Short term rental bonus depreciation is available: under the One Big Beautiful Bill Act (OBBBA) and the IRS interim guidance on §168(k), qualified property acquired and placed in service after January 19, 2025 generally qualifies for a 100% first-year write-off. Cost segregation lets you pull short-lived components out of a rental's basis. Whether the resulting loss offsets your other income depends on material participation.
TL;DR:
- Property acquired and placed in service after January 19, 2025, generally qualifies for a 100% first year deduction on qualified furnishings, appliances, and certain improvements.
- Pre cutoff acquisitions may receive a transitional rate; the service date sets the deduction year, so retain the purchase contract and evidence of guest readiness.
- Without material participation, losses are generally passive and can offset passive income, not wages; keep dated hours logs and records of duties performed personally.
- Cost segregation reallocates basis to shorter lived components, and a study is most likely to pay off for larger purchases or properties with extensive renovations.
- Bonus depreciation lowers basis, potentially increasing taxable gain and depreciation recapture at sale, so model the exit before committing to accelerated deductions.
Table of Contents
- How bonus depreciation works now: OBBBA, §168(k), and IRS interim guidance
- What counts as qualified property for STR owners and timing rules
- Material participation, the 7-day rule, and when STR losses offset nonrental income
- Cost segregation for short-term rentals: what it does and when it pays for itself
- How to claim bonus depreciation and elections, plus a documentation checklist
- Worked examples: how cost segregation plus bonus depreciation changes year-one deductions
- How bonus depreciation interacts with passive loss rules, QBI, SE tax, and recapture
- Practical checklist and strategies for STR investors: timing, structure, and recordkeeping
- Impact of the Tax Cuts and Jobs Act on bonus depreciation for short term rentals
- Differences between bonus depreciation and Section 179 expensing for short term rentals
- State-level bonus depreciation rules and how they interact with federal rules
- How the bonus depreciation deduction phases down or expires in future years
- Implications of bonus depreciation on basis for future sale and capital gains tax
- How bonus depreciation affects eligibility for other tax credits or deductions
- What we do with bonus depreciation for our short-term rental clients
- How we help short-term rental investors save on taxes
- FAQ
- Sources
How bonus depreciation works now: OBBBA, §168(k), and IRS interim guidance
The law changed in 2025, and the change favors investors. OBBBA §70301 amended §168(k) so that the old phasedown no longer applies. In its place sits a permanent 100% additional first-year depreciation deduction for qualified property acquired and placed in service after January 19, 2025. The IRS interim guidance confirms this, and Publication 463 for 2025 says the same. The IRS newsroom also announced the guidance and points readers to the official notice.
The interim guidance works by substitution. Instead of writing brand-new regulations, the IRS tells you to keep applying the rules in §1.168(k)-2 and to swap in January 19 or January 20, 2025 wherever those rules refer to earlier dates. If you understood the old framework, you can follow the new one with that single adjustment.
Property that was acquired earlier but placed in service during 2025 falls under transitional percentages. Publication 463 notes these rates apply to certain 2025 placements, and the interim guidance explains them. That is why your acquisition date matters as much as the date a property started hosting guests.
The guidance also describes elections. Under §168(k)(5) and §168(k)(10), you can make specific elections in defined situations, and the notice walks through the procedures. Most investors will not need an election, but you should know the option exists before you file.
Here is the practical takeaway for an investor:
- Acquisition date controls whether you get the full 100% or a transitional rate.
- Placed-in-service date controls which tax year the deduction lands in.
- Both tests must be satisfied for the property to count as qualified.
A rental you closed on in February 2025 and furnished that spring sits in a different position than one you contracted for in 2024. When you plan purchases, treat these two dates as separate checkpoints and write both down the day they happen.
What counts as qualified property for STR owners and timing rules
"Qualified property" under §168(k) is, broadly, depreciable property with a short recovery period. The IRS interim guidance and Publication 463 frame the rules, and the building shell itself generally does not qualify. A residential rental building is depreciated over a long recovery period, so the shell stays on the slow track. The components inside and around it are where the opportunity sits.
