344. Is a Condo or Single-Family Home Better for Maximizing Bonus Depreciation? (And More FAQ)

Summary

Tax Smart Real Estate Investors Podcast

Episode 344: Is a Condo or Single-Family Home Better for Maximizing Bonus Depreciation? (And More FAQ)

Release Date: September 9, 2025
Host: Hall CPA (Tom & Ryan)

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Episode Overview

In this Q&A episode, Tom and Ryan take questions from their Tax Smart Investors Facebook group, covering a range of hot topics on real estate investment tax strategies. The main focus is on maximizing bonus depreciation, nuances between condos and single-family homes, handling improvements, short-term rentals, 1031 exchanges, and complex form filings such as Form 3115. The hosts use real case questions to break down tax rules and pitfalls, drawing on their expertise to provide actionable advice for both seasoned and new investors.

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Key Discussion Points and Insights

1. Condo vs. Single-Family Home for Bonus Depreciation

Timestamp: 02:31

• Question: Is it better to buy a condo or a single-family/townhome for maximizing bonus depreciation, given issues with land allocation?
• Ryan:
  • "You can't depreciate the whole amount either way... even with a condo property it is still something that the IRS expects that you would split out some portion of your purchase to the value that the condo is sitting underneath." (03:00)
  • Generally, condos allow a higher percentage of the purchase price to be allocated to depreciable, bonus-eligible property since there’s typically less land involved.
  • However, single-family homes with significant land improvements (like a pool, which is a 15-year improvement) may still generate more bonus depreciation.
  • Takeaway: Always get a cost segregation study or projection for an apples-to-apples comparison between specific properties.

Memorable Quote:

"In general, it is generally going to be a condo, but always it depends." – Ryan (04:41)

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2. Bonus Depreciation on Property Improvements

Timestamp: 05:33

• Question: Can you claim 100% bonus depreciation on improvements (like flooring, cabinets) made in 2025 on a rental acquired in 2008?
• Ryan:
  • Improvements placed in service in 2025 are considered new assets and can generally be depreciated using bonus depreciation if they qualify (typically 5, 7, or 15-year property).
  • The original acquisition date of the property affects the property’s bonus depreciation only for that property, not for new qualifying improvements.
  • Consult a cost segregation specialist or CPA for precise qualification.

Memorable Quote:

“Just the improvement portion itself... yes, that is a high likelihood that, yes, that would be a hundred percent eligible for bonus depreciation.” – Ryan (06:44)

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3. Bonus Depreciation on Converted Primary Residence

Timestamp: 07:09

• Question: If you convert your primary residence (bought 2023) to a rental in 2025, what level of bonus depreciation is available?
• Tom:
  • You can do a cost seg and claim 40% bonus depreciation (since the property was acquired before the latest tax law deadline).
  • IRS regulations are clear on treating former primary residences as business-use properties for depreciation purposes.

Memorable Quote:

“Kind of just to draw some contrast... this property was acquired in 2023, it is eligible for bonus depreciation. The question is, how much is it eligible for? And it would be 40%.” – Tom (07:55)

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4. 1031 Exchange: Swapping Lake House for Multifamily

Timestamp: 08:49

• Question: Should I sell a vacation lake house that’s not cash flowing and buy a multifamily via a 1031 exchange to improve ROI and pursue real estate professional status (REPS)?
• Tom:
  • To qualify for a 1031 exchange, the property must not be used as a personal residence (i.e., not used by the owner >14 days/year or 10% of rental days).
  • If it qualifies as investment property, selling and using proceeds for a cash-flowing multifamily may enhance ROI and allow for REPS qualification via increased active involvement.
  • Personal/family value of the lake house vs. financial ROI must be weighed.

Ryan:

• Be careful if your strategy depends on both the 1031 exchange and cost segregation for bonus depreciation–basis gets split between ‘old’ and ‘new’ property.

