Is Bonus Depreciation Worth It? 5-Year Hold Math for STRs (2026)

"Is bonus depreciation worth it?" is the single most asked question by STR investors evaluating their first §168(k) election. The Year-1 numbers are dramatic — a $48,000 federal tax refund on a $750K property buys a lot of attention. But the dramatic Year-1 number is also what makes investors suspicious: there has to be a catch, the IRS has to want some of that back, and the back-end math has to matter.

It does. This article walks through the full 5-year hold math on a realistic property — Year-1 spike, Years 2–5 reversal, recapture at sale, NPV, bracket arbitrage, and exit strategies. Numbers come from the DepreciMax 5-Year Outlook, which models this exactly in your browser.

The 5-year outlook: $750K STR

Same property, two scenarios: (a) straight-line depreciation over the asset's life vs. (b) electing 100% §168(k) bonus depreciation in Year 1. Both scenarios run the same NOI, debt service, growth assumptions (3%/yr rent and expense growth), and federal marginal bracket (32%).

Read the table left-to-right and three things show up immediately.

First, Year 1 is the spike. The $57,246 advantage in Year 1 is the entire value proposition of bonus depreciation — a $194,000 deduction taken at a 32% marginal bracket produces ~$62,000 in cash tax savings that wouldn't have existed under straight-line. That $62,000 lands in your bank account during the same tax year you bought the property.

Second, Years 2–5 reverse, but only mildly. The bonus scenario runs ~$1,506/yr behind straight-line because you've already taken the 5-year and 15-year property's depreciation in Year 1 — only the 39-year shell remains to depreciate in Years 2–5. Total reversal over 4 years: ~$6,024, or about 10% of the Year-1 advantage.

Third, cumulative bonus wins by $51,220. The 5-year total advantage is roughly 7x the Year-1 cash flow on the property — the bonus dep decision dwarfs the actual rental performance over the hold period. This is why STR investors with stable W-2 income at 32%+ brackets effectively view §168(k) as the deal's primary economic driver, not the rental yield. For the full ranking of 197 US STR markets by bonus depreciation potential, see our 2026 STR Bonus Depreciation Market Study.

What about recapture at sale?

The table above shows the hold-period cash flow only. At Year 5 sale, two recapture buckets activate:

• §1245 ordinary recapture on the 5-yr and 15-yr property bonus-elected portion (~$165K depreciation × 37% top bracket = $61,000 federal tax)
• §1250 unrecaptured gain on the 39-yr shell straight-line depreciation taken over 5 years (~$30K × 25% cap = $7,500 federal tax)

If your federal bracket at sale is the same as your bracket during the hold (32%), the §1245 recapture costs $52,800 instead of $61,000. Either way, recapture is real and material — but it's been deferred by 5 years, and the dollars saved in Year 1 have been earning return that whole time.

At an 8% discount rate, $61,000 of recapture in Year 5 is worth $41,500 in Year-0 dollars. The Year-1 federal savings of $62,000 minus the Year-5 PV of recapture ($41,500) leaves $20,500 positive NPV from the Year-1 spike alone — before adding back the Year-1 cash flow advantage from the table ($57,246 over straight-line) and netting out the Years 2-5 reversal (~$6,000 PV).

Net: ~$44,000 positive NPV at 8% discount on a 5-year hold with full recapture. Full math in our recapture explainer.

The three things that change the answer

1. §1031 exchange at exit

If you 1031 the property into a replacement at Year 5, recapture is deferred indefinitely. NPV jumps from $44K to ~$78K because the entire recapture liability rolls into the next property's basis instead of triggering at sale. Repeat the 1031 and the recapture is deferred again. Roll to death and the recapture is eliminated entirely via stepped-up basis under IRC §1014.

This is the most common exit strategy for serious STR investors and the math behind why bonus dep is "almost always" the right call: the recapture cost only materializes if you actually pay it.

2. Bracket arbitrage

The §1245 recapture rate matches your marginal bracket in the year of sale, not the year of the original deduction. Most STR investors take bonus dep at 32-37% during peak W-2 earning years, then sell after retirement at 22-24% bracket. On $165K of §1245 recapture, dropping from 37% to 24% saves $21,450. That's pure arbitrage — same deduction, lower recapture rate.

For investors with intentional career-trajectory planning (sabbatical, retirement, business-loss year), bracket arbitrage can flip a marginally positive NPV into a strongly positive one.

3. Hold extension to 10+ years

NPV improves with longer holds because the recapture PV shrinks. At a 10-year hold instead of 5, the same $61,000 recapture liability discounts to $28,250 PV at 8% — a 32% reduction. The hold-period cash advantage also stays positive (the Years 2-5 reversal stops once basis is fully depreciated; Years 6+ flatline for both scenarios). NPV at 10-year hold: ~$68K vs. ~$44K at 5-year. At 15+ year holds with hold-and-die planning, NPV approaches $100K+ on a $750K property.

