What is bonus depreciation for short-term rentals?

If you're buying a short-term rental — an Airbnb cabin, a lakehouse, a ski condo — you may be sitting on a Year 1 tax deduction worth $80,000 to $150,000 or more. Most investors don't realize it until after closing. This guide explains what bonus depreciation is, how it applies to STRs, and how to estimate your deduction before you make an offer.

How normal depreciation works (and why it's too slow)

Under standard IRS rules, residential real estate is depreciated over 27.5 years. That means if you buy a $500,000 property, you'd deduct roughly $18,000/year — a meaningful deduction, but modest relative to the investment size.

The problem is that not everything in a rental property is actually a 27.5-year asset. The cabinets aren't going to last 27.5 years. Neither are the hot tub, the hardwood floors, the Viking range, or the outdoor fire pit. These are shorter-lived assets, and the IRS has a different schedule for them.

What §168(k) bonus depreciation does

IRS §168(k) — commonly called bonus depreciation — allows you to deduct 100% of the cost of qualifying personal property and land improvements in the year the property is placed in service, rather than depreciating them over their normal useful life.

This means that instead of deducting $1,000/year for ten years on a $10,000 set of custom cabinets, you deduct the full $10,000 in Year 1. Multiply that across every finish, fixture, appliance, and outdoor feature in a well-appointed STR, and the numbers get large quickly.

100% bonus depreciation is now permanent. The One Big Beautiful Bill Act (OBBBA), signed in early 2025, permanently restored 100% first-year bonus depreciation for qualified property placed in service after January 19, 2025. Unlike the TCJA's provision, which phased down from 100% to 80% to 60% over several years, this is a permanent provision — no scheduled sunset.

The three property classes that determine your deduction

To understand what you can and can't deduct in Year 1, you need to understand how the IRS classifies the components of a property. Everything in a building falls into one of three buckets:

The key insight for STR investors: outdoor amenities are 15-year land improvements and 100% bonus eligible. A property with a pool, hot tub, fire pit, and deck can have $60,000–$120,000 of 15-year property alone. Add high-end kitchen finishes and FF&E, and the bonus-eligible portion climbs fast.

A real example: $500k Smoky Mountain cabin

At a 37% marginal tax rate, a $126,000 deduction is worth roughly $46,600 in tax savings in the year of purchase. That's real money that changes the return profile of the deal.

Why short-term rentals are especially well-suited

Not all rental properties produce the same bonus depreciation. STRs outperform long-term rentals for three reasons:

• High-end finishes — STR guests expect hotel-quality interiors. That means granite, custom cabinetry, decorative lighting, and frameless glass showers — all 5-year personal property.
• Outdoor amenities — Pools, hot tubs, fire pits, and outdoor kitchens are standard STR amenities. They're 15-year land improvements, entirely bonus eligible.
• Fully furnished — Furniture, appliances, TVs, and linens conveyed with the property are 5-year personal property. A well-furnished vacation rental often includes $60,000–$90,000 in FF&E.

By contrast, a plain long-term rental in a working-class market might have standard finishes, no outdoor amenities, and be sold unfurnished. The bonus dep story is much weaker.

The material participation requirement

Here's the catch most investors miss: to deduct bonus depreciation losses against ordinary income (like W-2 wages or business income), you need to pass a tax test called material participation.

For a short-term rental, material participation generally means spending 500+ hours per year in the rental activity — or more hours than any other person involved, including property managers. The IRS's "short-term rental exception" (average rental period of 7 days or fewer) lets STR owners treat the activity as non-passive without being a real estate professional, which makes meeting the participation test easier.

If you don't materially participate, the depreciation loss is "passive" and can only offset other passive income — not your W-2. This is a meaningful distinction and something to discuss with your CPA before closing.

How to estimate your deduction before you buy

A formal cost segregation study — conducted by an engineering firm — is the definitive method for quantifying bonus depreciation. These studies typically cost $4,000–$8,000 and take several weeks. That timeline doesn't fit a real estate transaction.

For most STR investors, the pre-closing workflow looks like this:

1. Get an AI estimate — Upload 7–9 listing photos. A tool like DepreciMax analyzes visible finishes and outdoor features, classifies each component under IRS rules, and produces a line-item estimate with a total bonus-eligible amount.
2. Share with your CPA before closing — Your CPA can validate the estimate, confirm material participation eligibility, and help you model the impact on your tax situation.
3. Commission a full cost seg study after closing — If the bonus dep story is strong enough to justify the $5,000–$8,000 study fee, you commission it once you own the property.

The key is moving the analysis upstream. Knowing that a property has a weak bonus dep profile before you close can change your offer, your due diligence, or your target market entirely.