Notable Exchange:

“If you love the home and it’s just a matter of like the cash flow that's going out, could you just rent it more, or could you just increase the price...?” – Ryan (11:10)

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5. Catching Up on Missed Depreciation: Form 3115

Timestamp: 13:31

• Question: Husband never depreciated his rental property for 10 years. Can Form 3115 for a catch-up adjustment be done via TurboTax, or is a CPA necessary?
• Tom:
  • Form 3115 is complex, even for professionals.
  • It's not recommended for DIY due to the risk of error, complexity, required supporting statements, and unlikely recurrence of need.
  • Value your time versus the cost of professional assistance.

Memorable Quote:

“Even if TurboTax has that capability, I would have to recommend you go work with a tax professional on that. Just given the complexity of the form and…this isn’t a skill set that’s going to serve you.” – Tom (15:53)

Ryan:

• “I can, with about 99% confidence and guarantee that that's not going to be right.” (16:22)

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6. Remote vs. Local Short-Term Rental Investing & Material Participation

Timestamp: 18:01

• Question: Are investors focusing on local or remote STRs, and how can you prove material participation in remote setups?
• Ryan:
  • Both options are common; depends on your proximity to a strong vacation market.
  • Proving material participation remotely is possible, especially if you’re actively setting up, furnishing, and managing the property.
  • Remote STRs require commitment to travel and hands-on setup, especially early on.
• Tom:
  • Practical tip: invest in a location that is easy/pleasant to travel to—makes regular visits and hands-on management more feasible.

Notable Quote:

“There are tax court cases to support remote work, but it’s a matter of, okay, you know, you’re going to own this asset, if you’re going to want to take a look at it from time to time...the closer you are or at least somewhere you enjoy going, it can make it easier.” – Tom (20:29)

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7. Turning Part of a Primary Residence (ADU) into an STR for Tax Benefits

Timestamp: 21:11

• Question: What tax benefits exist if I turn my detached garage/ADU into a short-term rental?
• Tom:
  • If an area of your primary residence is used exclusively as a hotel/motel/STR, it’s eligible for depreciation and STR tax treatment.
  • This applies only if it's not used for personal/family purposes at all.

Ryan:

• Be vigilant about exclusive use—personal/family use or switching between long-term and short-term rentals can disqualify you from certain benefits.

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8. Bonus Depreciation, Recapture, and Converting STR to Primary Residence

Timestamp: 22:49 & 24:09

• Question: If I buy a home, use it as a short-term rental with 100% bonus depreciation, and then convert it to my primary residence within a few months, what happens?
• Ryan:
  • No immediate recapture occurs when converting from STR to primary; depreciation is only recaptured upon ultimate sale.
  • Warning: The IRS could challenge if your intent all along was to convert to a primary and only used STR status for the tax benefits—so be careful with such rapid conversions.
• Tom:
  • There is risk, if audited, that the IRS could view the sequence unfavorably, though no explicit rules prohibit this.

Memorable Quote:

“There’s nothing blatantly wrong with doing what you’re suggesting. However, there is a slight risk that the IRS can view this unfavorably… just something you want to be a little bit careful of and how you navigate that.” – Tom (25:26)

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Notable Quotes & Memorable Moments

• On whether to DIY Form 3115:

  “I can, with about 99% confidence and guarantee that that's not going to be right.” – Ryan (16:22)

• On maximizing bonus depreciation between condos and houses:

  “In general, it is generally going to be a condo, but always it depends.” – Ryan (04:41)

• On remote asset management:

  “There are tax court cases to support remote work... invest in a market that you don’t mind traveling to, because you’ll want to visit the property.” – Tom (20:29)

• On STRs for part of a primary residence:

  “If a part of your primary residence is used exclusively as a hotel, motel or similar establishment, then it can be treated as such.” – Tom (21:32)

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Timestamps for Key Segments

• Condo vs. Single-Family Bonus Depreciation: 02:31 – 04:44
• Claiming Bonus Depreciation on Improvements: 05:33 – 06:46
• Converting Primary to STR & Bonus Depreciation Eligibility: 07:09 – 08:49
• 1031 Exchange and REPS Considerations: 08:49 – 12:32
• Missing Depreciation & Form 3115: 13:31 – 17:30
• Remote vs. Local STR & Material Participation: 18:01 – 21:11
• ADU/STR Tax Benefits: 21:11 – 22:44
• STR to Primary, Bonus Depreciation & Recapture: 22:49 – 25:26