For a short-term rental, items worth inspecting include:
- Furniture, beds, and décor placed in the unit
- Appliances such as refrigerators, washers, and dryers
- Certain land improvements like fencing, outdoor lighting, or a patio
- Short-lived building components identified through a cost segregation study
- Remodeling components that qualify on their own
Acquisition rules come first. The interim guidance explains how the acquisition date is determined, and a binding written contract can affect the answer. Property you acquired before the cutoff may only qualify for the transitional percentage rather than 100%. After the acquisition test, the placed-in-service test asks when the asset was ready and available for its intended use. For a furnished rental, that usually means the day the listing could accept guests, which is why booking records and photos help.
Vehicles deserve a separate note. Publication 463 lists depreciation limits for passenger automobiles, so a vehicle you use for your rental business does not simply get a full write-off. If you are weighing a purchase, read those caps before you buy.
One habit saves a lot of trouble: sort every purchase into a bucket the day you make it. Furnishings go in one pile, renovation work in another, and structural items in a third. A clean ledger at year-end is far cheaper than reconstructing invoices during a study.
Material participation, the 7-day rule, and when STR losses offset nonrental income
Eligibility for bonus depreciation and the ability to use the loss are two different questions. The second one runs through the passive activity rules. Publication 925 explains that rental activities are generally passive under §469 unless an exception applies. It also describes the $25,000 special allowance for active participation and lists the exceptions, including material participation and the real estate professional category.
Short-term rentals may get different treatment based on average guest stays. Depending on the applicable rules and the facts, an activity may not be classified as a rental for passive loss purposes, which can make material participation tests relevant. The statute is IRC §469, and the regulation that governs material participation is §1.469-5T. We cover the average-stay mechanics in our post on the short-term rental tax rules owners often miss.
If you do not materially participate, the loss is typically passive. A passive loss can generally only offset passive income, so a big first-year deduction may sit suspended rather than reducing your W-2 or business income.
Evidence that investors commonly used to substantiate participation includes:
- A contemporaneous hours log with dates, tasks, and time spent
- Records of operational duties you performed yourself, such as guest messaging, cleaning turnovers, and maintenance
- Proof of management activity like pricing decisions, vendor hiring, and listing optimization
- Calendar entries, texts, and emails that corroborate the log
- A clear split between your hours and your property manager's hours
The common pitfalls are predictable. People reconstruct hours at tax time, count time spent as an investor reviewing statements, or lean on a manager who does most of the work. A log built after the fact invites questions, so start tracking before the year begins. For deeper background, read our guide to passive activity loss rules.
Cost segregation for short-term rentals: what it does and when it pays for itself
A cost segregation study reallocates a property's purchase price. Instead of treating everything as a long-lived building, the study splits the basis into 5-, 7-, and 15-year classes plus the remaining structure. Bonus depreciation then applies to those shorter classes, which is how an owner turns a slow deduction into a first-year deduction. Our walkthrough of cost segregation for rental owners goes deeper, and an independent investor primer on cost segregation is useful background if you want a second perspective on methodology.
Short-term rentals tend to be strong candidates because they are furnished and equipped. Components often reclassified include:
- Furniture and fixtures placed for guest use
- Appliances and electronics
- Carpeting and certain flooring
- Dedicated HVAC serving specific equipment
- Signage and outdoor lighting
- Certain land improvements such as landscaping, paths, and fencing
Cost is the other half of the equation. A study is a professional engagement, and it makes the most sense when the deduction it unlocks clearly exceeds the fee. Larger purchases, renovation-heavy deals, and portfolios where you can reuse the process tend to clear that bar fastest. A small, lightly furnished property bought for a low price may not justify a full study. Compare the expected tax savings with the study fee using your actual tax situation before you commit.
Remember also that a study only helps if the loss is usable. If the deduction ends up suspended because you do not meet material participation, the benefit arrives later rather than now. Match the strategy to your participation level.
Pro Tip: Choose an engineer-backed study that documents its method and keep every supporting file. A defensible report and a clean paper trail are your best protection if the IRS asks questions.
How to claim bonus depreciation and elections, plus a documentation checklist
Bonus depreciation is reported on Form 4562, the depreciation and amortization form. The special depreciation allowance sits in the part of the form for that deduction, and the regular depreciation for each asset class is reported alongside it. Publication 946 is the IRS reference for how depreciation is computed and how Form 4562 is used, so keep it handy when you or your preparer build the return.
Elections follow the procedures in the interim guidance. When you make an election under §168(k)(5) or §168(k)(10), you generally attach a statement to a timely filed return, so confirm the filing requirements before the deadline rather than after. A missed statement can cost you the election.
