Bonus Depreciation, Short-Term Rentals, and Smart Tax Moves

In this Q&A episode, Thomas Castelli and Ryan Carriere, CPA from the Tax Smart REI podcast, dive into real investor questions on depreciation strategies, short-term rentals, and tax planning decisions. Here are the highlights:

Condo vs. Single-Family Homes for Bonus Depreciation

Question: Is it better to buy a condo or single-family home for bonus depreciation?

• Condos often allow a larger percentage of the purchase price to be allocated to building components eligible for bonus depreciation since there’s typically no land ownership involved.
• Single-family homes can sometimes outperform if they include significant land improvements like pools, which qualify for bonus depreciation.
• Bottom line: Results vary. A cost segregation estimate can help compare properties before purchase.

Improvements on Older Properties and Bonus Depreciation

Question: If I improve a rental acquired in 2008, can I take 100% bonus depreciation in 2025?

• The original property (placed in service in 2008) isn’t eligible for bonus depreciation.
• However, new improvements made in 2025 (flooring, cabinets, vanities, etc.) may qualify for 100% bonus depreciation if they fall into the 5- or 15-year property category.
• Always confirm specifics with a CPA or cost segregation specialist.

Converting a Primary Residence into a Short-Term Rental

Question: If I convert a former primary home into a short-term rental in 2025, can I still take bonus depreciation?

• Yes, but the property is only eligible for 40% bonus depreciation because it was acquired before January 19, 2025, under prior rules.
• IRS guidelines clearly outline how to treat former primary residences when converted into business use.

Selling a Lake House vs. 1031 Exchange into Multifamily

Question: Should I sell my underperforming lake house and 1031 into a multifamily property for better ROI and tax benefits?

• If the lake house qualifies as an investment property (not a personal residence), a 1031 exchange is possible.
• Selling and reinvesting in a multi-unit property could create better cash flow and help qualify for Real Estate Professional Status (REPS).
• However, personal enjoyment of the lake house should be factored into the decision. It’s not just about ROI.

Catching Up Missed Depreciation with Form 3115

Question: My husband never depreciated a rental for 10 years. Can we fix this with Form 3115 using TurboTax?

• Yes, Form 3115 allows you to catch up missed depreciation with a §481(a) adjustment.
• But the form is extremely complex; even seasoned CPAs spend hours on it.
• DIY software like TurboTax likely won’t handle this properly. Working with a tax professional is strongly recommended.

Local vs. Remote Short-Term Rentals

Question: Do investors usually buy short-term rentals locally or remotely, and how do they prove material participation?

• Both strategies work. Many investors buy remotely, especially if their local market isn’t viable.
• Material participation doesn’t require proximity, but you’ll likely need to visit the property, especially in the first year, to set it up and establish involvement.
• Consider ease of travel when choosing a market.

Tax Benefits of ADUs Used as Short-Term Rentals

Question: If I convert a detached garage ADU into a short-term rental, what tax benefits apply?

• IRS rules allow parts of a primary residence used exclusively as a short-term rental to be treated as rental property.
• This means depreciation, expense deductions, and potentially bonus depreciation are available.
• Just be careful with personal or mixed use, which can affect eligibility.

Bonus Depreciation and Converting to a Primary Residence

Question: If I buy a home, use it as a short-term rental with bonus depreciation, then make it my primary residence the next year, is there recapture?

• No immediate recapture occurs when converting from rental to primary residence.
• Depreciation is only recaptured when the property is sold.
• However, be cautious. The IRS may scrutinize intent if it appears the primary goal was claiming depreciation before moving in.

Final Takeaway

This episode emphasized a recurring theme: “it depends.” Every tax situation is nuanced, and while condos, improvements, or 1031 exchanges may seem straightforward, the right choice depends on your goals, property details, and timing.

For personalized guidance, consult a CPA or cost segregation specialist before making decisions that can have long-term tax implications.

Book a free discovery call with our team.

Disclaimer: This podcast summary was generated from the transcript and may contain some errors or miss key points from the audio recording. Any mention of third-party vendors, products, or services does not constitute an endorsement or recommendation. You should conduct your own due diligence before engaging with any vendor.