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Summary: Takeaways for Real Estate Investors

• Always seek personalized, project-based analysis (like cost seg studies) rather than relying on generic rules.
• Improvements to older rentals can qualify for new bonus depreciation if made in eligible years (like 2025).
• The IRS scrutinizes perceived “intent” behind rapid property conversions, so avoid obvious maneuvering.
• DIY is tempting, but some tax filings (notably Form 3115) are best left to professionals to avoid costly errors.
• Remote STR investing is common; material participation can be demonstrated with the right approach, particularly in early management/setup.
• Partial primary residence use for short-term rental, via ADUs, can unlock substantial tax benefits—but exclusive use for STR is key.

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Final Note

For more in-depth tax strategies, or to ask your own questions, join the Tax Smart Investors Facebook group or reach out for a consultation at therealestatecpa.com.

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This episode provides actionable tax guidance but always consult your own advisor for specifics to your case.

Transcript

[A]

You're now listening to the Tax Smart REI Podcast, the number one tax podcast.

[B]

For real estate investors.

[C]

Your source for all things real estate accounting and tax. Here we reveal our secrets that can save you thousands in taxes, streamline your accounting process and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors and current clients on what strategies they use to grow their business and how they steer clear of Uncle Sam.

[B]

Thanks for tuning into this week's episode of the Tax Smart REI Podcast.

[A]

Today, Ryan and I are going to.

[B]

Be taking questions from the Tax Smart Investors Facebook group.

[A]

We're going to be covering questions about.

[B]

Bonus depreciation, timing, short term rentals, converting short term rentals into primary residences, what qualifies and does not qualify for bonus depreciation, and should you do a Form.

[A]

3115 yourself in order to catch up.

[B]

Depreciation, or should you delegate that to a tax professional?

[A]

We'll be answering all of those and.

[B]

More when we get back in just one minute.

[A]

Hey Tax Smart Investors, I'd like to invite you to join the 2025 Tax and Legal Summit presented by Hull CPA. Taking place September 12th through the 14th, 2025, this free three day virtual event is designed specifically for real estate investors who are building long term tax efficient wealth. Over the three days, you'll hear from leading experts in tax, legal and real estate strategy. Sessions will cover key topics including how to navigate the current real estate market share, structure your entities for legal protection, understand the impact of the 2025 tax bill, avoid common tax scams and preserve generational wealth. You'll also learn what's changed with IRS audits this year, how to avoid the biggest legal mistakes real estate investors make, and how to efficiently find and fund your next deal. General admission is completely free, but for those who want to take it a step further, VIP tickets are available for just $77. As a VIP, you'll gain access to exclusive bonus sessions including a private legal Q and A with with a real estate attorney, a one on one laser session with our tax strategist, and much more. You'll also enjoy priority access and extended replays of select sessions. This is a must attend event for the year if you're a real estate investor who looks to minimize taxes, protect your assets and build real lasting wealth. Reserve your ticket for free or grab your VIP pass for just $77 taxes. The full experience by visiting www.taxandlegalsummit.com registration Again, grab your free tickets or reserve your VIP tickets by visiting www.taxandlegalSummit registration today. We'll see you there. But for now, right back into today's episode. Okay, cool.

[B]

So let's just start off with the first question we have here. This is a question from our tax Smart investors group. I will keep the person's name private for anonymity purposes, but if you're in our Facebook group, you go ahead and find this one. The question is, is it better to buy a condo versus a single family townhome for bonus depreciation? In a house you can't depreciate land. But if you have a condo building, can you depreciate the entire amount? Ryan, what say you?

