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)

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.

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)

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)

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)

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)

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)

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)

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.

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)

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)

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

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.

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.

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