Short-Term Rental Bonus Depreciation: Rules, Qualifying Assets, and Recapture

Short-term rental bonus depreciation lets you deduct the full cost of a property’s furnishings, appliances, and land improvements in the first year you place it in service, and use that deduction against your wages or business income if the activity qualifies as non-passive. Under the One, Big, Beautiful Bill signed in 2025, qualified property acquired after January 19, 2025, is again eligible for 100% first-year bonus depreciation on a permanent basis.¹ The strategy has two moving parts: getting your rental treated as a non-passive trade or business, and reclassifying as much of the purchase price as possible into asset categories that qualify for the accelerated write-off. Done well on a $500,000 property, a cost segregation study can shift $100,000 or more into bonus-eligible assets and produce a six-figure year-one deduction.

Getting the Loss Treated as Non-Passive

By default, the IRS treats rental activity as passive, which means any loss can only offset other passive income.² A passive loss you can’t use gets suspended and carried forward until you generate passive income or sell the property. If that’s where your loss ends up, bonus depreciation doesn’t help your current tax bill. To actually apply the loss against W-2 wages or other ordinary income, the activity has to clear two separate tests.

The 7-Day Average Stay Test

Your rental escapes the automatic “rental activity” classification if the average period of customer use is seven days or fewer.² The calculation is total days rented divided by number of separate bookings during the tax 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.

If your average tips over seven days, the activity is a rental activity subject to passive loss rules, and there’s no workaround short of qualifying as a real estate professional, which requires 750-plus hours annually in real property trades or businesses and more than half of your total working hours spent there. For an STR owner with a day job, the 7-day exception is the only realistic route.

Material Participation

Clearing the 7-day test reclassifies the activity as a trade or business rather than a rental. That alone isn’t enough. You still have to materially participate in the business. The IRS lists seven tests, any one of which works. The most practical for STR owners is the 100-hour test: you participated more than 100 hours during the year, and at least as much as any other single individual, including a property manager or cleaning crew.²

The bar 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 becomes hard to meet.

Documenting Your Hours

The IRS doesn’t strictly require a contemporaneous daily log. You can establish participation using appointment books, calendars, or narrative summaries showing the services performed and the approximate hours spent.² In practice, a real-time log holds up far better in an audit than a reconstruction. The burden is entirely on you to prove you hit 100 hours and that no one else did more. Record dates, tasks, and time as you go, in a spreadsheet or app.

Keep booking records showing every guest’s check-in and check-out dates as well. You need those to prove the 7-day average. If you own more than one property, track each separately, since the IRS evaluates average stay per activity.

Which Assets Qualify

Bonus depreciation applies to tangible property with a MACRS recovery period of 20 years or less.³ The building itself, classified as residential rental property, has a 27.5-year recovery period, so the structure doesn’t qualify.⁴ You depreciate that portion over 27.5 years using straight-line MACRS. Bonus depreciation targets everything else.

Eligible assets fall into three recovery-period buckets:

5-year property: appliances, carpeting, furniture, and decorative items. This category captures most of what’s inside a furnished STR, including beds, couches, kitchen appliances, rugs, and window treatments.⁴
7-year property: office furniture and equipment such as desks and filing cabinets, plus any property that has no assigned class life and isn’t designated elsewhere.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 is. A central HVAC system is structural, but a removable window unit is personal property. Built-in cabinetry is structural; a freestanding kitchen island is 5-year property. Dedicated wiring for the building is structural, but wiring to a specialized appliance or a hot tub may be separable.

One common misconception: Qualified Improvement Property, which covers interior improvements to commercial buildings, does not apply to residential rental. QIP is limited to nonresidential real property by definition.⁵ Interior renovations to your STR follow the standard residential categories above.

The Cost Segregation Study

A cost segregation study is the engineering-based analysis that breaks your 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 everything into the 27.5-year building bucket and stop there. With one, a meaningful percentage 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 allocating cost basis by asset class, which your tax preparer uses to compute the deduction on your return.

Professional studies typically run $5,000 to $15,000 depending on property size and complexity. The upfront cost usually pays for itself many times over. The economics work best on properties valued at around $500,000 or more, where the reclassified dollars are large enough to justify the fee. For lower-value properties the math tightens, though it can still work depending on how much of the property is furnishings and land improvements versus bare structure.

Use a qualified third-party firm. The study is the primary document the IRS will scrutinize in an examination. A report from a reputable engineering firm with defensible methodology holds up much better than a rough allocation done without engineering support.