[D]

You can't depreciate the whole amount either way. I know typically with a condo you don't usually like own the land, but there have been court cases where even with a condo property it is still something that the IRS expected that you would split out some portion of your purchase to the value that the condo is sitting underneath. So even though you might not own the land, you still technically to do that. I will say though, typically we do see a better percentage of your acquisition as far as the building portion be allocated to more of the five year property. Usually again with no land improvements because you don't own the land itself with a condo. But typically we do see a better cost segregation study results. Higher, again, higher portion of your purchase being allocated to the more bonus eligible property. We do see that more with condos compared to some single family homes. Now that even has a caveat there because I can tell you I've seen clients or even people I know where they go and buy a single family home that has a pool. If you've got a pool that is a 15 year land improvement, think about like an in ground pool. That is usually a massive, massive amount of bonus depreciation right there that can be assigned to that pool. So even when we say condos in general versus single family homes. Yep, it's a general statement. Generally we see condos being higher, but usually it just really depends. And that's what we can kind of almost always say. It just truly depends because you could have a single family home that has a higher percentage of bonus depreciation because it has a pool compared to maybe a condo, maybe that doesn't have something like that. So it always is a depends. But the last question here, can you depreciate the entire amount? No, you can basically never do that. There are certain asset classes, you know, we can always talk about that too. That's not the point of this question. But in general it is generally going to be a condo, but always it depends on.

[B]

Yeah, yeah. And if you really want to get a, you know, an answer, you can reach out for like a request or get like a projection from a cost company on kind of what would be entailed there. Just so you have an apples to apples comparison. If you are considering between like, oh, do I buy this condo or do I buy the single family house, you can kind of get an idea. But like, if you're looking like which pond to fish in, you know, you know, condos might be something to take a look at. But again, you know, if you wanted a more accurate answer, you could find it by getting a request for like an estimate on what it would look like. All right, we have another one, another good one here. I have remodeled in July 2025 as a rental property that was placed in Service in like 2008 by replacing the flooring, closet, doors, kitchen cabinets, bathroom vanities. Can I claim 100% bonus depreciation on these improvements?

[D]

Short answer is yeah, you could. It depends. And I'm thinking the question is going around, hey, we know there's this new tax bill, 100% bonus depreciation is back, but I acquired and placed the property and service and I think you said 2008. So there's two parts to this. Right. As you think about depreciation, cost segregation, study, all that. There's the acquisition, which sounds like that was 2008. Okay, so if the question was around, hey, can I bonus depreciate my 2008 property? That's going to be a very different answer than what I'm going to say, which is a new improvement, okay. Which is brand new, okay. Just acquired it, just completed it and so forth. So the improvement itself is actually once you're done, it's going to go onto your asset, usually unless you're meeting one of the like de minimis safe harbors or something like that. Typically if it's depreciated, it's going to be a new asset on your depreciation schedule. So that new improvement, yeah, that could be eligible for bonus depreciation. Assuming like the acquired and placed in service and all that is done here in 2025. So yes, that is totally possible. Again, some of those things that I was hearing sounded like, yes, they're eligible for 100% bonus depreciation. So those portions, just the improvement portion itself, yes, that is a high likelihood that, yes, that would be a hundred percent eligible for Bonus depreciation?

[B]

Yeah. Yeah. The bottom line is the improvements that have before five or 15 year property would qualify if they're done in 2025. So, again, you're gonna have to talk to a cost segregation specialist if you do want a more accurate depiction of exactly what improvements you made might be able to qualify. You probably even speak to a CPA to go into some more specifics about your situation there. But, yeah, if you're making those improvements that would typically qualify.

[D]

Okay, one for you, Tom. If we have a property that was our primary residence, but changed to an investment property operating as a short term rental as of January 1, 2025, can I still do a cost segregation study and get 40% bonus depreciation because of the change of use, even though we purchased the property in 2023? Again, it was our primary residence that entire time up until it sounds like January 1st, 2025.

[B]

Yeah. Long story short, you can do that. And this person's question, they did point out that it'd be 40% bonus depreciation, because again, properties that were acquired in place of Service prior to January 19, 2025, are only eligible for 40% bonus depreciation, which is the old rules. Properties acquired after that or so on and so forth would be. So, long story short, the components that are eligible for bonus depreciation would receive 40% bonus depreciation in your scenario. And kind of just to draw some contrast here between the other question and then this question for the gentleman who asked the question about the property in 2008, that property was acquired such a long time ago, it was acquired before 2017. The tail end of 2017, that is the specific date I think is September 27th. It is not eligible for bonus depreciation. But however, this property was acquired in 2023, it is eligible for bonus depreciation. The question is, how much is it eligible for? And it would be 40%. And as for being a primary residence, the IRS regulations, the IRS publications are clear on how to treat former primary residences when they are converted into business use properties. So that's how that works there, and we're going to keep it. Moving to the next question.