Property acquired before January 20, 2025 sits in the transitional window, where the lower transitional percentage applies instead of 100%. Publication 463 explains those percentages and also covers the vehicle limits mentioned earlier.
Build your file as you go. The documents worth collecting are:
- Invoices and receipts for every furnishing and improvement
- The closing or settlement statement showing the purchase date and price
- The cost segregation report, if one was completed
- Proof of the placed-in-service date, such as the first booking confirmation
- Booking and usage records showing how the property was operated
- Dated photos before and after renovations
- Contractor work orders and permits
If a notice ever arrives, this file answers most questions in a single email. Gathering it after the fact is slow and often incomplete.
Worked examples: how cost segregation plus bonus depreciation changes year-one deductions
These examples are illustrative only. The numbers are assumptions chosen to show the arithmetic, not market data, and they are not tax advice.
- Example A, purchase allocation. Say you buy a furnished short-term rental and a cost segregation study identifies $150,000 of short-lived property that qualifies for 100% bonus depreciation. Without the study, that $150,000 would be recovered slowly. Assume for simplicity it would produce about $5,455 of first-year deduction if spread over a 27.5-year schedule ($150,000 divided by 27.5). With 100% bonus depreciation, the first-year deduction on that portion is the full $150,000. The difference in year one is $150,000 minus $5,455, or $144,545 of additional deduction.
- Example B, post-renovation components. Say you spend $80,000 on a renovation and $60,000 of it is allocated to qualifying components placed in service in the same year. With 100% bonus depreciation, you deduct the $60,000 in year one. The remaining $20,000 of structural work is recovered over the longer building schedule, so only a small slice appears in year one.
- Effect on taxable income. If you materially participate and your marginal rate is, say, 24%, then a $150,000 deduction would reduce federal tax by $36,000 ($150,000 times 0.24). If you do not materially participate, the loss may be suspended and used later, so the cash benefit shifts in time rather than disappearing.
- What the examples leave out. They ignore state tax, the loss limits covered below, QBI effects, and the sale-year recapture discussed later. Every real situation needs its own run of the numbers.
How bonus depreciation interacts with passive loss rules, QBI, SE tax, and recapture
Accelerated deductions create side effects that you should plan for. First, passive loss limits. As Publication 925 explains, a loss from a passive activity is generally limited to passive income, so a large first-year deduction may be suspended unless you meet an exception.
Second, the qualified business income deduction. Heavy depreciation can reduce the income that QBI is calculated on, and it can change how the safe harbor plays out. Our post on the QBI safe harbor for rental owners walks through the test.
Third, self-employment tax. An IRS memorandum on §§469 and 1402 explains that whether rental income is excluded from net earnings from self-employment depends on the provision of substantial services. Services primarily for the convenience of occupants, when substantial in nature, can make the income subject to SE tax. Each fact pattern is specific to the situation, so a host who provides hotel-like services faces a different answer than one who simply rents the space.
Fourth, recapture. When you sell, depreciation you took can be recaptured, which means part of your gain is taxed differently than a simple capital gain. Taking a large deduction early is a timing choice, and the bill for it can come due at disposition. Plan your exit strategy before you accelerate, not after.
Practical checklist and strategies for STR investors: timing, structure, and recordkeeping
A good plan is mostly sequencing. Work through this list in order:
- Order the cost segregation study early, ideally soon after closing
- Record the acquisition and placed-in-service dates the day each occurs
- Track your operating hours from the first day of the year
- Keep invoices, photos, and work orders in one organized folder
- Attach any required election statements to a timely filed return
- Review your participation level before you count on using the loss
Structure comes next. Some investors hold rentals in separate entities, and some evaluate whether an S corporation fits the operating income from a hands-on rental business. These choices depend on facts, and none of them guarantees an outcome, so coordinate with an advisor before a large acquisition rather than after closing. The right setup before you buy is easier to build than one retrofitted later.
Recordkeeping protects everything above. Keep the report, invoices, and participation log for the applicable record-retention period, and longer for assets you still own, since depreciation affects the year you sell.
Pro Tip: Save your cost segregation report and support files as read-only copies in two places, and note the tax year each one supports. Years later, a clean archive will matter more than any memory.
Impact of the Tax Cuts and Jobs Act on bonus depreciation for short term rentals
The Tax Cuts and Jobs Act of 2017 first made bonus depreciation a mainstream strategy for rental investors. Before it, the allowance applied mostly to new property. The act extended eligibility to used property in many cases, which mattered a great deal for short-term rental owners, who often buy existing homes and furnish them. That change made cost segregation on a purchased property a realistic play instead of a niche tactic.
