If that's not the case, though, you would be taking on significant risk of not being able to handle emergencies if when they occur, and all/most of your cashflow may be allocated to rebuilding reserves (in which case...is it really cashflowing?)

@Mark Vesu I think your decision depends on your asset allocation considering the rest of your portfolio.

You should specify the allocation of depreciation, income, responsibility for extra capital expenses, etc in an operating agreement or JV agreement. 

And on the same basis, shouldn't then the UBIT be allocated only to same "cash" investors?

How do you allocate the funds?

However I am trying to allocate most of those funds for a 2nd STR property at some point in the next year.

Painting after 5 years seems like something you are going to have to eat for the paint itself but you can charge what was allocated to the paint job to repair the holes and charge the tenant for that.  

Because I lived in the house for more than 5 years, the IRS rules seem to allow the 1031 exchange capital gain to disappear in the home sale capital gains exclusion ($250,000/$500,000), which is a nice loophole.Or would the IRS require me to allocate the original 1031 exchange basis between both properties? 

Should I allocate a bigger CapEx for STR?

If I were going to allocate millions to redeveloping a building that fell into the above category I would not want to do it in a C/D class area.