We are working on a very cool and quite complicated but exciting project in Excelsior, MN. I also learned something new that I thought I’d share. And for the record, this study has not quite started yet. When we get this one done, I’ll have to come back and provide and update to see if it worked out as we think it might.
The picture above is now the newly remodeled short-term rental that sits over top the Alerus space in downtown Excelsior, MN which has also been completed renovated. Here a photo from the street out front so you can see that it’s commercial on the main level and residential or STR now above.
This is an existing building that has been in-service for many years. The owners purchased it a couple of years ago. The upstairs was a long term rental apartment. The main level has been and continues to be commercial use. The owners have spent a significant sum of money converting the long term apartement into a short term rental (aka Airbnb). I was wondering if perhaps the improvements to convert the LTR to an STR might be considered QIP (Qualified Improvement Property). QIP gets 15 year class life and would get 80% bonus depreciation in 2023. QIP is only for commercial property. STRs are considered commercial property – 39 year class life instead of 27.5 for LTRs. To get classified as QIP is a big swing in favor of of the building owner if this turns out to be the case.
We believe this will qualify as QIP because the building was in-service and the building would have had to have had 80% of the revenue coming in from the residential rental part of the building in order for this NOT to be classified as QIP. I was not aware of that little rule. It looks like it will be good news for these owners. (Note if you have a new mixed-use building like this that has not been put into service yet and you have commercial on the main and an STR above it would not quaify for QIP. The building has to have been put into service at some point to qualify as QIP).
If you have a mixed use building like this one where you have retail on the bottom and you want to convert long term rental space above it to a short term rental, we should talk about how cost segregation might be of help. In fact you might not even need us to do the analysis but many CPAs and tax pros will still have us do the calculations and reclassifications so that everything is done correctly, buttoned up and is ready to be met with scrutiny if needed. I’m here to help – anywhere in the U.S. 864-276-1448