[D]

Okay, next question for you, Tom. Here we have a lake house that my family loves. We go up there a lot, but to be honest, it's a Drag to pay $4,000amortgage monthly for a second home. I do put it on Airbnb and gross earnings is around 35,000 annually. However, I'm thinking if it's a good idea to sell the Lake house that we're just talking about. Get a 4 to 8 plex, fix it up and add this to the portfolio with a 1031 exchange. Better ROI and tax benefit from real estate professional status. And yes, I'm part time. Any words of wisdom there?

[B]

So what I'm hearing is they have a vacation home. It's like a secondary home that they're in the hole on because expensive for them to keep as a home. They're renting it out. But they're wondering if they should do a 1031 exchange into an investment property and try to qualify for revs.

[D]

Right?

[B]

Yeah. So you'd have to make sure that first. First things first, we have to make sure that's an investment property at this point. A classifies such if you're using it for more than 14 days or 10% of the days rented, it will be considered a residence and therefore it's not eligible for a 1031 exchange. You would have to rent it out for a period of time as it not being a residence in order to qualify. So just kind of that quick disclaimer there, assuming that's not the case. Right. Assuming that it is considered an investment property at this point in time, what do you do next? Right. You know, should you sell it? And that's the question. It depends. It sounds like you don't want to operate it. It's putting you in the hole. I would consider selling it. Again, there's no right or wrong answer here. I would consider selling it in your case because it sounds like you do and buying a property where it would give you the hours, maybe put some renovations in or maybe it's a multi family property or multi unit property where there's a lot of work involved that will allow you to get that 750 hours and more than half your total working time requirement to qualify for reps, get some additional tax savings. Again, it's a loaded question because it's a lot of it depends. But based on the way the question was asked, sounds like that's what they're leaning towards. And if that's more viable financially for you to hold that type of property and maybe turn an actual profit despite the fact you might have losses for tax purposes, that might be the better way to go. But it's going to depend on your long term goals. It's going to depend on other financial details within your your scenario. But on the surface it sounds like it's more viable than holding a property that's burning a hole in your pocket and that capital Might be better utilized elsewhere.

[D]

Yeah, and it ultimately depends, like you said, it depends on kind of what your goals are. Because, like the first thing that they start with is my family loves this lake house. So it's like, okay, well there's some like personal enjoyment that's going on here. So you're kind of getting rid of something that your family really loves. So is that okay? Because the second part of this question is just roi, right? ROI and tax benefits. Those are not always completely at odds with each other. It is hard to kind of marry those two together. But I feel like there's a couple different goals here that are going on. So if you're looking for just highest roi, maybe you've got some gain there. That's why you're thinking 1031 Exchange. That's great. I'll just add into one thing that Tom said too. If you're thinking about reps and 1031 exchange and so forth, and maybe trying to do a cost seg, this wasn't in here, but trying to do a cost seg on this new four to eight unit property. Just keep in mind the difference in the benefits from a 1031 exchange property and a cost segment. You've now got kind of that split in your basis between kind of old and new basis. So just be careful there if that's really what you're relying on to kind of make real estate professional status work for you. But yeah, to me it would just be a matter of what are your goals here. Cause if you love the home and it's just a matter of like the cash flow that's going out, could you just rent it more or could you just increase the price or add some new amenities to get a higher price, to get more revenue and then to cover kind of that fixed mortgage rate or refinance maybe in a few months if rates go down, things like that. So there's, there's multiple things here I think that someone could really draw out. Uh, but yeah, great question.

[B]

Yeah, phenomenal question. And it's high level.

[A]

With 2024 officially in the rearview mirror, now's the perfect time to start planning for how you're going to maximize your tax savings in 2025. With major tax changes looming under the new administration and IRS audits on the rise, navigating the task code alone is now riskier than ever. Whether you're leveraging the short term rental loophole, claiming the real estate professional status, utilizing passive losses, 1031 exchanges, or anything in between, our expert team of tax advisors at Hall CPA has your back. We'll help you uncover hidden opportunities and avoid costly mistakes that could put you at risk during an audit. With potentially tens of thousands of dollars of tax savings online, why wait? Visit ww.therealestatecpa.com podcast to request your free 30 minute discovery call today. Again, that's ww.therealestatecpa.com podcast for a free consultation. Let's help you ensure you keep more of what you earn in 2025. That's all for now and we'll dive right back into today's episode.

