Across 1,717 listings in the 197-market study, the median short-term rental qualifies for a Year-1 deduction of 19.84% of purchase price — about $99,200 on a $500,000 property under 100% bonus depreciation. The swing factor is land ratio: lower-land markets produce bigger write-offs. The STR loophole (7-day average stay plus material participation) is what lets this deduction offset W-2 income.
If you own a short-term rental — or are shopping for one — the Year-1 tax break is one of the most asked-about numbers in the entire tax code. This post gives you the deduction math (what you can actually write off, in dollars), the formulas behind the national median, and a market-by-market table showing where the number stretches furthest. For the state tax layer sitting on top of these numbers, see our STR loophole states tax conformity map.
How is the short-term rental tax break calculated?
The short-term rental tax break is calculated by stripping land value out of the purchase price, splitting the depreciable building basis into bonus-eligible components (5-year personal property, 15-year land improvements), and taking those bonus-eligible components as a 100% first-year deduction under IRC §168(k) bonus depreciation.
Worked example — a $500,000 short-term rental at the national median:
| Step | Component | Amount | Notes |
|---|---|---|---|
| 1 | Purchase price | $500,000 | Example property, 197-market median anchor |
| 2 | Less: land ratio (13.5%) | $67,500 | Land is never depreciable; building basis = $432,500 |
| 3 | Bonus-eligible components (19.84%) | $85,718 | 5-year personal property + 15-year land improvements, 100% deducted Year 1 under §168(k) |
| 4 | Remaining shell ($346,782) over 27.5 yrs | $6,311 | Standard MACRS first-year depreciation on the 27.5-year building shell |
| Total Year-1 deduction | $92,029 | Write-off against ordinary income if STR loophole tests are met | |
The component breakdown behind that bonus-eligible subtotal looks like this on a typical property:
| Component class | Share of basis | Examples |
|---|---|---|
| 5-year personal property | ~14-16% | Finish flooring, cabinetry, countertops, appliances, FF&E, decorative lighting, window treatments |
| 15-year land improvements | ~4-6% | Paved surfaces, landscaping, pools, hot tubs, fire pits, outdoor kitchens, pergolas, fencing |
| Bonus-eligible subtotal | 19.84% | Combined 5-yr + 15-yr; 100% deducted in Year 1 under §168(k) |
| Remaining 27.5-year shell | ~66-67% | Foundation, framing, roof, drywall, central HVAC ductwork, embedded tile |
| Land (not depreciable) | ~13.5% | Allocated by assessor data or defensible appraisal |
A $500,000 short-term rental at the national median qualifies for approximately $92,029 in Year-1 deductions under §168(k) bonus depreciation, according to DepreciMax's analysis of 1,717 listings across 197 U.S. markets.
What determines how big your STR tax break is?
Five variables determine your deduction size. In rough order of impact: land ratio, what qualifies for the 20-year rule, whether you clear the STR loophole tests, the §461(l) excess business loss cap, and whether your state conforms to federal bonus depreciation.
1. Purchase price and land share
Depreciable basis equals purchase price minus land value. If a $500,000 property sits on land worth 13% of the price, your depreciable basis is $435,000; if it's on land worth 40% of the price, your depreciable basis is $300,000 — on the same purchase price. Land ratio is the dominant swing factor in Year-1 deduction size. Inland and mountain markets routinely come in at 11–16% land ratio; coastal and urban-infill markets routinely come in at 30%+.
2. What qualifies: the 20-year rule
Only components with a MACRS recovery period of 20 years or less qualify for IRC §168(k) bonus depreciation. In practice, that means 5-year personal property (finishes, appliances, FF&E, decorative fixtures) and 15-year land improvements (pools, hot tubs, paved surfaces, landscaping). The building shell at 27.5 years never qualifies for bonus — it depreciates on standard straight-line MACRS over the full 27.5-year life. A formal cost segregation study — or an engineered estimate like DepreciMax's $99 report — identifies which components fall into which bucket.
3. The STR loophole, stated precisely
The "STR loophole" is a two-test exception to the §469 passive activity rules. First, an average rental period of 7 days or less takes the property out of the §469 rental activity definition entirely (Treasury Reg §1.469-1T(e)(3)(ii)). Second, you must materially participate under §469(h) — typically by meeting the 100-hour test (at least 100 hours and more than any other individual involved) or the 500-hour test under Reg §1.469-5T. Losses from an activity that clears both tests are non-passive and can offset ordinary W-2 or self-employment income. Clear only one test and the loss sits trapped as a passive loss carryforward.
4. The §461(l) cap
Even if your STR loss is non-passive, IRC §461(l) caps the amount of excess business loss you can use against non-business income in a single year. For 2026, the limit is $289,000 single / $578,000 married filing jointly (IRS Notice 2025-8). Any deductions above the cap carry forward indefinitely as a net operating loss — not lost, just deferred.
5. State add-back
Many states decouple from federal §168(k). You take the full Year-1 deduction on your federal return; on the state return, you add back the bonus depreciation and depreciate the components over standard MACRS lives. Over the property's life, state and federal depreciation totals equalize — but Year-1 state benefit may be zero in a decoupled state. California, New York, New Jersey, Pennsylvania, Massachusetts, Maryland, Kentucky, Arkansas, Illinois, North Carolina, and Wisconsin are the current non-conformers. See the full breakdown in our STR loophole states tax conformity map and look up your state in the state conformity tool.
How much do short-term rentals write off in Year 1, by market?
