Bonus depreciation is the multiplier on the entire short-term rental tax strategy. Cost segregation determines how much of a building gets reclassified into short life property. Bonus depreciation determines how much of that reclassified amount you can deduct immediately rather than over five, seven, or fifteen years. Get the timing wrong and the same purchase produces a materially smaller deduction.
My BnB Accelerator, LLC is a real estate acquisition firm, not a CPA firm. This is a plain English explanation of the mechanics so you can have an informed conversation with a qualified professional. It is not tax advice. Our partner firm is AE Tax Advisors.
What bonus depreciation actually does
Ordinary depreciation spreads a deduction across an asset's recovery period. A five year asset generates roughly one fifth of its cost as a deduction each year, adjusted for the applicable convention. Bonus depreciation allows a percentage of the cost of qualifying property to be deducted in the first year the asset is placed in service instead.
Qualifying property generally means tangible property with a recovery period of twenty years or less. In a short-term rental context, that is exactly the category a cost segregation study creates: appliances, cabinetry, carpeting, decorative lighting, specialty electrical, and the fifteen year land improvements such as driveways, fencing, decking, and landscaping. The building shell itself, at 27.5 or 39 years, does not qualify.
This is why the two strategies are always discussed together. A cost segregation study without bonus depreciation still accelerates deductions, but the effect is spread across years. With bonus depreciation applied, a large share of the reclassified basis lands in a single tax year, which is what produces the headline numbers people associate with this strategy.
The rate has moved, repeatedly
The bonus depreciation percentage is set by statute and has changed several times under recent legislation, including a scheduled phase down and subsequent legislative changes. The practical consequence for an investor is simple and important: the rate that matters is the one in effect for the year the property is placed in service, not the year you signed a contract, not the year you started looking, and not the rate your neighbor got two years ago.
Because this figure moves, we do not publish a current percentage on this page. It should be the first question you ask your CPA, and the answer should be confirmed for your specific placed-in-service year before you build a model around it.
Placed in service is the date that governs
A property is generally placed in service when it is ready and available for its intended use, which for a short-term rental means furnished, listed, and available to book. Not the closing date. A December 20 closing with a January listing usually lands the deduction in the following tax year. This single detail has moved more client deductions between years than any other.
Timing decides how much this is worth
Placed-in-service dates, closing timelines, and market availability all move together. We build acquisition timelines backward from the date your CPA needs.
Apply NowWhat the arithmetic looks like
Illustrative only, and dependent on the applicable bonus percentage in your placed-in-service year.
Take a $1.1 million property with land allocated at $165,000, leaving a depreciable basis near $935,000. A cost segregation study reclassifies 30 percent of purchase price, roughly $330,000, into five, seven, and fifteen year categories. The remaining basis stays on the long schedule.
At a full bonus rate, most of that $330,000 becomes a first year deduction. At a reduced rate, a portion is deducted immediately and the rest depreciates across the normal recovery periods. Same property, same study, materially different first year outcome. For a household at top combined federal and state marginal rates, the swing between those scenarios can exceed six figures in a single year.
Three conditions that have to hold first
Bonus depreciation is the last step, not the first. Before it matters at all, three things have to be true.
- The activity has to clear the seven day test. Treasury Regulation 1.469-1T(e)(3)(ii)(A) removes an activity from rental classification when the average period of customer use is seven days or less. Read the full mechanics here.
- You have to materially participate. Otherwise the loss is passive and suspends, regardless of how large it is. See how to document material participation.
- You need the study. Without an engineering based cost segregation study, there is little short life property to apply bonus depreciation to. See cost segregation for Airbnb properties and our partner firm's material on cost segregation studies.
It is a timing benefit, not free money
Accelerated depreciation reduces your basis, which increases gain on sale, and portions of that gain can be taxed as recapture at rates above long term capital gains. That is not an argument against doing it. Deferring a large liability for years while deploying the freed capital into an appreciating asset is genuinely valuable. It is an argument for modeling the exit before running the study rather than after. See depreciation recapture explained.
The buyers who get the most out of this are the ones who treat the deduction as an accelerant on a property that already underwrites on its own merits. A weak property with a strong deduction is still a weak property. Market selection comes first.
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Frequently asked questions
What is bonus depreciation for a short-term rental?
Bonus depreciation allows a percentage of the cost of qualifying property with a recovery period of twenty years or less to be deducted in the first year the asset is placed in service, rather than spread across the normal recovery period. In a short-term rental, the qualifying property is typically what a cost segregation study reclassifies into five, seven, and fifteen year categories.
What bonus depreciation rate applies to my property?
The rate that governs is the one in effect for the tax year the property is placed in service. That percentage has changed several times under recent legislation, so it should be confirmed with your CPA for your specific year rather than assumed from a prior year or another investor's experience.
When is a short-term rental considered placed in service?
Generally when the property is ready and available for its intended use, which for a short-term rental means furnished, listed, and available to book. It is not the closing date. A December closing with a January listing typically moves the deduction into the following tax year.
Can I take bonus depreciation on the building itself?
No. The building shell depreciates over 27.5 or 39 years depending on classification, which exceeds the twenty year threshold for bonus eligibility. Only the shorter life components identified by a cost segregation study, such as appliances, finishes, specialty systems, and land improvements, are generally eligible.