[B]

Let's take a look what else we have here today.

[D]

My husband has a long term rental that he's never depreciated. 10 years. 10 years he's never depreciated. That's a huge issue here. I think we need form 3115 and so far from what I'm seeing, that's correct. Any tips on how to do this? We usually do taxes ourselves with TurboTax and we prefer not to hire a CPA to do all of our taxes if we don't need to. So what do you think about doing Form 3115 yourself?

[B]

Yeah, look, you know, with 3115, so what you're going to need to do is a 41A adjustment and use Form 3115 to catch up to the depreciation you should have taken over the last 10 years. That form is complex, so complex that it takes even CPAs, enrolled agents and other tax professionals, courses and in time and experience and reviews and so on and so forth to do correctly. I'm not sure off the top of my head if TurboTax has that capability to even do that level of tax compliance item. I know that TurboTax sometimes lacks the more sophisticated forms because of, you know, just risk and probably stuff like that on their end. But I would strongly suggest it doesn't have to be us, but I would strongly suggest working with a tax professional to correct that. I totally understand trying to save some costs, you know, doing it yourself. I totally get it. You know, that's a constant battle that you have to ask yourself for any services. You know, should I hire someone or should I do it myself? And this is just one of those things that yes, it's going to cost you a little bit of money, but it's going to save you a tremendous amount of time. Right. You have to put a value on your time. Right. How much is your time worth? Right. I don't know how long it's going to take you to the form. 3115 could take you five hours, could take you 10 hours. Right. What is your time worth? What is your hourly rate? Right. Multiply it by the amount of time it's most likely to take you. Let's say five or ten hours. Right. And then ask yourself, would I be better off paying a cpa? Is that less than I would pay a CPA to do that? And I could take that time to go put it into something more constructive for my goals. Can you do extra work, Take on extra shifts, look for additional properties? I don't know what your specific goals and skills and lifestyle look like, but that's the first question I'd be asking myself. You know, how much is it going to cost me to do? How much is this going to cost me to do it for somebody else? And then how long is this going to take me to do? And would it be better off paying someone else to do it the right way the first time and not having to worry about trying to figure it out when this isn't a skill set that you'll probably need to use again, how often would you use it? Right. So to answer your question, I can't recommend doing it yourself. I just can't. Even if TurboTax has that capability, I would have to recommend you go work with a tax professional on that. Just given the complexity of the form and the fact that if you're not a tax professional, this isn't a skill set that's going to serve you. It's not like you're building up a skill set within doing this that oh, I can do this again type of thing. I don't know how often you'll ever have to do this again. So that's my answer. I know it's long winded, but hope that helps understand, like, you know, the background of why I'm giving that answer. It's not just because we're CPAs and I'm saying go work with the CPA, right?

[D]

Yeah, I can, with about 99% confidence and guarantee that that's not going to be right. So if you care, if you're someone who cares about getting it done correctly or more correctly than not, because I can tell you, even a lot of CPAs who you go talk with, if they try to prepare it, it's likely going to have some, some parts that are going to be incorrect. It is a difficult form, It's a more advanced calculation that you have to do and it's going to require all sorts of additional statements that are going to go into your tax return, walking the IRS through how you came to what you did, what you changed and why, and blah, blah, blah. I've prepared maybe a couple dozen of them and they're all slightly unique based on your situation and what's going on, but they're tough. Even as someone who's prepared a dozen, couple dozen of those, they take a lot of time and they take a lot of thought and I've done it a lot. And so for someone who's like, hey, I've never done this before, I'm not a cpa, never prepared this, should I do it myself? I would just say it just depends on how much you want to get it right and how much you want to save your time.

[B]

Yeah, I agree with you. And it's just something that, you know, you'd be better served putting your time towards something else and delegating it to somebody who is effective at doing that.

