Bonus depreciation may let short-term-rental owners deduct eligible costs immediately. These costs include furniture, appliances, land improvements, and other short-life assets. Land does not qualify, and residential buildings usually do not. The deduction may create losses, but separate rules control offsets.
Current law restored a permanent 100% additional first-year depreciation deduction. It covers qualified property acquired and placed in service after January 19, 2025. Earlier property may follow the prior phaseout schedule. Important factors include dates, contracts, asset classes, and taxpayer elections.
This guide explains federal rules for early-stage property investors. Review them before including projected deductions in purchase decisions. A qualified tax professional should review purchase documents and operating records. That review should also cover studies and tax returns.
Understanding Depreciation in Real Estate
Depreciation spreads eligible property basis across a fixed recovery period. Tax basis generally means the owner’s investment for tax purposes. Residential rental buildings usually use a 27.5-year recovery period. Land cannot be depreciated under these rules.
An owner’s basis usually begins with the property’s purchase cost. Allocations, improvements, depreciation, and other adjustments later change that basis. Assume a $500,000 property allocates $100,000 to land and $400,000 to the building. Full-year depreciation equals about $14,545 before the first-year convention: $400,000 divided by 27.5.
Straight-line depreciation generally deducts equal amounts during each year. However, the first-year deduction may differ under required tax rules. Monthly conventions reflect when the building first entered service.
Depreciation measures taxes, not cash flow or market value. Mortgage principal, reserves, and some capital spending lack current deductions. A property may produce cash while reporting a tax loss. It may also require cash while reporting taxable income.
What Is Bonus Depreciation?
Bonus depreciation is an additional first-year deduction under Internal Revenue Code Section 168(k). Current law allows 100% for qualified property acquired and placed in service after January 19, 2025. The IRS explains the law in its summary of the 2025 law. It also gives interim guidance in Notice 2026-11.
Qualified property generally includes depreciable physical property lasting 20 years or less. Furnished rentals may include furniture, appliances, certain flooring, and equipment. Some land improvements may also qualify for this treatment. Eligibility depends on classification and the placed-in-service date.
Cost-segregation studies cannot make land or residential buildings eligible. Instead, studies may find components belonging in shorter tax classes. This change affects when eligible costs receive tax deductions. Total tax basis and economic value remain unchanged.
IRS Publication 946 explains methods, recovery periods, and placed-in-service rules. It also covers listed property, Section 179, and special depreciation allowances. State treatment can differ from federal bonus-depreciation treatment. Some states do not fully follow the federal rules.
Bonus Depreciation and Section 179
- Bonus depreciation: It automatically applies to eligible property. Taxpayers may make a valid election out for a property class. It may create or increase losses, subject to other limits.
- Section 179: It requires an election for eligible property. Annual dollar, investment, and taxable-income limits apply. Allowed deductions and carryforwards depend on each taxpayer’s circumstances.
Both rules require correct calculations and reviews under other limits. These include passive-activity, basis, at-risk, excess-business-loss, and personal-use rules.
When Airbnb Depreciation May Offset Other Income
Rental losses are generally passive under federal tax rules. Passive losses usually offset income from other passive investments. They normally cannot offset wages or active business income. Short guest stays may change classification, but further requirements still apply.
Treasury Regulation § 1.469-1T(e)(3)(ii) excludes several activities from its rental definition. One exception covers average customer use of seven days or less. Divide total customer-use days by customer-use periods during the tax year. The resulting figure is the average customer-use period.
An excluded activity must also satisfy a material-participation test. That step makes its income or loss potentially nonpassive. Material participation measures qualifying owner work during that tax year. It differs from both seven-day averaging and real estate professional status.
Meeting both requirements may let allowed losses offset nonpassive income. This income may include wages or other nonpassive earnings. Final results also depend on ownership, spousal participation, and allowed expenses. Other rules may still suspend or defer the loss.
Requirements Before the Deduction Is Usable
1. Establish the Property's Depreciable Basis
Allocate purchase costs and eligible acquisition costs among all assets. Categories include land, buildings, furniture, equipment, and other property. Land cannot be depreciated under federal tax rules. Use supportable facts and records for every allocation.
2. Identify Eligible Short-Life Property
A cost-segregation study reviews components and land improvements. It identifies their proper tax classifications and recovery periods. A qualified provider may find eligible 5-, 7-, or 15-year property. The return preparer must assess return effects and taxpayer elections.
Possible assets include furniture, appliances, removable finishes, and specialty electrical work. Fencing, landscaping, and paved areas may also have short lives. Classification depends on each asset’s installation and actual use. Another property’s list cannot prove this property’s classifications.
3. Confirm Acquisition and Placed-in-Service Dates
Current 100% treatment generally has two timing requirements. Qualified property must be acquired and placed in service after January 19, 2025. Written binding contracts and self-constructed property have special acquisition rules. The closing date may not settle every acquisition-date question.
An asset enters service when ready and available for use. For rentals, it usually must be available to guests. Booking records, permits, inspections, invoices, and listings can prove timing. Investors should keep these records with their tax files.
4. Establish Material Participation
Owners must meet at least one material-participation test. Treasury Regulation § 1.469-5T(a) provides seven separate tests. Tax professionals commonly review the following three tests:
- More than 500 hours: The owner participates more than 500 hours during the tax year.
- Substantially all participation: The owner performs substantially all work in the activity. This comparison includes every person, including nonowners.
- More than 100 hours and no less than anyone else: The owner participates more than 100 hours. No other person may participate more than that owner.