When bonus depreciation is NOT worth it

The math reverses in three scenarios:

Owner in a 0-12% federal bracket

A 12% bracket on a $194K deduction is $23,280 in Year-1 cash savings — but the §1245 recapture at sale is the same dollar amount (you don't get to "recapture less" just because you saved less). NPV approaches zero or negative if the property is sold within 5 years.

Sale within 12 months

Time value of money doesn't have room to compound. Recapture rate and original deduction rate are essentially the same, and the bonus election only generated administrative cost (cost seg study fees) with no offsetting NPV gain.

Non-conforming state with no federal benefit margin

In CA, NY, NJ, PA, IL, or MA, the state-level benefit is deferred — Year-1 cash benefit is federal-only. If you're a 24% federal / 13% CA bracket investor, you're getting ~$45K federal cash savings but losing ~$25K of state cash benefit to Year-1 vs. spread over 5-39 years. Still positive, but the margin gets thin. See our California conformity guide for the worked example.

The decision framework

For most STR investors with high-W-2 income, electing §168(k) bonus depreciation is the default — and the math almost always supports it. The decision points are not whether to elect, but how to plan the exit:

1. Bracket today > 24% federal? Election makes sense.
2. Material participation feasible (100h+ > anyone, or 500h total)? Required for the deduction to offset W-2.
3. Hold period 3+ years? Below 3 years, run the marginal NPV — bonus may not clear the breakeven.
4. Exit strategy known: 1031 / hold-and-die / low-bracket sale? If yes, recapture is largely academic.
5. State conformity? If non-conforming, calculate state-only impact separately and confirm federal portion still clears the breakeven.

If all five answer favorably, bonus depreciation is almost always the right election. The cost seg study to support the filing is $99 (DepreciMax property report) to $5,000-$8,000 (formal engineering study) depending on property size and certainty needs.

For CPAs and tax advisors

If you're advising STR clients on the §168(k) decision, the 5-year hold model above is exactly the math your clients need to see before electing. The DepreciMax for Tax Professionals workflow generates this analysis with client-specific inputs and co-branded outputs — the same numbers presented as a deliverable rather than a model file. Pair with our recapture explainer to brief the client on the full lifecycle math.

Frequently asked questions

Is bonus depreciation worth it on a 5-year STR hold?

Yes, in almost every scenario — on a $750K STR with $194K of Year-1 bonus dep, the 5-year total net-after-tax is $84,371 vs. $33,151 without. That's a $51,220 advantage even after the Years 2-5 reversal. Add a 1031 exchange and the gap widens because recapture is deferred. Bonus dep is not worth it only when: (1) owner is in a 0-12% bracket, (2) property is sold within 6-12 months, or (3) state non-conformity wipes out cash benefit and federal is too small.

What does the 5-year cash flow look like with bonus depreciation?

Year 1 is a spike — bonus dep creates a paper loss that offsets W-2, generating $48K-$80K+ federal cash on a $750K-$1M STR. Years 2-5 revert: NOI minus debt service plus 39-year straight-line. DepreciMax 5-Year Outlook: Year 1 net-after-tax $62,240 (bonus) vs $4,995 (straight-line); Years 2-5 reverse with bonus running ~$1,500/yr behind. Cumulative bonus wins by ~$51K over the hold.

How does recapture affect the 5-year hold math?

If you sell after 5 years without 1031, most of the bonus dep is recaptured at ordinary rates (up to 37%) under §1245. On a $750K Joshua Tree STR with $194K bonus, recapture at 37% is $71,873 plus $14,200 §1250 unrecaptured gain. But because the deduction was taken 5 years earlier, time-value-of-money still makes bonus the better election by $25K-$40K NPV at 7-8% discount. Recapture is fully neutralized by 1031, hold-and-die, or low-bracket-year sale.

What is the NPV of taking bonus depreciation vs. straight-line?

On a $750K STR with 25.9% bonus-eligible held 5 years, NPV of the bonus dep election at 8% discount is ~$44K-$52K positive vs. straight-line — accounting for Year-1 spike, Years 2-5 reversal, and Year-5 recapture if sold without 1031. NPV climbs to $75K+ with a 1031 exit and $120K+ at 10+ year holds with stepped-up basis.

When is bonus depreciation NOT worth it for an STR?

Three scenarios: (1) Owner in 0-12% bracket — cash savings too small to outweigh recapture risk + cost seg cost; (2) Short-hold flip — selling within 6-12 months recaptures at nearly same rate; (3) Non-material-participation — without §469(c)(2) STR exception, deduction suspends as passive loss. Outside these cases, math almost always favors electing, especially with clear 1031 or hold-and-die exit.

Does bonus depreciation make sense for a 10-year hold instead of 5?

Yes — it gets better with longer holds. Year-1 cash savings are the same regardless of hold; the benefit comes from extra years of compounding return on front-loaded cash and lower PV of recapture. At 10-year hold with no 1031, recapture is the same dollar amount as 5-year, but its PV (discounted 10 years instead of 5) drops ~40% at typical discount rates. NPV swings from $44K (5-year) to $68K+ (10-year) on the same $750K property.