[A]

Hey, real quick, if you've been a longtime listener of the show, then you.

[B]

Know, we give everything away for free.

[A]

From how to use the real estate professional status and, and the short term rental loophole to save tens of thousands of dollars on taxes to upcoming tax changes, including the potential return of 100% bonus depreciation. We don't hold anything back. And the only way we're able to help more real estate investors is if you rate, review and share the show. It just takes 15 seconds to leave a quick rating review or share with a friend who may find this information useful on their real estate journey. That's all for now. We'll dive right back into today's episode.

[B]

Are people buying short term rentals in their local market or are they also buying remotely? I'm comfortable buying remotely, but how do I prove material particip? I don't really have a job, so theoretically I can work from that location for a few weeks towards the end of the year. But I'm curious how other people are doing.

[D]

Yeah, so we see both. It's not that people are only doing one, we do see both. My first question when I would talk with someone like that is to try to figure out where are they? We do have a lot of clients who are in like California, New York, things like that. And just depending on which state you're in and where you're at and how close you are to a good vacation rental market, it just might be something where almost automatically you're thinking out of state, say you're in California, you're likely Looking out of state would be my guess, not by default. Or let's say you like you're in New York City, right? You're probably looking outside of New York would be my guess. Otherwise you're looking, you know, the outskirts of New York, probably not extremely local. So then that would be my next thing is like what's local to you? Because if you're in Manhattan and you're thinking 30 minutes, well, you're probably not right, because New York City has kind of shut down short term rentals. But I would guess most people are looking remote. That's okay. It's not something where you have to be close by to necessarily meet material participation. It is something though, as you think about how far it is, whether it's a couple hour drive or whether it's a plane ride, that you probably are going to go there once. If not a couple times would be my guess. Especially in the first year and especially in that first year, you're going to want to see things, you're going to want to set things up your way, you're going to want to furnish things your way, things like that and whatever, right? So you're probably going to go out there once, if not a couple times per year just to get familiar. So you need to one, not only just bake in the whole material participation local to you and whatnot, you also need to bake in the extra time that you're putting in to do that, in the cost of that. But yeah, it is something that we see both. I would just say first and foremost it depends on which state you're in. And then secondarily, how close are you to a good quality vacation rental market? That's going to be more important than simply the question of out of state or in state. That's, that's how I would respond to that.

[B]

Yeah, it's a great question. It definitely depends. And again, Ryan said we've seen both. And what I typically see, at least in my experience, is that people will buy in a vacation market. It's like if you live in a state where there is no good vacation rental market or the investment properties are just so expensive, it just doesn't make sense. You can buy out of state and usually you're going there, like to Ryan's point, you're going there for a period of time to get property set up, you're visiting that property, get it all kind of up and running and then you're managing it remotely. One last anecdote that I'd share is that when I was getting started in real estate investing, you know, almost 10 years ago now. It's pretty crazy. One of my mentors told me, he's like, hey Tom, like when you're looking for a market to invest in, make sure that it's a market that you don't mind to or that's easy for you to travel to. So you'll actually go there and visit the properties. Because yes, you can do this all theoretically, remotely. It can be done. There are task court cases to support remote work, but it's a matter of, okay, you know, you're going to own this asset if you're going to want to take a look at it from time to time, you know, the closer you are or at least somewhere you enjoy going, it can make it easier. So again, both are possible, but it's more of a specific question for you. What do you want to do?

[D]

Next question. My primary residence includes a detached garage with a grandmother's quarters right in adu, basically above the garage. While I imagine the tax benefits that come with a brand new short term rental may not apply to this situation, what meaningful tax benefits exist for me to turn this section, this kind of ADU into a short term rental?

[B]

Yeah, absolutely. So there's a rule, there's a carve out that I'll point to specifically within the code that says that if a part of your primary residence is used exclusively as a hotel, motel or similar establishment, then it can be treated as such. So in this specific case, if you have the detached garage, which is essentially an ADU and you use it exclusively as a short term rental, you can treat it like a short term rental for tax purposes, which means you can depreciate it, you'll be able to deduct your expenses and you could potentially use bonus depreciation on it depending on when it was acquired and different components that are in it and when you place into service. But long story short, it can be used as such. We see this a lot in California specifically. A lot of people have ADUs due to the housing crisis there. We're building ADUs and sometimes they rent out those ADUs on a short term basis and there are tax benefits to be had. The specific tax benefits are going to be dependent on a number of different factors, but you know, in general it's something that can be done.

