I’m thinking of purchasing a property and starting a short term rental business using Airbnb. I want to stick within an hour drive of my own primary residence.
The purchase price would be 250k+ In addition spending about 15k in furnishing the property.
I plan to be active in managing and operating the rental. My only other source of income is a w2 salary employment . I might have to take out taxable IRA early distribution as well to make this work.
I want to do cost segregation on the purchase property to max out the amount I can take for bonus depreciation and also take bonus/ full depreciation on assets I would purchase to furnish the property.
I don’t plan on executing all this until 2nd half of year.
my questions:
1. If I do this my understanding is I would be able to take all the first year bonus depreciation to offset my w2 wages and ira distribution that is taxable (but still pay10% penalty). Is this correct?
2. If let’s say 2023 or 2024 I convert my short term rental to long term rental what implications would I have when it comes to the depreciation aspect.
3. what other considerations am I missing here?
in short, it seems that starting out as short term rental is an advantage for me due to the huge depreciation amounts I would get in year 1 and the offset of the wages and ira tax. my marginal tax rate is 22%. I don’t qualify for real estate professional status.
One thing I try not to do, is to give financial advice. But I will share non-advisorial information here.
it seems that starting out as short term rental is an advantage for me due to the huge depreciation amounts I would get in year 1 and the offset of the wages and ira tax. my marginal tax rate is 22%
Looks to me like you're only looking at things from a short term tax perspective, and not long term overall. One key thing I want to point out here. Depreciation is *not* a permanent deduction. When you sell or otherwise dispose of the property in the future, all depreciation taken on the property must be recaptured and taxed in the year of the sale/disposition.
1. Recaptured depreciation is add to, and therefore increases your AGI for the tax year of sale.
2. There is the possibility that the amount of recaptured depreciation could increase your AGI enough to put you into the next higher tax bracket. This is more likely when you take bonus depreciation and then sell the asset before it would have been fully depreciated has you used "normal" class life depreciation. But it depends on the cost basis of such assets.
You can't rob Paul without paying Peter.
@zeldablack1979 wrote:1. If I do this my understanding is I would be able to take all the first year bonus depreciation to offset my w2 wages and ira distribution that is taxable (but still pay10% penalty). Is this correct?
You might be thinking of the special allowance for rental real estate activities and should note that there are income limitations (based on MAGI).
See https://www.irs.gov/instructions/i8582#en_US_2021_publink1000278149
If the rental scenario you are contemplating does not rise to the level of a trade or business, then any net loss you sustain will be subject to the passive activity loss rules (PALs).
If this is not a trade or business and you do not otherwise qualify for the special allowance (mentioned above), then your net losses will be suspended until they can be offset with passive income or you sell the property.