TCJA also set a phasedown schedule. The deduction stepped down in later years rather than staying at its peak, and investors who bought during the decline watched the percentage shrink. That schedule is the history behind the transitional rules you now see. As Publication 463 notes, OBBBA replaced that phasedown with the permanent 100% allowance for property acquired and placed in service after January 19, 2025.
For short-term rental owners, the lesson is that the framework has been unstable. Rules were built, stepped down, and then restored, so older advice you find online may describe a percentage that no longer applies. Always check the date on any guide you read, including ours, and confirm against the current IRS materials before acting on a number.
Differences between bonus depreciation and Section 179 expensing for short term rentals
Both tools let you deduct the cost of equipment quickly, but they work differently. Bonus depreciation under §168(k) is automatic for qualified property unless you elect out, and it has no dollar cap in the way a §179 limit does. Section 179 is an election you choose asset by asset, and it comes with its own annual limits and income-based restrictions.
For a rental owner, the deduction limit on §179 tied to taxable income from your business is the practical hurdle. If your rental produces a loss, §179 may not let you deduct more than the income that business generates, which blunts its usefulness for a newly purchased property. Bonus depreciation does not have that income ceiling, so it can create or increase a loss in the first year.
There is also a property-type question. Section 179 is limited in what real property it reaches, and residential rental property generally does not qualify as it would for an active trade or business with eligible equipment. Furnishings and appliances are the usual overlap between the two tools. Bonus depreciation, combined with a cost segregation study, reaches the broader set of short-lived components described earlier.
You can sometimes use both, picking which assets get which treatment. The details depend on your entity and your income, so this is a conversation to have with your advisor. The choice also interacts with the passive loss rules covered above, since an accelerated deduction you cannot use now only postpones the benefit.
State-level bonus depreciation rules and how they interact with federal rules
Federal conformity is not automatic at the state level. Each state decides whether to follow the federal bonus depreciation rules, and many states decouple, which means they require you to add back the bonus deduction and depreciate the property more slowly on your state return. The practical result is that you can have a large federal deduction and a much smaller state deduction in the same year.
That gap creates a second set of books. If your state decouples, you track the federal depreciation and the state depreciation separately, and the two schedules diverge for the life of the asset. When you eventually sell or fully depreciate the property, the difference eventually unwinds, but in the early years you may owe state tax on income the federal return has already sheltered.
Investors with properties in more than one state face more complexity. A rental in one state and your home in another can trigger filing in both, and each state applies its own conformity rules to the property located there. Do not assume your home state's treatment matches the state where the rental sits.
The safest approach is to check each state's current rules before you finalize your tax projection. State treatment changes with legislation, and the federal OBBBA changes may not yet be reflected everywhere. We help clients consider state and federal planning because a federal-only estimate can overstate the cash benefit.
How the bonus depreciation deduction phases down or expires in future years
For property acquired and placed in service after January 19, 2025, the IRS interim guidance confirms that the allowance is permanent at 100%. That is a change from the earlier law, under which the percentage stepped down each year. Under the current rules, you do not face a scheduled drop for qualifying purchases.
Permanent in tax law still means "until Congress changes it." Rates, definitions, and eligibility can be amended, and investors have seen the rules rewritten more than once. A planning approach that depends on bonus depreciation lasting forever carries risk. A more durable approach treats the deduction as valuable today while keeping your plan flexible if the law shifts.
For planning, that means a few things. Do not rush a poor purchase just to capture a deduction, because a bad property is a bad property regardless of the tax treatment. Do not delay a good purchase waiting for a better rule either, because the current one is already favorable. And remember the transitional percentages for property acquired before the January 2025 cutoff, since those assets follow a lower rate.
Finally, timing across years can be a tool. If your income is unusually high in a given year, accelerating a purchase and its deduction into that year can be worth more than the same deduction in a lower-income year. Run the comparison with your own numbers rather than defaulting to the earliest date.
Implications of bonus depreciation on basis for future sale and capital gains tax
Depreciation reduces your tax basis. Every dollar you deduct, including a dollar of bonus depreciation, lowers the adjusted basis of the asset. When you sell, your gain is the sale price minus that reduced basis, so a larger deduction today generally means a larger taxable gain later.
