As 2024 comes to a close, real estate investors look for ways to optimize their portfolios and reduce taxable income. For PadSplit hosts, the benefits of co-living properties extend far beyond traditional rental investments. By reducing taxable income with tailored deductions, improving cash flow through cost segregation and bonus depreciation, and staying ahead of tax law changes, PadSplit’s innovative model offers unique advantages that can enhance your tax strategy and maximize savings.
To help you make the most of these opportunities, Eliot Thomas, Tax Advisor Manager at Anderson Advisors, shares his expertise on the strategies that real estate investors should prioritize.
Use cost segregation and bonus depreciation to enhance deductions
Cost segregation and bonus depreciation remain two of the most effective tools for real estate investors seeking to optimize their tax savings. According to Thomas, a cost segregation study can be a game-changer. By breaking down property costs into tangible personal property and real property, it’s possible to assign shorter depreciable lives to certain components. “§1245 tangible property with a depreciation rate under 20 years can be eligible for bonus depreciation up to 60% in 2024,” he explains.
With bonus depreciation scheduled to drop to 60% in 2024—down from 80% in 2023—and phasing out entirely by 2026, the time to act is now. For instance, a PadSplit host converting a single-family home into co-living spaces could use cost segregation to accelerate deductions for building components like flooring, lighting, and furniture, improving cash flow in the property’s first year. Unlike traditional rentals, PadSplit properties offer opportunities to apply these strategies across shared spaces and furnishings, making them uniquely advantageous for cost segregation and bonus depreciation.
Pro Tip: Your property must be placed in service before December 31 to qualify for bonus depreciation in the 2024 tax year. Ensure all qualifying expenses are completed and documented before this deadline.
Learn more about Bonus Depreciation from the IRS.
Leverage Section 179 for additional savings
PadSplit hosts can also take advantage of the increased Section 179 deduction limits for the 2024 tax year. These limits allow up to $1,220,000 in expensing, with a phase-out threshold of $3,050,000 for property placed in service. Thomas emphasizes the value of this deduction, noting that it can apply to a range of eligible improvements.
Eligible expenses include:
- HVAC systems
- Roof replacements
- Fire protection systems
- Security systems
- Plumbing upgrades
- Window replacements
- Electrical system improvements
- Energy-efficient lighting installations
These improvements not only add value to your PadSplit property but also provide immediate tax savings, which can be reinvested in additional upgrades or other properties.
Explore the IRS guide on Section 179 Deductions.
Maximize deductions for upgrades and furnishings
Frequent upgrades to furnishings and shared spaces are common for PadSplit hosts, and Thomas highlights a key provision to keep in mind. “Furnishings or renovations under $2,500 can be immediately expensed under the $2,500 de minimis election, even if that expense would otherwise normally be depreciated,” he says.
For PadSplit hosts, this is particularly useful for maintaining the quality of co-living spaces. Upgrades such as new mattresses, common area furniture, kitchen appliances, washer and dryer replacements, water heaters, and carpeting or flooring improvements can enhance the property’s appeal while also being immediately expensed under the de minimis election. This flexibility allows hosts to make smaller but impactful upgrades that improve tenant satisfaction and the property’s overall functionality.
How PadSplit simplifies tax benefits
PadSplit’s co-living model streamlines tax optimization by centralizing expense categories like utilities, maintenance, and furnishings. Unlike traditional rentals, where expense tracking can become fragmented across individual units, PadSplit properties make it easier to deduct shared costs and manage records efficiently. With built-in benefits like pre-furnished rooms and managed utilities, PadSplit hosts can achieve higher per-square-foot profitability and simplified tax filings. Additionally, centralizing shared costs under the PadSplit model improves tax efficiency and reduces the administrative burden, giving hosts more time to focus on growth.
Here’s how PadSplit hosting compares to traditional rental models:
Maintain detailed records for shared expenses
Thorough bookkeeping is a cornerstone of financial success for PadSplit hosts. Shared expenses such as utilities, maintenance, and cleaning often represent significant costs, but they also offer valuable deduction opportunities. Thomas advises hosts to keep detailed records for every expense category, highlighting that well-documented costs simplify tax filing and enable better day-to-day financial decision-making.
Investing in expense management software or consulting with a tax advisor familiar with co-living properties can make this process seamless. Beyond compliance, accurate records can uncover patterns that help you identify inefficiencies or opportunities to save, ensuring your property operates as profitably as possible.
Plan ahead for tax law changes
As the tax landscape for real estate evolves, staying proactive is crucial for investors seeking to protect their bottom line. PadSplit hosts, in particular, should focus on leveraging bonus depreciation before the scheduled reduction to 60% in 2024—and eventual phase-out in 2026. “If the unit is placed into service (available for rent) before year-end, then one should consider getting a cost segregation and using bonus depreciation for the first year,” Thomas explains.
Additionally, broader tax changes, such as the scheduled rise in the top individual tax rate to 39.6% in 2026 and the reintroduction of the pre-TCJA Alternative Minimum Tax thresholds, could affect long-term profitability. Reassessing entity structures, accelerating deductions, and planning for these shifts now can help PadSplit hosts avoid surprises and ensure tax efficiency in the years ahead.
Learn more about First-Year Depreciation from the IRS.
Seek expert guidance for tailored strategies
Navigating the complexities of real estate tax law requires more than just general knowledge; it demands expertise tailored to your portfolio. Thomas points out that working with a tax advisor who understands the nuances of real estate investments can help you unlock opportunities while minimizing risk. “Speak with a tax advisor that understands real estate tax deductions—especially the differences between passive and non-passive, and short-term versus long-term rentals,” he notes.
For PadSplit hosts, this expertise is particularly valuable. Whether combining Section 179 deductions with bonus depreciation to maximize immediate tax savings or fine-tuning expense allocations for shared properties, a personalized approach can make all the difference. Proactive consultations allow you to refine your strategies, ensuring they align with both your financial goals and changing tax regulations.
Explore expert resources from Anderson Advisors
To further support PadSplit hosts, Anderson Advisors offers two valuable resources designed to streamline tax planning and asset protection:
- Tax and Asset Protection Workshop: This free, virtual event is live almost every Saturday and helps real estate investors learn strategies to minimize taxes and protect assets.
- Strategy Session: A personalized consultation for investors seeking tailored advice on tax planning and liability management. During your session, you will receive a Wealth Planning Blueprint, define your goals and liabilities, and learn tax strategies from an expert.
Turn year-end strategies into long-term success
As the year-end approaches, PadSplit hosts have an unparalleled opportunity to leverage tax strategies that enhance profitability and streamline operations. From cost segregation and bonus depreciation to precise expense management, these tools can transform your approach to real estate investing. Contact Anderson Advisors today to take the first step toward a stronger financial future. Your success begins with smart planning—don’t wait to make the most of these opportunities.