Deduction size tracks land ratio and bonus-eligible mix at the market level. Here are the Top 10 markets from the 197-market study by median bonus-eligible percentage, with illustrative Year-1 deductions on the market's median listing price:
| Rank | Market | Med. Price | Land Ratio | Bonus-Elig % | Med. Y1 Deduction | State Conformity |
|---|---|---|---|---|---|---|
| 1 | Lake Cumberland, KY | $330K | 11% | 27.1% | $89,416 | Full |
| 2 | Poconos, PA | $669K | 12% | 26.7% | $178,623 | Partial |
| 3 | Branson, MO | $365K | 12% | 26.6% | $97,090 | Full |
| 4 | Angel Fire, NM | $635K | 12% | 26.4% | $167,640 | Full |
| 5 | Broken Bow, OK | $525K | 12% | 26.4% | $138,600 | Full |
| 6 | Winter Park, CO | $2,800K | 15% | 26.1% | $736,680 | Full |
| 7 | Driggs/Teton, ID | $1,300K | 13% | 26.1% | $346,885 | Full |
| 8 | Joshua Tree, CA | $397K | 15% | 25.9% | $102,814 | Decoupled |
| 9 | Blue Ridge, GA | $527K | 16% | 25.8% | $136,066 | Full |
| 10 | Orlando, FL | $297K | 16% | 25.7% | $76,572 | Full |
Contrast at the extremes: Lake Cumberland, Kentucky (11% land ratio → 27.1% bonus-eligible → ~$89K deduction on a $330K median listing) vs. Nantucket, Massachusetts (42% land ratio → 8.1% bonus-eligible → ~$498K deduction on a $6.15M median listing). The absolute dollar number is larger in Nantucket because the asset is larger — but the deduction as a percentage of what you paid is roughly three times higher in Lake Cumberland. Land ratio is the swing factor.
Lake Cumberland, Kentucky leads the 197-market study with a 27.1% median bonus-eligible percentage, driven by an 11% land ratio, according to DepreciMax's analysis.
To screen a specific market or a specific listing before you make an offer, run a free search inside the short-term rental bonus depreciation study (197 U.S. markets), or model your own purchase price in the short-term rental bonus depreciation calculator.
What about regular operating deductions?
Cleaning fees, platform fees (Airbnb, Vrbo, Booking.com), mortgage interest, property management, utilities, insurance, repairs, HOA dues — these are ordinary operating deductions available to any rental activity and are covered widely in other IRS guidance. They matter on your Schedule E, but they are not the reason high earners buy short-term rentals for tax purposes. This post focuses on the depreciation side, which is where the Year-1 impact actually comes from. For a full list of operating deduction categories, see IRS Publication 527.
Short-term rental bonus depreciation: common questions
Can I claim bonus depreciation on a short-term rental?
Yes — if you meet the §469 7-day-or-less average stay test and the material participation test. 5-year personal property and 15-year land improvements qualify at 100% under §168(k) following the One Big Beautiful Bill Act (OBBBA). Both tests must be satisfied in the same year to use the resulting loss against ordinary (non-passive) W-2 income.
What are the rules for 100% bonus depreciation on rental property in 2026?
Under the One Big Beautiful Bill Act (OBBBA, P.L. 119-21, signed July 4, 2025), 100% first-year bonus depreciation applies permanently to qualified property acquired AND placed in service on or after January 19, 2025. IRS Notice 2026-11 confirms operational guidance. For a short-term rental, this applies to the 5-year personal property and 15-year land improvement components identified in a cost segregation estimate or formal study.
Do I need a cost segregation study to take bonus depreciation?
Not legally required, but recommended. A planning estimate (like DepreciMax's $99 property report) is enough to screen a property before making an offer. For properties over $2M or complex situations, a formal engineering-based cost segregation study may be advisable to defend the component classifications on audit.
How do I know if my STR qualifies for the loophole?
Check your average rental period (total rental days divided by number of bookings). If it is 7 days or less, your activity falls under the §469(c)(7) rental activity exception codified at Treasury Reg §1.469-1T(e)(3)(ii). Then confirm you materially participate — typically the 100-hour test (at least 100 hours and more than any other person) or the 500-hour test under Reg §1.469-5T.
Does my state follow federal bonus depreciation?
State conformity to federal §168(k) varies significantly. Some states fully conform, some partially conform, and some fully decouple (requiring an add-back on the state return). The federal Year-1 deduction is unaffected either way — but your state return may require depreciating the bonus-eligible components over standard MACRS lives instead. Check your state in the state conformity tool.
Comparing short-term rentals to other W-2 offset strategies? See how the STR loophole stacks up against the real estate professional election, oil & gas working interests, max-401(k) contributions, and donor-advised funds in short-term rentals vs. other tax offsets for high W-2 earners. Also useful: our deep dive on short-term rental regulations by state — if your market has banned STRs or imposed a minimum-stay ordinance, the 7-day test breaks.
Pin down your Year-1 number — before you make an offer.
Run any active short-term rental through our $99 property report. You'll see the federal §168(k) deduction, state conformity impact, and an item-by-item cost segregation estimate — closely calibrated to a formal cost segregation study's bonus-eligible %.
Get a Property Report →Methodology. The 19.84% median figure is the Airbnb-weighted market-level median bonus-eligible percentage across 1,717 listings in a 197-market U.S. short-term rental study. Market-level deductions in the Top 10 table use each market's median listing price and median land ratio. Individual properties vary; a formal cost segregation study or an engineered estimate on a specific address is the right way to size a specific deduction.
Byline. DepreciMax Research Team · Updated October 2026.