Year-End Real Estate Tax Q&A: Depreciation, STR Loophole, Cost Seg, and What Really Matters

On this episode of the Tax Smart REI Podcast, Thomas and Nathan host a year-end Q&A, pulling questions from the Facebook group, the online community, and frequently asked questions they’ve been hearing as 2025 wraps up.

They hit common issues around depreciation, cost segregation timing, the strange January 2025 bonus depreciation cutoff, short-term rentals with sellers still living in the property, real estate professional status (REPS), syndication losses, hiring your kids, and when “significant services” turn a rental into more of a hotel-style operation.

There’s also a reminder about their free Year-End Tax Checklist and a tease for a special announcement on the next episode.

Depreciation on Schedule E Is Not Optional

One listener asked whether they could skip depreciation on Schedule E because their tax preparer said it’s “better” to just take the other deductions, implying depreciation might hurt them or be less beneficial than other write-offs.

Thomas and Nathan are very clear:

• Depreciation on a rental is not optional. If the property is in service as a rental, you’re required to depreciate it.
• A preparer who simply chooses not to take depreciation is preparing the return incorrectly and doing the client a disservice.
• Skipping depreciation doesn’t “save” you anything long-term; it usually just creates problems later when you sell and the IRS assumes you took it anyway (depreciation recapture).

Bottom line: if your preparer insists on not taking depreciation, Thomas’s advice is blunt: insist on a new preparer.

Cost Segregation Timing for a 2025 Purchase

A common year-end question:

“Do I need to complete a cost segregation study before the end of 2025 if I want to use it on a property I buy in 2025?”

Nathan explains the good news: you don’t need the study done by December 31.

• What matters is that the study is completed before you file your 2025 tax return.
• Practically, that means having the cost seg report in your CPA’s hands well before the filing deadline (typically April 15, or later if on extension).
• You can absolutely get the study in early 2026 and still apply it to your 2025 return, as long as the return hasn’t been filed yet.

So: buy in 2025, get the study done before you file for 2025, and you’re fine.

The Weird January 20, 2025 Bonus Depreciation Cutoff

There’s a quirk in the law for 2025: a January 20th cutoff date that changes how much bonus depreciation you get. Nathan walks through it:

• If you purchased (closed on) a property before January 20, 2025, you’re generally stuck with 40% bonus depreciation under the rules as written for that period.
• If you closed on or after January 20, 2025, you may qualify for 100% bonus depreciation, assuming other requirements are met.

Where it gets tricky is:

• If you signed a purchase contract before January 20, but you can still walk away without losing your escrow or otherwise being “bound,” then it’s likely not a binding contract for these rules.
• In that case, as long as you close after January 20, you can still fall under the 100% bonus depreciation rules.
• Larger deals or unusual contract terms can complicate this, and there are also construction rules (e.g., if you’ve incurred more than 10% of expected construction costs before the cutoff, you may be stuck under 40% bonus even if placed in service in 2025).

Nathan notes there are potential workarounds, like component allocations and Section 179 in certain non-residential cases, but those are highly fact-specific.

New Build Timeline: Land in 2024, Placed in Service in 2025

Thomas presents a common scenario:

• Buy raw land in September 2024
• Start construction October 2024
• Finish construction February 2025
• Place in service March 2025

Nathan’s take:

• The land purchase timing doesn’t really matter for the bonus percentage.
• What matters is when the construction property is treated as “acquired” and placed in service.
• If you’ve incurred more than 10% of total construction costs before January 20, 2025, the property is generally treated as acquired before that date.
• That combination, acquired (via construction) in 2024/early 2025 and placed in service in 2025, likely locks you into the 40% bonus depreciation regime.

You might still mitigate with tools like Section 179 in some cases (especially non-residential or certain short-term rentals), but you’re likely not getting 100% bonus on the full building.

When the Seller Stays After Closing on a Short-Term Rental

Another tricky fact pattern: someone is buying a short-term rental near year-end, but part of the deal is that the seller gets to live in the property for a short period after closing (e.g., close November 30, seller stays through December 7).

