The Short-Term Rental Investor's Guide to Bonus Depreciation

What is bonus depreciation?

When you buy an investment property, the IRS generally requires you to deduct the cost of the structure over 27.5 years (residential) or 39 years (commercial). That slow, straight-line depreciation has been the default since the 1980s.

Bonus depreciation — codified in IRS §168(k) — changes that. It allows you to take an immediate, first-year deduction on qualifying property components rather than spreading the deduction over decades. For a high-value STR in a desirable market, that can mean $80,000–$250,000 deducted in Year 1. (Reference: IRS Publication 946, Chapter 3.)

The key word is qualifying. Not everything in a property qualifies. The IRS divides property into classes based on useful life, and only certain classes are eligible for bonus depreciation:

The share of your purchase price that falls into the 5-year and 15-year buckets is your bonus-eligible amount. A property with heavy finishes, lots of outdoor amenities, and a low land value ratio will have more bonus-eligible assets than a bare-bones property on a large lot — even at the same purchase price.

Why short-term rentals are uniquely positioned

Not all rental property investors benefit equally from bonus depreciation. STR investors have a structural advantage that most people overlook.

1. The STR tax election eliminates the passive activity limitation. Under normal IRS rules, rental losses are passive and can only offset passive income — meaning most investors can't use depreciation deductions to offset W-2 salary. STRs, however, qualify for an exception under Treas. Reg. §1.469-1T(e)(3)(ii)(A): if you materially participate in the rental activity and average rental stays are 7 days or fewer, the IRS treats it as an active business (see also IRS Publication 925). That means depreciation losses can offset any income, including a high W-2 salary.

2. STR properties are typically well-furnished. Airbnb and VRBO properties compete on finishes, amenities, and guest experience. That means more 5-year personal property — appliances, furnishings, decorative fixtures — which are the highest-value bonus-eligible assets.

3. Outdoor amenities are land improvements. Hot tubs, fire pits, patios, pools, fencing, and landscaping that LTR landlords skip are standard in the STR market. All qualify as 15-year property eligible for bonus dep.

How bonus depreciation actually works

Bonus depreciation is claimed through a process called cost segregation. A cost seg engineer inspects the property and reclassifies components of the purchase price from the default 27.5/39-year buckets into shorter-lived classes. Bonus dep is then applied to those reclassified amounts.

Here's the flow:

That $62k doesn't appear as a check — it reduces the taxes you'd otherwise owe on other income. Put another way: on a 15% down payment of $105k, you recover 59% of it in Year 1 through tax savings alone.

100% Bonus Depreciation Is Back in 2026: What STR Investors Need to Know (OBBBA)

Bonus depreciation was set to 100% by the Tax Cuts and Jobs Act of 2017, then began stepping down in 2023. The One Big Beautiful Bill Act (OBBBA) permanently restored it to 100% for property placed in service after January 19, 2025 — including 2026, 2027, and beyond. (Treasury/IRS implementing guidance: OBBBA §168(k) restoration guidance.)

Property choice determines outcome — a real comparison

The most common mistake STR investors make is treating bonus depreciation as a tax election, not a buying criterion. The truth is that two properties at the same price point in the same market can have wildly different bonus dep outcomes — and you won't know the difference until after you close, unless you screen first.

Same market. Same price. $33,000 difference in Year 1 tax savings — and 37 percentage points of your down payment recovered. At 100% bonus dep, choosing the right property matters more than ever.

How to screen properties before you buy

Most investors don't find out their bonus dep potential until they commission a cost seg study — which typically happens 6–12 months after closing, costs $5,000–8,000, and can't change the outcome. You already bought the property.

The better approach is to screen properties during the search, before making an offer. There are three signals that predict bonus dep potential without a full study:

1. Land value ratio. Land is never depreciable. A property where 40% of the value is in the lot has a much smaller depreciable basis than one where 15% is land. County assessors publish land vs. improvement breakdowns — or tools like DepreciMax pull this automatically.

2. Finish quality and amenities. High-finish properties — stone countertops, custom cabinetry, premium appliances, outdoor living spaces — have more 5-year and 15-year property packed into them. Price per square foot is a reasonable proxy: a $600/SF cabin in Ketchum has richer finishes than a $250/SF cabin in rural Tennessee.

3. Property age. Newer properties have more original finishes that qualify under cost seg. Older properties may have been renovated (good) or may have outdated finishes that don't classify as well.

When to commission a full cost seg study

A cost seg study is a formal engineering analysis that produces IRS-defensible classification of every building component. It's done by a specialist firm and typically costs $5,000–8,000.

Worth it if: Your purchase price is above $400k, you are in the 32%+ bracket, and the property scores reasonably well on the pre-purchase signals above. For a $700k property with 20%+ bonus-eligible potential, a $5,000 cost seg study that unlocks $35,000+ in tax savings has a 7:1 return.

May not be worth it if: The property has a high land value ratio, minimal finishes, or a low purchase price. Running a $5,000 study on a $200k cabin with minimal bonus-eligible assets often doesn't pencil out.

The DepreciMax property report ($99) is designed to answer the question before you commission a full study — giving you enough confidence to know whether the $5,000 engagement is justified.

Frequently asked questions

This guide is for educational purposes only and does not constitute tax or legal advice. Tax laws change frequently. Consult a qualified CPA or tax attorney before implementing any tax strategy.