All Forum Posts by: Bonnie Griffin Kaake

@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. 

@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.