Wife and I are looking at our first investment property and I want to sanity check a strategy before I do something dumb with real money.
The plan:
- Buy a $500-600k property in late 2026
- Run it as an STR. Material participation via the 100 hrs / more than anyone else test
- Cost seg study, take 100% bonus depreciation in year 1, offset our W2 income
- After year 1, convert to LTR
For context: ~$600k combined W2, EM physician + non-physician spouse, Texas, standard tax stuff already maxed, no prior real estate.
Reason for the conversion after year 1: every STR I underwrite comes out cash flow negative $500-1500/mo. 1 the tax savings dwarf the bleed. But year 2+ without bonus rolling, it's just chronic monthly bleed unless rates drop a lot. LTR numbers in the same markets actually pencil close to neutral or slightly positive.
I understand (let me know if this is incorrect):
- After conversion, future losses go passive and are useless against W2 going forward
- What I already deducted in year 1 stays deducted (no recapture until sale)
- LTR depreciation continues on the same schedule
- If I sell later, recapture hits whether I converted or not
What I can't get a clean answer on:
1. Does the IRS care about how fast you convert? Year 1 STR with material participation, year 2 LTR feels like exactly the move the loophole was built for. Is there an unwritten "hold it as STR for X years or it looks bad" rule? Or is the timing genuinely fine as long as year 1 was legit?
2. Did anyone here actually do this and have your CPA push back on the timing? Or did they flag it preemptively?
3. Mechanics. Buy in October, place in service before Dec 31, run as STR through the following year, convert Jan of year 2. Does that hold up or am I cutting it too close on the "actually was an STR" optics?
4. If audited, what does the file look like? I assume bookings history, contemporaneous time log, the cost seg report, and clean documentation that I actually operated as a real STR. Anything else?
5. Anyone come at it the other way? Bought planning to be an STR forever, then year 2 said "this is awful" and bailed to LTR? Did your CPA handle the conversion mid-year, or did they push you to wait for a clean year boundary?
6. Also looking for recommended cost segregation study services + a CPA that deals with this for high income W2 earners, so please give some if you have any.
First time doing any of this for real. Would much rather get yelled at by this sub now than figure it out from an IRS letter in 2028.
Thanks.