Bonus depreciation FAQ for STR investors

Yes. The One Big Beautiful Bill Act (OBBBA), signed into law in 2025, permanently restored 100% bonus depreciation for property placed in service after January 19, 2025. Unlike the original TCJA bonus depreciation, this has no scheduled phase-down. Future legislation could change it, but under current law every STR placed in service in 2026 (and beyond) qualifies for the full 100% Year 1 deduction on bonus-eligible components.

Both are accelerated depreciation tools but with different rules. Bonus depreciation (§168(k)) has no income limitation, no dollar cap, applies automatically unless opted out, and can create a loss. Section 179 has an annual dollar cap (~$1.2M in 2026), a taxable income limitation (can't create a loss), is elective per-property, and historically applies more narrowly to qualifying equipment. For most STR investors, bonus depreciation is the dominant tool; §179 is sometimes used for specific equipment purchases that don't qualify under §168(k).

If you've already placed the property in service in a prior year and used standard straight-line depreciation, you can do a "look-back" cost seg study to catch up missed bonus deductions. This is done via Form 3115 (Application for Change in Accounting Method) and a §481(a) adjustment. The catch-up deduction is taken in the year you make the change, not amended back. This is best done with a CPA familiar with cost seg look-back procedures.

No. The Real Estate Professional 750-hour test does NOT apply to STRs that qualify under the 7-day rule. You just need to meet (1) the average rental period test (7 days or fewer) and (2) material participation (typically 100+ hours and more than any other individual, or 500+ hours total). This is the key advantage of STR investing for high-W-2 earners who can't qualify as RE pros.

Activities that count: managing bookings, communicating with guests, coordinating cleaning, maintenance and repairs, listing optimization, photography updates, marketing, financial management, scouting properties for the portfolio, time spent at the property doing physical work. Activities that don't count: passive ownership, time spent as an investor (researching unrelated markets, etc.), time your manager spends. Keep a contemporaneous time log — calendar entries, dated emails, expense receipts with timestamps.

You fall back into the standard passive rental classification. Bonus depreciation still applies to the property (the deduction still exists), but it can only offset passive income — not W-2 salary. The loss carries forward indefinitely until you have passive income to absorb it (or you sell the property, at which point any unused passive losses are released). Some investors deliberately tighten their stay limits to keep averages under 7 days during peak season.

Technically yes — there's no legal requirement that a licensed engineer perform a cost seg study. But for IRS audit defense, the credibility of your classification matters. An informal DIY allocation has the weakest defense; an AI-based estimate ($99) has moderate defense; a formal engineering study ($5k–$8k) has the strongest. Most CPAs recommend at least the AI estimate as defensible support for smaller properties, and the formal study for larger purchases.

DepreciMax is closely calibrated to a benchmark formal cost seg study. That's typically close enough for pre-purchase decisions and for tax filing on smaller properties. For larger purchases where the deduction value is high enough to justify the additional study cost, the formal engineering study provides additional audit defense via on-site measurements and engineering documentation that the AI estimate doesn't provide.

A formal study typically includes: (1) an engineer site visit and detailed inventory of all components, (2) measurement and quantification of each building component, (3) classification into 5-year, 15-year, and 39-year property under §168(k) and Treasury regs, (4) IRS-defensible documentation including photographs and engineer signatures, (5) calculation of the Year 1 bonus deduction and the multi-year depreciation schedule, and (6) audit-defense support if the IRS questions the classification.

Depreciation is "recaptured" at sale. 5-year and 15-year property recaptures at ordinary income rates (up to 37%). 39-year structural depreciation recaptures at the unrecaptured §1250 gain rate, capped at 25%. Even with full recapture, most investors come out ahead due to the time value of money on the upfront deduction. Holding for 5+ years and using a 1031 exchange to defer the sale can capture additional benefit.

Yes — a properly executed 1031 like-kind exchange defers both capital gains and depreciation recapture into the replacement property. The deferral is indefinite as long as you keep exchanging into qualifying properties. Eventual recapture happens only when you sell out of the chain into a non-1031 disposition. Some investors strategically chain 1031s through their lifetime and pass the property to heirs, who receive a stepped-up basis that may eliminate recapture entirely.

Bonus depreciation is federal. State-level treatment varies. Conforming states (Georgia, South Carolina, Florida-no-tax, Tennessee-no-tax, Texas-no-tax, most others) honor the federal §168(k) deduction on the state return. Decoupled states (California, New York, Wisconsin, some others) require you to add back federal bonus depreciation and use standard MACRS on the state return. Partial-conforming states (Pennsylvania, Arkansas, others) allow bonus depreciation with adjustments. The federal benefit is the larger of the two for almost all STR investors — and is unaffected by state conformity.