All Forum Posts by: Bonnie Griffin Kaake

Quote from @Jose Perez:

I am looking at a STR and a seasonal rental. Does this tax rule apply to seasonal (4-6 months), rentals as well?

thanks everyone for all your posts. I am learning a ton

Hi Jose, the property you are describing can most likely have a cost segregation study done on it. The best way to know is to get a no cost pre-analysis/estimate. There are some things you need to know. If you are occupying it at anytime, you may not be eligible if you don't abide by the length of time IRS lets you stay. If the average number of tenant occupancy days in a year is 7 days or less, it is a STR and if you are actively participating at least 100 hours per year, and more than any other person or company, you can consider this an active investment. If the average number of rental days in a year is more than 7 but less than 30, it is still a STR and is treated as such but it is not an active investment, unless you have Real Estate Professional status. STRs are depreciated over 39 years (regardless if they are active or passive properties). If the rental averages 30 days or more, it is a long-term rental property and gets depreciated over 27.5 years. Let me know if you have more questions.

@Ana Bejar  Have you leveraged cost segregation yet on all your properties? This could give you the cash-flow you need now. With those lower interest rates, you may not want to sell those properties but a 1031 exchange into a larger investment could give you more leverage. You didn't mention whether you are a real estate professional or not. Also, have you grouped your properties, active or passive, to be able to use losses on one against gains on another?

Another option you may not have considered is to work with a developer and build a multi-family property in a desirable area, leverage ECO construction benefits available ($5 to $15 per sq. ft.) and cost segregation and bring in a management company to manage the property once it is ready for occupancy. Hands off, more time for family, and, if you hold it with the intention to pass the property to your heirs, you never have to pay any of the tax benefits back. Your heirs inherit the property at its new market value and they can leverage whatever tax benefits are available at that time.

I am here if you have additional questions. Don't pay more in taxes than you need to, especially when there are options that you and your CPA/tax professional may not have considered. 

@Dan Engberson  It sounds like you are on the right track. Don't forget to add an adviser to your team to work with your CPA/tax professional to maximize the tax benefits available on each and every project. It costs you nothing to get the information that will save you many thousands of dollars. Some ground up construction projects and major renovations can save you as much as $5 to $15 per square foot when you consider the benefits of ECO construction methods. If you need more information, let me know. Here to help. 

Let's talk. 

@Alec Jacobs You said "My agent gave me first dibs". If you don't have a contract with that real estate agent, the agent works for the home seller, not you. This is especially true if the agent who represents the seller is at the same real estate agency as the agent you are working with. Yes, it can be an advantage to know when a new property comes on the market in a buyer's market. You are most likely paying that $20K extra because both agents work for the same company and have that early information. 

@Suganya Vinayakam There are many different opinions on the value of an ADU. Yes, they cost more to build and the ROI takes a long time. On the other hand, with the price of real estate today, it is difficult for our children to be able to afford their own homes. If the ADU is part of the parents' property, it can be a blessing. The adult child would not likely be able to afford to purchase in the neighborhood where the parents live.

For seniors, living in an ADU on their children's property sure beats a $7K/mo assisted living center and still gives them independence.

There is a lot of push-back coming from HOAs in today's real estate market regarding ADUs. This is for many reasons, some legitimate and others just excuses or racial profiling in a different form. Please don't shoot the messenger.

The severe housing shortage is increasing housing density from coast to coast. There are no easy solutions. What I am seeing is older residential units being purchased, eventually torn down and upscale apartments replacing them. In my opinion, it has already started, we are going to see single family residential zoning going away. Those who get on board earlier are going to be the winners of the future. I work with one client in CA, who is buying up small houses on bigger lots and adding ADUs quite successfully. 

Here is a simplified calculation that some may be interested in: ADU cost $200K, annual rental $21,600 ($1,800 per month) = almost 11% per year. Just try to get that interest rate from a bank.

My last post was for @Charlie Hardage, NOT
@Mark H. Porter

@Costin I. Just to be clear so you are using the right numbers as your basis. $100K purchase price minus $20K land value = $80K basis for depreciation. This is using a 80/20 ratio for building versus land if that is what the assessor's office lists for your property.

Of course, if you do any renovations on the property to get it ready for rent, those renovations may need to be capitalized (added to your basis) or might be expensed, depending on what is done. 

@Anx Carter Your safest bet is to have your CPA/tax professional determine the land value. They have to report that on the Federal Depreciation Schedule that is required from year to year on your property anyway. Let them take the risk of justifying their numbers to the IRS. This protects you if you are ever audited.

Your depreciation will actually start in the month and year it became "occupied" as a rental, based on the original purchase price, minus land, plus whatever capitalized items you did to prepare the property for rent.

@Steve Wright  You are making this more complex than you need to. Your basis in the property for which you can start depreciating once you put the property up for rent, is calculated like this:

What you paid for the property when you bought it, minus the land value, plus whatever capitalized improvements you made.

TurboTax is not going to cut it as you are moving forward. Get yourself a good real estate savvy CPA, EA or tax accountant. Depending on the size/value of your property, you may also want to consult a tax consultant regarding how to maximize your federal tax benefits and what can be expensed. You may be able to expense some items that are normally thought to need capitalization. Too many people try to save pennies with short-cuts (like using online tax programs) while they are walking over/not seeing hundreds and thousands of dollars they are missing or already missed. This is not just you but large investment companies as well.