Short-Term Rental Bonus Depreciation: Rules, Rate, and Recapture

Short-term rental bonus depreciation lets you deduct the cost of a furnished rental’s personal property, land improvements, and other short-life assets in a single year, and under the One, Big, Beautiful Bill signed in 2025, qualified property acquired after January 19, 2025, is once again eligible for 100% first-year bonus depreciation.¹ Executed properly, a cost segregation study on a $500,000 property might shift $100,000 or more into bonus-eligible categories, producing a six-figure deduction in year one. But the deduction only reaches your W-2 or business income if you first prove the rental is a non-passive trade or business.

Two Hurdles Before the Loss Reaches Your Ordinary Income

The IRS treats rental activity as passive by default. A passive loss can only offset passive income, and anything left over gets suspended and carried forward until you produce passive income or sell the property.² For most STR investors with a day job, a trapped loss defeats the whole point of accelerating depreciation.

Two things have to be true for the loss to land against your ordinary income.

Average Guest Stay of Seven Days or Fewer

Your rental escapes the automatic “rental activity” classification if the average period of customer use is seven days or fewer.² Divide total rental days by the number of bookings for the year. A property listed on Airbnb or VRBO with typical weekend and vacation stays almost always clears this. A property rented on 30-day leases does not, and there’s no workaround short of qualifying as a real estate professional, which itself demands 750+ hours annually in real property trades or businesses and more than half your total working hours spent there.

Material Participation

Clearing the 7-day test reclassifies the activity as a trade or business rather than a rental. You still need to materially participate in it. The IRS offers seven tests, and any one works. The most practical for STR owners is the 100-hour test: you participated for more than 100 hours during the year, and you participated at least as much as any other individual, including your property manager or cleaning crew.²

The threshold is “at least as much as” any other person, not more than. If your property manager logs 95 hours and you log 101, you qualify. Hours that count include guest communication, coordinating cleaning and maintenance, managing listings and pricing, handling check-ins, bookkeeping, and property oversight visits. If you outsource nearly everything, this test gets hard to meet fast.

Documenting Your Hours

The IRS doesn’t technically require a contemporaneous daily log. You can establish participation with appointment books, calendars, or narrative summaries showing services performed and approximate hours spent.² In practice, a real-time log is far more convincing in an audit than a summary reconstructed years later. Record dates, tasks, and time as you go. Keep booking records too, since you need check-in and check-out dates to prove the 7-day average. If you own more than one property, track each separately; the IRS evaluates average stay per activity.

Which Parts of the Property Qualify

Bonus depreciation applies to tangible property with a MACRS recovery period of 20 years or less.³ The building itself is residential rental property with a 27.5-year recovery period, so the structure is not eligible.⁴ It still depreciates over 27.5 years using straight-line MACRS. The bonus strategy targets everything else.

Eligible assets fall into three recovery-period categories:

5-year property: appliances, carpeting, furniture, and decorative items. This captures most of what’s inside a furnished short-term rental: beds, couches, kitchen appliances, rugs, and window treatments.⁴
7-year property: office furniture and equipment such as desks and filing cabinets, plus property with no assigned class life.⁴
15-year property: land improvements outside the building, including driveways, fences, retaining walls, landscaping, walkways, and sprinkler systems.⁴

The line between building structure and separable personal property is where the real money lives. A central HVAC system is part of the structure; a removable window unit is personal property. Built-in cabinetry is structural; a freestanding kitchen island is 5-year property. Dedicated electrical wiring to the building is structural, but wiring to a specialized appliance or a hot tub may be separable. Resolving these distinctions is the job of a cost segregation study.

The Cost Segregation Study

A cost segregation study is an engineering-based analysis that breaks the property’s purchase price or construction cost into its component parts and assigns each to the correct recovery-period category. Without one, most tax preparers lump the whole cost into 27.5-year building depreciation. With one, a meaningful share of the total cost shifts into 5-, 7-, and 15-year property, all of which qualify for immediate bonus depreciation.

The study is performed by a team that includes an engineer and a tax specialist. They review blueprints, invoices, and the physical property to identify and value each component. The deliverable is a detailed report showing the cost basis allocated to each asset class, which your tax preparer uses when calculating the deduction.