Qualifying work may include guest messages, pricing, and booking management. Supply purchases, maintenance coordination, bookkeeping, and inspections may also count. The work must involve genuine operating activity. Investor review generally fails unless tied directly to daily operations.
No single app or record automatically proves material participation. Regulations permit taxpayers to use other reasonable supporting evidence. Current calendars, task details, messages, invoices, and platform records provide support. They are stronger than estimates created after year-end.
5. Apply the Remaining Loss Limits
Nonpassive treatment does not remove other tax deduction limits. Basis rules may restrict deductions to the owner’s adjusted tax basis. At-risk rules may impose another separate limit. They measure amounts economically exposed to possible loss.
Personal-use rules may apply to owners and related parties. Excess-business-loss rules may limit current deductions for noncorporate taxpayers. Separate rules may affect interest, startup costs, and capital spending. They also affect losses from activities not yet operating.
Disallowed amounts may follow different carryforward rules. A carryforward keeps limited deductions available for possible later use. The tax return should track every limitation separately. Investors should retain each related schedule and supporting record.
Step-by-Step Tax Savings Example
Consider a property bought for $600,000 and placed in service after January 19, 2025. Assume supportable analysis allocates $100,000 to land and $350,000 to the building. Another $150,000 goes to bonus-eligible short-life assets. These figures explain calculations, not another property’s likely results.
- Land: The $100,000 allocation is not depreciable.
- Residential building: The $350,000 allocation generally uses 27.5-year depreciation.
- Eligible short-life property: The $150,000 allocation receives assumed 100% bonus depreciation.
The assumed bonus-depreciation deduction equals $150,000. A simplified full-year building calculation adds about $12,727. This amount equals $350,000 divided by 27.5. Before tax conventions and other items, depreciation totals about $162,727.
Assume rental revenue equals deductible operating expenses before depreciation. The example then creates an approximate $162,727 tax loss. Material participation and all other limits must allow current use. If allowed, nonpassive income falls from $450,000 to about $287,273.
Assume a 35% marginal federal income-tax rate. The simplified current federal income-tax reduction equals about $56,954. This amount is not a cash rebate or guaranteed return. Results depend on brackets, filing status, income, deductions, state law, ownership, participation, and loss limits.
The deduction also lowers the property’s adjusted tax basis. Larger current deductions may increase later gain or depreciation recapture. That result can occur when the owner sells the property. Therefore, this example shows timing benefits, not permanent tax removal.
How STR Search Supports the Property Decision
Investors should first review the property’s operating strength. Review demand, nightly rates, realistic occupancy, expenses, financing, and reserves. Also review local rules, management workload, and exit risks. Do not rely on tax treatment before this review.
STR Search analyzes markets and properties for short-term-rental purchase decisions. Its analysis compares revenue, seasonality, regulations, and operating assumptions. It does not decide tax eligibility. It also cannot replace cost-segregation providers or tax-return preparers.
Before relying on deductions, give tax professionals the proposed purchase structure. Also provide closing documents, budgets, management plans, and expected use. Tax planning works best before signing contracts. Later, purchase and operating choices may become difficult to change.
FAQ
What happens to depreciation when I sell?
A sale may apply different recapture rules across asset classes. Recapture changes some gain tied to earlier depreciation deductions. That gain becomes a specified type of taxable income. Section 1245 gain may become ordinary income through the applicable recapture amount.
Building depreciation may create unrecaptured Section 1250 gain. This gain generally faces a maximum 25% federal tax rate. Actual treatment depends on price, adjusted basis, and depreciation history. Other facts may also change the final result.
A Section 1031 exchange may defer gain when every requirement is met. The exchange keeps relevant basis history and cannot ensure permanent deferral. Personal property transferred with real estate may receive different treatment. Begin planning before listing the property or signing contracts.
Can a long-term rental use bonus depreciation?
Eligible short-life assets in long-term rentals may receive bonus depreciation. Current use of resulting losses needs a separate review. Long-term rentals generally remain rental activities under Section 469. Therefore, passive-loss rules usually apply to those losses.
Real estate professional status and material participation may change results. Professional status generally requires over 750 real-property business hours. Those hours must exceed half the taxpayer’s personal-service time. These rules differ from material participation in that specific rental.
What records should an owner keep?
- Keep closing statements and support for land-and-building allocations.
- Keep invoices, receipts, contracts, and payment proof for improvements and furnishings.
- Keep the complete cost-segregation report and preparer’s tax workpapers.
- Keep documents supporting acquisition and placed-in-service dates.
- Keep booking records showing each customer-use period and day.
- Keep current participation records listing dates, time, tasks, and other workers.
- Keep prior returns, depreciation schedules, elections, suspended-loss schedules, and basis records.
Required retention periods depend on each record’s purpose. Basis and depreciation records may matter during ownership and after sale. Therefore, a standard seven-year retention period may be too short. Owners should ask their tax advisers about longer storage.
Conclusion
Bonus depreciation speeds deductions for eligible short-life rental assets. Current law generally allows 100% for qualified property acquired and placed in service after January 19, 2025. Land and residential buildings usually remain ineligible.
The deduction forms only one part of tax analysis. Average guest use and material participation may control current use. Basis, at-risk amounts, personal use, and excess business losses also matter. Acquisition timing and state law can change results.
Investors should first test the property’s operating case. Next, test taxes against the actual purchase and management plan. Before filing, use a qualified CPA, enrolled agent, or tax attorney with rental-property experience. That adviser should review the study, records, depreciation schedule, and proposed reporting.