[D]

Yeah, and just add one more thing and then we can move on. Just be careful of like personally using that space or like renting it to like friends or family or kind of switching it between like short to long term, those could be other factors. You just be careful of to okay.

[B]

So I think this will be the last question we'll take for today for everybody who is tuning in.

[A]

If you do have questions, you can.

[B]

Always join our Tax Smart Investors Facebook group and you can jump in there and ask your questions. We might just answer on the next episode of Tax Smart Q and A here. Also, if you already have an existing portfolio or an acquisition is imminent for you, meaning it's going to happen within the next say 30 days or so, we'd love to have a conversation with you, learn more about your situation, how we can help. If you are looking for a new CPA firm, you want tax planning and not just tax preparation or you're looking for accounting services, you can go ahead and fill out the link in the description that's in the show notes for a free discovery call. And we would love to again learn more about your situation, how we can help. But anyway, we're gonna take this last question here Ryan. This one, I'm kick this one over to you. This one is it's gonna be be a hundred percent bonus depreciation and recapture timing and this is an important consideration for people considering short term rentals. If I close on a new home in September 2025, this is timely, we're in September immediately use the main home as a short term rental and use a hundred percent bonus depreciation. Then I decide to convert that short term rental into my permanent residence in January 2026. Am I subject to any timing restrictions, penalties, rules or recapture if this is not sold as a newly acquired property or any any property I own? Seems basic, but I'm a little confused on how this works basically what they're asking here.

[D]

So before I answer the question, number one, I would just say be careful of what we're trying to do here because this could be looked at maybe even further than just what you're doing, which is intentions, right. And intentions could show to the irs, hey, you were just trying to get the tax savings in the first year and this whole time you were just going to make this a primary residence, Right? So just be very careful when you're doing something like a massive tax strategy, a massive write off and then immediately the following next tax year you flip it into a primary. Especially if maybe you haven't even bought it yet because he says if I'm closing on a new home in September, you're already planning to make it a primary. Just be very careful there. The IRS could see maybe intentions around the whole time you're trying to make this a primary. But to answer the question directly, if you have something that is a short term rental, you do a cost seg, you take all the benefits and so forth and then you turn it into a primary residence the following year, something like that, there is no recapture on that. The depreciation though, does stay within that property. So if you ever sell the property in the future, you are going to recapture that. But if there's no true sale, there's no taxable event, you simply convert it from short term rental to primary residence. There is no recapture at that moment. As soon as you flip that, it's only going to happen once you sell the property in the future, whenever that might be.

[B]

Right? Right. Yeah. So that's to answer the question. And to Ryan's point, if you look at it, there's nothing blatantly wrong with doing what you're suggesting. However, there is a slight risk that the IRS can view this unfavorably and we've not seen it yet. We may never see it, but just understanding just the way the game is played, so to speak, it does open up some questions there and just something you want to be a little bit careful of and how you navigate that. And just understand that while there, there's nothing explicitly prohibiting you from flipping it into your own primary resins at the end of the or at the beginning of next year, there could still be some risk there if the IRS ever does audit you and they can be asking questions. We may never see it, but we do believe there's a little bit of risk there. So having said that, thank you everybody for tuning into this week's episode of the taxmart REI Podcast. We did answer a lot of questions then we'll see you next week on next week's episode of the Tax Smart REI Podcast.

[A]

The Tax Smart Real Estate Investors Podcast is for general information purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. Information on the podcast may not constitute the most up to date legal or other information. No reader, user or listener of this podcast should act or refrain from acting on the basis of the information on this podcast without first seeking legal and tax advice from counsel in the relevant jurisdiction. Use of an access to this podcast or any of the links or resources contained or mentioned within the podcast show or show Notes do not create a relationship between the reader, user or listener of the podcast and the host, contributors or guests. 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 any vendor. For more information, reference the show notes or description of this episode.

[C]

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[D]

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[C]

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