Part of that gain is treated differently. Depreciation previously taken can be recaptured, and the recaptured amount is not taxed like a standard long-term capital gain. For equipment and furnishings that you depreciated to zero, selling for any meaningful amount can produce recapture income, so the early deduction has a cost on the back end.
None of this means you should skip the deduction. A dollar of deduction now is usually worth more than a dollar of tax later, because of the time value of money and the chance to reinvest what you saved. The point is to plan the exit. Holding the property for a long period, using a like-kind exchange where it fits, or timing the sale for a low-income year can all change the result.
Keep a running record of basis for every asset class. When a sale is on the horizon, ask your advisor to model the recapture before you sign a contract, because after closing the numbers are fixed. A few minutes of modeling in advance can change the price you are willing to accept.
How bonus depreciation affects eligibility for other tax credits or deductions
A large depreciation deduction does not exist in isolation. It lowers your taxable income, and that ripple can change the value of other tax items that depend on income.
The most direct example is the qualified business income deduction. Because QBI is based on net business income, heavy depreciation can shrink the amount the deduction applies to. In our post on the QBI safe harbor for rentals, we explain how the safe harbor test is structured, and it is worth reading before you finalize a large first-year deduction.
Other income-based items can shift too. A lower adjusted gross income can help with phaseouts on certain deductions and credits, though the exact effect depends on your return. The passive activity rules, discussed in Publication 925, also decide whether the deduction can reduce your other income at all, so those rules control the downstream effect.
On the other side, a suspended passive loss does not reduce your income this year, so it will not change your eligibility for anything now. It carries forward and may be released in a later year, often when you sell. Plan with both outcomes in mind.
The practical step is to model the full return, not just the depreciation line. A deduction that looks large in isolation may interact with the rest of your return in ways that make it more or less valuable than it seems.
What we do with bonus depreciation for our short-term rental clients
We are a proactive tax strategy firm led by Enrolled Agent Melissa Korber, and real estate investors are a core part of our work. Our engagements typically include an intake to learn how you own and operate the property, coordination of the cost segregation study, filing of the elections and Form 4562 entries, and ongoing advisory so your plan adjusts as your portfolio changes.
In one anonymized case, a client who bought a furnished short-term rental and materially participated used a study to move a large share of the purchase price into short-lived classes. The first-year deduction reduced that client's taxable income meaningfully. Results vary, and we make no guarantees about any outcome.
— Melissa
How we help short-term rental investors save on taxes
We built our services to take the guesswork out of depreciation planning. Our Monthly Tax Advisory and Quarterly Tax Strategy Sessions give you year-round support, with Monthly Tax Advisory at $11,997 per year and Quarterly Tax Strategy Sessions at $9,497 per year. If you run an operating business alongside your rentals, our S-Corp Tax Strategy Accelerator is $997 one-off. We can help with cost segregation and the Form 4562 and election work as part of tax planning.
You can review our fee schedule to see current pricing, including our Investor or Rental Owner return at $550 one-off. The next step is simple: request a consultation or start with a tax strategy session, and we will map your purchase, your participation level, and your timeline before you commit to a study.
This article is general information, not a substitute for advice from a qualified financial advisor. Consult a qualified financial professional about your own circumstances before acting on anything here.
FAQ
Do short-term rentals qualify for bonus depreciation?
Yes, qualified short-term rental components can qualify. Under the IRS interim guidance, qualified property acquired and placed in service after January 19, 2025 generally receives a 100% first-year deduction. The building shell itself usually stays on a long recovery schedule.
Can I use a bonus depreciation loss to offset my other income?
It depends on your participation. If you materially participate in the activity, the loss may offset nonrental income. If you do not, the loss is typically passive under the rules in Publication 925 and may be suspended until you have passive income or sell.
What is cost segregation for a short-term rental?
Cost segregation is an engineering-based study that splits a property's basis into shorter recovery classes. That lets bonus depreciation apply to furnishings, appliances, and certain improvements. It tends to pay off most on larger purchases and renovation-heavy deals.
Does bonus depreciation create a tax bill when I sell?
It can. Depreciation lowers your basis, so a sale can produce a larger gain, and part of it may be recaptured. Modeling the sale before you close helps you see the true after-tax result.
Do states follow the federal bonus depreciation rules?
Not always. Many states decouple from federal bonus depreciation and require slower depreciation on the state return. Check the rules for each state where you own property.