Professional studies typically run $5,000 to $15,000 depending on property size and complexity. The economics work best on properties valued at roughly $500,000 or more, where the reclassified dollar amounts are large enough to justify the fee. Below that, the math tightens but can still work if the property has substantial furnishings and land improvements relative to the bare structure.

Use a qualified third-party firm. The study is the primary document the IRS scrutinizes if your return is examined, and a report from a reputable engineering firm with defensible methodology holds up far better than a rough allocation from a tax preparer without engineering support.

The Current 100% Rate and the Acquisition-Date Cutoff

The One, Big, Beautiful Bill, enacted in 2025, restored 100% bonus depreciation on a permanent basis for qualified property acquired after January 19, 2025.¹ Buy a short-term rental now and the full cost of eligible assets identified in your cost segregation study is deductible in the year the property is placed in service.

The acquisition date, not the placed-in-service date, controls the rate. If you acquired property before January 20, 2025, but placed it in service later, it follows the original TCJA phase-down schedule rather than the restored 100%. The IRS has also provided an election that lets taxpayers use the lower phase-down rate even for post-January 19, 2025, acquisitions, though most will prefer the full deduction.¹

The remaining basis in the building, which doesn’t qualify for bonus, keeps depreciating over 27.5 years using straight-line.⁴

Reporting the Deduction

Bonus depreciation is calculated and claimed on Form 4562, Depreciation and Amortization.³ You enter the qualified asset amounts from your cost segregation report; bonus depreciation applies automatically unless you opt out by attaching a statement. Attach Form 4562 to your return for the year the property is first placed in service.⁴

The total flows to Schedule E, line 18, where you report income and expenses from the rental.⁵ Combined with operating expenses, the depreciation typically produces a large net loss. Because you’ve established the activity as non-passive, that loss carries through to Schedule 1, reduces adjusted gross income on Form 1040, and lowers your tax.

“Placed in service” means the date the property is ready and available for guests, not the closing date. Close in November, spend December renovating, list in January, and your placed-in-service date falls in the following tax year. The deduction shifts with it.

What You’ll Pay Back at Sale

Bonus depreciation shifts tax in time, not necessarily in total. When you sell, the IRS recaptures a portion of what you deducted.

Personal property (5-year and 7-year assets) is Section 1245 property. Gain attributable to depreciation previously taken is recaptured and taxed at your ordinary income rate. If you took 100% bonus on $80,000 of furnishings and appliances, that full amount is potentially subject to ordinary income tax on sale.
The building and 15-year land improvements are Section 1250 property. Depreciation taken on the building is recaptured as “unrecaptured Section 1250 gain,” taxed at a maximum federal rate of 25%. Gain above the depreciation amount is taxed at long-term capital gains rates.⁶

You report the sale and recapture on Form 4797, with Section 1245 recapture computed in Part III.⁷ The strategy still works in your favor once you factor in the time value of money and possible rate differences, but investors who plan to hold long-term or use a 1031 exchange to defer the gain benefit the most.

Limits That Can Blunt the Benefit

Three constraints deserve attention even when everything else lines up.

Excess business loss cap. Under IRC Section 461(l), non-corporate taxpayers cannot deduct aggregate business losses exceeding an annually inflation-adjusted threshold. In recent years the cap has run around $300,000 for single filers and roughly double for married joint filers. Losses above the cap become a net operating loss carried forward. This delays part of a large first-year deduction rather than eliminating it.

Personal use days. If you use the property yourself for more than the greater of 14 days or 10% of the days it’s rented at fair market value, IRC Section 280A treats it as a personal residence. Expenses get allocated between personal and rental use, and rental deductions cannot exceed rental income. That eliminates the net loss that makes bonus depreciation valuable. Track personal use carefully and stay under the threshold.

State conformity. A significant number of states either fully decouple from federal bonus depreciation or only partially conform. The common approach is a full add-back: you take the federal deduction, then add the entire amount back to state taxable income. Some states let you recover the added-back amount over four to seven future state tax years, and a few use partial add-backs or credits. Check your state’s rules before assuming the federal deduction also reduces your state tax bill.

1
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
2
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
3
Internal Revenue Service. Instructions for Form 4562 (2025)
4
Internal Revenue Service. Publication 527 (2025), Residential Rental Property
5
Internal Revenue Service. 2025 Instructions for Schedule E (Form 1040)
6
CCH AnswerConnect. 2026 Quick Tax Facts
7
Internal Revenue Service. Instructions for Form 4797