What the 100% Rate Applies To

The Tax Cuts and Jobs Act originally provided 100% bonus depreciation for qualified property placed in service from late 2017 through 2022, then phased it down by 20 percentage points per year: 80% in 2023, 60% in 2024, and 40% in the first weeks of 2025.⁶

The One, Big, Beautiful Bill restored 100% bonus depreciation on a permanent basis for qualified property acquired after January 19, 2025.¹ Buy an STR after that date and the full cost of every eligible asset identified in your cost segregation report is deductible in the year the property is placed in service.

Watch a transition wrinkle: property acquired before January 20, 2025, but placed in service later follows the original TCJA phase-down schedule. That would mean only 20% bonus depreciation for assets placed in service in 2026. Acquisition date, not placed-in-service date, controls the rate. The IRS has also allowed an election to use the lower phase-down rate on post-January 19, 2025, acquisitions, though most taxpayers will prefer the full 100%.¹

Claiming the Deduction on Your Return

The bonus depreciation deduction is calculated on IRS Form 4562, Depreciation and Amortization.³ You enter the qualified asset amounts from your cost segregation report and the form produces your total depreciation figure. Bonus depreciation is automatic unless you opt out by attaching a statement. Attach Form 4562 to your return for the year the STR is first placed in service.⁴

Total depreciation flows to Schedule E, line 18, where you report income and expenses from the rental activity.⁷ Combined with operating expenses, first-year depreciation typically produces a significant net loss. Because you’ve established the activity as non-passive, that loss carries to Schedule 1 and reduces your adjusted gross income on Form 1040.

One reporting ambiguity to know about: because the 7-day exception technically means the activity isn’t a “rental activity” for tax purposes, some practitioners argue it belongs on Schedule C as a business, which would subject the income to self-employment tax. Others report it on Schedule E and flag it as non-passive. The IRS hasn’t issued definitive guidance, and the choice affects both your self-employment tax and audit profile. Worth raising with a tax professional who works with STR clients specifically.

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

Personal Use Kills the Deduction

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, the IRS treats it as a personal residence under IRC Section 280A. Expenses get allocated between personal and rental use, and rental deductions cannot exceed rental income, which eliminates the net loss that makes bonus depreciation valuable. If you plan to vacation at your own property, track personal-use days carefully and stay under the threshold.

The Excess Business Loss Cap

Even with non-passive treatment, there’s a ceiling on how much business loss you can apply against other income in a single year. Under IRC Section 461(l), non-corporate taxpayers cannot deduct aggregate business losses above a threshold adjusted annually for inflation. In recent years the cap has run in the range of $300,000 for single filers and roughly double that for married joint filers. Anything above the cap becomes a net operating loss carried forward. Your benefit isn’t lost, but part of it may be delayed if the first-year deduction is unusually large.

Recapture When You Sell

Bonus depreciation creates a big upfront deduction, and the IRS takes some of it back at sale through depreciation recapture. Overlooking this leads to painful surprises at closing.

The rules split by asset type:

Personal property (5- and 7-year assets) is Section 1245 property. Gain attributable to previously deducted depreciation is recaptured and taxed at ordinary income rates. If you bonus-depreciated $80,000 of furnishings and appliances, that full amount is potentially subject to ordinary income tax on sale.
Real property (the building and 15-year land improvements) falls under Section 1250. Depreciation on the building is recaptured as “unrecaptured Section 1250 gain,” taxed at a maximum federal rate of 25%. Any remaining gain above the depreciation is taxed at long-term capital gains rates.⁸

You report the sale and recapture on Form 4797, which calculates recapture for business property dispositions.⁹

The practical takeaway: bonus depreciation shifts your tax burden in time, not necessarily in total. You get a large deduction now at your marginal rate and pay back a portion later at sale. The strategy still works in your favor when the time value of money and the potential rate spread between ordinary income and recapture are factored in, but it isn’t free money. Investors who hold long-term or use a 1031 exchange to defer the gain get the most out of it.

State Conformity

Federal bonus depreciation is only half the picture. A significant number of states either fully decouple from the federal rules or only partially conform. If you live or operate in one of them, you may owe state income tax as though the federal deduction never happened.

The most common approach is a full add-back: you take the federal deduction on the federal return, then add the whole amount back to state taxable income. Some states let you recover the added-back amount over four to seven future years on the state return. A few require only a partial add-back or offer a credit to offset it. The mechanics vary too much for a blanket summary. Check your state’s conformity before assuming the federal deduction also lowers your state bill, and have a tax professional familiar with your state model the actual after-tax benefit.

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. Publication 946 (2024), How To Depreciate Property
6
Internal Revenue Service. Tax Cuts and Jobs Act: A Comparison for Businesses
7
Internal Revenue Service. 2025 Instructions for Schedule E (Form 1040)
8
CCH AnswerConnect. 2026 Quick Tax Facts
9
Internal Revenue Service. Instructions for Form 4797