Questions:

• Does that seller occupancy count as personal use for the buyer?
• Does it hurt the average period of customer use for short-term rental purposes?

Nathan explains:

• That seller stay is typically treated more like a rental period (often with a price credit baked into the deal) rather than the buyer’s personal use.
• However, those days do count as rental days, and they will hurt your average stay length for that year if you’re trying to hit the “7 days or less” average for the short-term rental “loophole.”
• In many such cases, the property can end up functioning like a midterm or long-term rental for that first tax year, which may limit immediate STR tax benefits.

So, it doesn’t usually create personal-use problems, but it can very much affect your average stay calculations.

Short-Term Rental Hours vs. Real Estate Professional Status

A listener asked:
“Can I count my short-term rental hours toward real estate professional hours? And can I combine short-term and long-term rental hours for material participation?”

Thomas breaks it down:

• To be a real estate professional (REPS), you need:
  • 750+ hours in real property trades or businesses, and
  • More than half of your total working time in those activities.
• After 2021 regulatory clarifications, short-term rentals, hotels, motels, and similar establishments do count as real property trades or businesses for REPS purposes.
• So yes, short-term rental hours count toward the 750 hours to become a real estate professional.

But here’s the catch:

• Short-term rentals are often not treated as “rental activities” for passive loss rules; they are a separate category.
• To make long-term rental losses non-passive, you must materially participate in your long-term rentals themselves (often using the 500-hour test or another material participation test).
• Your short-term rental hours cannot be combined with long-term rentals to meet material participation tests for the long-term portfolio.

Analogy:

All of your short-term rental hours can help you qualify as a real estate professional, but they don’t automatically make your long-term rentals non-passive.

You still need to spend sufficient time on the long-term rentals themselves.

Turning Syndication Losses “Active” With REPS + Grouping

Many investors want to know if they can make syndication losses active and use them against W-2 or business income.

Thomas explains the requirements:

1. You must qualify as a real estate professional.
2. You must materially participate in your own direct rental holdings (often your long-term rentals) by meeting a material participation test, commonly 500+ hours spent on those rentals.
3. You then make a grouping election (under Reg. 1.469-9(g)) to treat all your rental real estate interests, including eligible syndications, as a single activity.

If:

• You’ve hit REPS (e.g., 1,000 hours as an agent, or 850 hours managing your own rentals), and
• You’ve also met 500+ hours of material participation in your long-term rentals,

Then, with the grouping election in place, losses from qualifying syndication investments can become non-passive and offset other income.

It’s a high bar and not easy to hit, but possible for some investors willing to put in significant time on their own portfolio.

Can You Use the STR “Loophole” With a Property Manager?

Another persistent myth:

“If I use a property management company for my short-term rental, can I still use the STR loophole to offset active income?”

Nathan’s answer is: almost never in practice.

Why:

• To get non-passive STR losses, you need to materially participate in that activity, often via the 100-hour-plus-more-than-anyone-else test.
• If you have a property manager handling day-to-day operations, it’s extremely hard for you to spend more time than they do.
• Much of what you’ll be doing, paying the mortgage, bookkeeping, reviewing statements, is treated as investor-level activity, not operational participation, and doesn’t count toward material participation when you have a PM in place.

Is it theoretically possible? Maybe in rare edge cases where:

• You are heavily involved in operations, design, guest interactions, and services.
• And the PM’s role is minimal or very narrowly defined.

In the real world, though, Thomas and Nathan put this in the 1–2% “maybe” bucket and see it fail in the vast majority of cases.

A more realistic approach: self-manage for the year you need the losses, then bring in a property manager later.

Hiring Your Kids in the Rental Business

One listener has a 13-year-old helping with cleaning and painting on turnovers and wants to know if they can put their child on payroll for a tax write-off, and whether age under 14 limits the type of work or hours.

Nathan’s guidance:

• Yes, you can legitimately hire your child to do age-appropriate work in your business (e.g., basic cleaning, simple tasks, filing, simple marketing tasks, etc.).
• Pay them a reasonable wage for the work, think in terms of the local minimum wage, not an inflated number.
• For young kids, the realistic annual amount he sees is often in the $2,000–$3,000 range, not the full standard deduction.

