to investors. There is not much a CPA can do for you without a good engineering-based study. And, they are taking on the risk if the study is ever audited. 

Jeff, there is no way you will know whether "the juice is worth the squeeze" unless you get a quality engineering-based study estimate. The estimates are free and give you all the information you need to make an educated decision. Then, ask yourself what you would do with that extra cash-flow now?

You can usually expect about 6-8% of your purchase price in up-front cash-flow. Even with the change in Bonus from 100% to 80% for a purchase in 2023, you are still getting 100% of what is depreciable to reinvest. You will get 80% in 2023 and the balance of the 20% we can expedite over 5 or 15 years...that is 1/5th and/or 1/15th each year going forward. If you won the lottery, would you want that money up-front or wait for it year by year? Then again, with the lottery, you get less if you take it up front. With cost segregation, you get ALL of it up-front minus a relatively small fee for the study. Maybe you know this but the Treasury Department does not pay you interest on that money if you leave it with them over the 27.5 or 39 years. ;-) 

Start by stopping the panic. Cost segregation was viable before Bonus Depreciation even existed. And, before 100% Bonus was available under the Tax Cuts and Jobs Act (TCJA) in 2017, the bonus had already dropped to 40%. So, what does it really mean when we say that Bonus is dropping to 80% in 2023 and by 20% more each year after? 

The 100% Bonus began with properties acquired and placed in service after September 17, 2017 and ends on December 31st, 2022. In 2023 it will drop to 80% which means that in a cost segregation study, 80% of all items that qualify for depreciation in 5, 7 and 15 years can be depreciated in the first year (just like the 100% Bonus did) and the next 20% can be accelerated to the appropriate category: 5, 7 or 15 years. That means those remaining items will be divided by 5, 7 or 15 years and each year you will take that portion in depreciation over and above your structural/capitalized depreciation. You are NOT losing it, you are simply going to take a little longer to depreciate the entire balance of what you can accelerate. You are still getting all of it. Keep in mind that the majority of what can be accelerated with bonus is usually in the 5 year category anyway. 

I hope that lets a few investors sleep better at night.  

@Matthew Kirkwold You definitely need another estimate but that is a low purchase price and when you consider the fact that you cannot deduct land, it may not be viable for cost seg. Another option would be considering a 1031 exchange into a higher priced property when you are ready. 

@Bob Foglia Short-term rentals and mid-term rentals require more hands-on management by you or a company you hire. The long term rental seems best in my opinion, especially if you are moving out-of-state. 

If it is unfurnished, you will have a tenant before you know it. Of course, the property is in a reasonably decent area of town. There may be a market for a family moving here from another state for a furnished rental if their intent is to look for a place to purchase before they move their furniture. You will also have to consider the furnished rentals offered by places like the Marriott and others as competition. Just remember that tenants rarely take as good care of the furniture as you would. Your furniture could be at risk. 

If you are even considering STR, be sure to check zoning laws and your HOA now and frequently. These laws and regulations are changing with frequency.

P.S. Don't forget the tax benefit and extra cash-flow you may likely be entitled to with cost segregation once it is listed for rent. It can be significant. 

@Mike Lambert  and  @James J Young  James, pay close attention to what Mike said above. Then, remember that there are those of us who don't like the all inclusive resorts. We don't drink a lot and may have food allergies or are vegan and can't justify the incredibly high cost associated with all inclusive resorts. In addition, My husband and I speak Spanish and love to practice while in Mexico. We deliberately look for non-all inclusive resorts. 

A couple words of caution, as Mike said, even if we frequent travelers to Mexico go for a condo or Airbnb type property, we want luxury. Therefore, you will likely need MUCH more money than you think you will need to purchase and upgrade those properties. 

Think this through well and crunch the numbers with a savvy investor in MX. I wish you great success! 

@Amy Konopka I must be missing something. I am an expert in cost segregation and the tax and cash-flow benefits available to investors in commercial and residential real estate. As an owner/operator, you should not only be able to take advantage of cost segregation but also as an active investor without REPs status. I am curious, something does not sound right here...maybe I am missing something. Then again, it is not the majority of CPAs/tax professionals that understand the complexities behind cost segregation or other benefits available to investors. 

@Bob Wilson  I hope you know that you can do cost segregation studies on rental homes as well. If you haven't done this, you are likely leaving a LOT of money on the table that could be reinvested in new properties. I am available if you have additional questions. You may not need as much in a commercial loan as you think you do.