CLIENT KNOWLEDGE BASE

    The 179 Loophole for STR Investors

    As bonus depreciation phases down, we have an innovative strategy that COULD get you back to an equivalent of 80% depreciation/expensing in the first year!

    Bonus depreciation is phasing down...60% in 2024, 40% in 2025.  Thus, we are examining new strategies that provide a similar benefit to 80 or 100% bonus.

    For business owners who operate a short-term rental property as a single-member LLC and have pass-through tax treatment, the Internal Revenue Code provides an opportunity to utilize IRC Section 179 to offset business income. 

    If the owner materially participates in the short-term rental under IRC 469, they may be eligible to use Section 179 to deduct the cost of qualifying property from their business income. 

    This will ONLY apply under the following fact pattern:
    • Passthrough Business (S Corp, Partnership, Single Member LLC)
    • You operate a STR at the PERSONAL Level (no partnerships)
    Here’s how this strategy works and what owners need to consider.


    1. 1

      Understanding IRC Section 179 vs Bonus Depreciation (168k)

      IRC 179 allows business owners to deduct the cost of qualifying property—like furniture, equipment, short lives assets —upfront, rather than depreciating these items over several years. The key difference between 179 and Bonus (168) is 179 CANNOT BRING YOU TO A LOSS (until our loophole is applied)


      1. Business Income Limitation: The deduction is limited to the amount of taxable income generated by the business, meaning the short-term rental income and other income from pass-through businesses. The overall annual deduction limit is subject to a maximum dollar amount, which varies by tax year.  However, you "group" these at the personal level and the 179 deduction from your STR CAN offset the business income on your tax return. 

        1. Max 179 Deduction across your tax return cannot be more than $1.22M, while BONUS is not capped.

      2. Qualified Property: The property must be tangible personal property, such as appliances, furniture, or equipment, used in the active conduct of a trade or business. For rental properties, typical eligible items include furnishings, appliances, and office equipment for managing the rental.

      3. Material Participation under IRC Section 469: The owner must materially participate in the rental activity (and their business) to qualify for Section 179 and this grouping. For tax purposes, this means they need to be involved in the rental’s day-to-day operations regularly, continuously, and substantially.

      4. Not Considered a Residential Rental Activity (the STR Loophole): The rental property must meet the criteria of a “non-residential” rental activity, meaning it’s rented on a short-term basis. Generally, if the average rental period is seven days or less, or if the average rental period is 30 days or less and significant personal services are provided, it may qualify as a non-residential rental.
    2. 2

      Proper Execution is Key

      1. Operating Business Structure: Operating as an S Corp, Partnership or single-member LLC with pass-through taxation means the business income will flow through to your personal tax return. 

      2. Materially Participate in the Short-Term Rental Business: Engage in significant activities related to the short-term rental. This can include marketing the property, handling guest interactions, and maintaining the property. Meeting one of the IRS’s material participation tests under IRC Section 469 is crucial for this deduction.  Contact your PM for a tracker!

      3. Run a Cost Segregation Study: Buy furnishings, appliances, or other tangible personal property needed for the rental.  The short lived assets will be eligible for 179 or 168k.

      4. We will examine if the 179 strategy is > then 60% bonus:  From the examples we have run under this fact pattern, it will be.  However, specific facts and circumstances matter (as multiple items affect the ability to use this strategy).
    3. 3

      Example of using 60% BONUS vs our Strategy

      S Corporation business owner with a $50,000 wage and $150,000 K-1 income who purchases and operates a short-term rental as a single-member LLC.

      • S Corporation Income: $50,000 Wage, $150,000 K-1 income

      • Short-Term Rental (Single-Member LLC): Owner materially participates, allowing active income treatment.

      • Qualified Property: After Anomaly performs a Cost Seg study, we identify that $100,000 of depreciable property under Section 1245, eligible for Section 179 or 60% bonus depreciation under Section 168(k).
    4. 4

      Comparison of Outcomes


      Deduction MethodWage IncomeK-1 IncomeDeduction AmountTaxable Income After Deduction
      Section 179$50,000$150,000$100,000$100,000
      60% Bonus Depreciation$50,000$150,000$60,000$140,000
    5. 5

      Analysis

      • Section 179 Deduction: Provides a larger upfront deduction of $100,000, reducing the taxable income to $100,000.

      • 60% Bonus Depreciation: Offers a $60,000 immediate deduction, leaving taxable income at $140,000, but leaves $40,000 to be depreciated over time.

      Although this is a very specific fact pattern, a lot of Anomaly clients operate as S Corps (or passthroughs) and are interesed in STRs.  This could be a homerun to take us back to a higher year 1 deduction given bonus depreciation is phasing out!
    If you still have a question, we’re here to help. Contact us