To do it properly, you need:

• A real job description and responsibilities
• Actual movement of cash (pay the kid)
• Proper payroll forms and W-2s filed by January 31

If total income for the child is under the standard deduction, their wages can be effectively tax-free to them, while you get the deduction, and you can even fund a Roth IRA for the child with those earned wages.

As always, documentation and reasonableness are key.

Can You Bonus Depreciate 100% of a Condo?

Another common question:

“If I buy a condo, I don’t own the land directly. Does that mean I can depreciate (and bonus depreciate) the entire purchase price?”

Nathan’s answer: not quite.

• Even in a condo, you effectively own an interest in the land via the association.
• The tax courts and IRS generally expect some portion of the purchase price to be allocated to land, often a modest percentage (e.g., 5–10%), but not zero.
• On the cost seg side, a lot of the exterior elements (roof, structural components, exterior walls, etc.) often belong to the association, not you, so your cost seg will be tilted more heavily toward interior five-year property and fewer 15-year/exterior components.

So no, you can’t just treat 100% of the condo cost as depreciable building, but there can still be good acceleration available.

“Significant Services” for Medium-Term Rentals (<30 Days)

Some investors miss the 7-day-or-less average stay test for STRs and look to the “less than 30 days with significant services” exception to get non-passive treatment.

Nathan asks Thomas: What actually counts as significant or substantial services?

Thomas’s explanation:

• The regulations look at continuity, frequency, and substance of the services.
• Merely offering services isn’t enough; they must actually be rendered to guests.
• Think like a true bed-and-breakfast or hotel, not a traditional Airbnb:
  • Daily cleaning while guests are in the unit
  • Meal preparation (e.g., cooked breakfasts)
  • Laundry and linen service during the stay
  • Concierge-type services (booking excursions, arranging transportation, stocking groceries directly as part of your operation, etc.)
  • Ongoing face-to-face interaction and on-demand services

Examples that are not substantial on their own:

• Just cleaning between guests
• Providing a welcome basket but no ongoing services
• Saying you can provide services but never actually doing so

Thomas also points out the “dark side”: if your operation starts to look like a true hotel/bed and breakfast with substantial services, you may expose that activity to self-employment tax, which can change the economics.

This is why the 7-day-or-less average test is the more popular path. With no service requirements, it’s simpler to execute. For the substantial services path, it has to be real, not just wording on a listing.

Year-End Planning: Take a Breath and Think Long-Term

As the episode wraps, Nathan and Thomas move from technical questions to mindset and planning.

Nathan’s tactical reminders:

• Keep a time log if you’re pursuing REPS or STR material participation. Starting now is far easier than reconstructing everything in January.
• Use a simple tool or app (like Toggl or any time-tracking app) to record hours and tasks.
• Look at charitable giving strategies, such as bunching donations into one year to get above the standard deduction and capture extra tax savings.
• Don’t forget standard levers like retirement contributions (401(k), etc.), where deadlines are year-based.

Thomas zooms out even more:

• There’s always urgency around year-end deals, especially short-term rentals, cost seg, and bonus depreciation, but don’t force bad investments just for one year’s tax outcome
• Bonus depreciation, in their framework, isn’t disappearing tomorrow. There are multiple future years where accelerated depreciation will still be available.
• Real estate is a long-term game, and so is your relationship with your CPA and advisory team. Don’t pick a firm or a strategy based solely on a one-year windfall.
• It’s okay if, in some years, “the cookie crumbles” and your tax result isn’t perfect. Focus on building a solid long-term plan instead of chasing a single-year home run.

Bottom line:

This Q&A episode is all about clarity and guardrails. Depreciation isn’t optional, cost seg timing is more flexible than people think, and that weird January 20, 2025, cutoff really matters. Short-term rentals can be powerful, but details like seller occupancy, property management, and actual services provided can make or break your tax treatment.

Most importantly, year-end tax moves should fit into a coherent, long-term plan, not a last-minute scramble that sacrifices good deals for short-lived tax benefits.

Disclaimer: This podcast summary was generated from the transcript and may contain some errors or miss key points from the audio recording.