Bonus Depreciation for Short-Term Rentals: The Complete Guide (2026)

What Is Bonus Depreciation?

Bonus depreciation is a tax provision that allows property owners to deduct a large percentage of the cost of qualifying assets in the year they are placed in service, rather than spreading the cost out over many years of regular depreciation.

Three closely related concepts are worth keeping straight:

• Regular depreciation: Spreads the cost of an asset over its useful life (for example, 27.5 years for residential real estate, 5 years for appliances, 15 years for land improvements).
• Bonus depreciation: Lets you deduct a large percentage of qualifying short-life property (MACRS recovery period of 20 years or less) in the first year.
• Section 179: Similar to bonus depreciation but subject to annual dollar limits and cannot create a net business loss.

The Phase-Out Schedule (Before the Big Beautiful Bill)

Under the 2017 Tax Cuts and Jobs Act, bonus depreciation was scheduled to phase down each year:

• 2022: 100%
• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027: 0%

That schedule is no longer the controlling law for most post-January-19, 2025 acquisitions — see the Big Beautiful Bill section below.

Bonus Depreciation vs. Regular Depreciation

Regular depreciation turns an asset purchase into a slow drip of annual deductions. Bonus depreciation compresses much of that drip into year one. For a high earner, that compression can change the year-one deduction by hundreds of thousands of dollars on the exact same property.

Why Short-Term Rentals Get a Unique Advantage

Most real estate losses are considered passive under IRS rules, meaning they can only offset other passive income — not wages, business income, or investment gains. Short-term rentals can escape that trap.

The STR Loophole, Explained

The so-called "STR loophole" relies on a specific carve-out in the passive activity rules (IRC §469 and Treasury Reg. §1.469-1T(e)(3)(ii)). If the average period of customer use for a rental is 7 days or less, the IRS does not treat it as a "rental activity." That sounds technical, but the consequence is powerful: you do not need to qualify as a real estate professional to use your depreciation losses against ordinary income. You only need to materially participate in the activity.

Material Participation: What It Means

The IRS provides seven material participation tests. For most STR owners, one of these three will apply:

• 500-hour test: You participated in the activity for more than 500 hours during the year.
• Substantially-all test: Your participation constituted substantially all of the participation in the activity by all individuals (including non-owners).
• 100-hour test: You participated for more than 100 hours, and no other individual participated more than you did.

Keep a contemporaneous log. "Hours" means real, documented work: guest communication, listing management, bookkeeping, maintenance coordination, supply runs, cleaning oversight, marketing.

STR vs. Long-Term Rental: Why This Matters

With a long-term rental, you generally cannot deduct losses against your W-2 income unless you qualify as a real estate professional (750+ hours, more than half your working time in real estate trades). For most W-2 earners, that's a non-starter. With an STR, the bar is dramatically lower — and that's why bonus depreciation becomes so powerful.

The Big Beautiful Bill: What It Means for STR Owners in 2026

What the Law Does

OBBBA overrides the TCJA phase-down and permanently fixes bonus depreciation at 100% for qualifying property acquired after January 19, 2025. "Permanent" in tax language means "until Congress changes it again," but there is no scheduled sunset.

What This Means in Practice

If you acquire and place an STR property in service in 2026, you can deduct 100% of the cost basis of the bonus-eligible components in year one — not 20%, which is what the old phase-down schedule would have produced for 2026.

What to Do Right Now

1. Confirm acquisition date: The 100% rate hinges on an acquisition date after January 19, 2025. Pull your closing docs.
2. Order a cost segregation study: Bonus depreciation only applies to property with a MACRS recovery period of 20 years or less. A cost seg study is how you identify it.
3. Track participation hours: Start a contemporaneous log now. Retroactive reconstruction is a red flag in audits.
4. Talk to a CPA who knows STRs: General-purpose CPAs often miss the 7-day rule and default to treating STRs like long-term rentals.

How Bonus Depreciation Works on a Short-Term Rental: Step-by-Step Example

The Scenario

A W-2 earner making $400,000 buys a $900,000 STR in 2026, places it in service in January, materially participates, and keeps the average guest stay at 4 days.

The Math

• Purchase price: $900,000
• Land allocation (20%): $180,000 (not depreciable)
• Depreciable basis: $720,000
• Cost seg reclassifies 30% to short-life property: $216,000
• Year-one bonus depreciation (100%): $216,000
• Plus regular building depreciation (year 1): ~$18,300
• Total year-one deduction: ~$234,300
• Estimated federal tax savings at a 37% marginal rate: ~$86,700

Cost Segregation: The Key to Unlocking Bonus Depreciation

What Is a Cost Segregation Study?

A cost segregation study is an engineering-based analysis that reclassifies components of a building from the default 27.5-year residential real estate category into shorter-life categories (5, 7, and 15 years). Bonus depreciation only applies to those shorter-life components.

What Gets Reclassified?

• 5-year property: Appliances, carpet, decorative lighting, furniture, window treatments.
• 7-year property: Certain specialty equipment and furniture not covered by 5-year.
• 15-year property: Land improvements — landscaping, paving, fencing, site lighting, drainage.

What Does a Cost Seg Study Cost?

A full engineering study typically runs $3,000 to $10,000 for a single STR, depending on complexity. DIY and software-assisted studies are cheaper ($500 to $2,000) but carry more audit risk.

When Is It Worth It?

A rough rule of thumb: if your property's depreciable basis is above $300,000 and you materially participate, the study will almost always pay for itself many times over in the first year.

Who Qualifies? Rules and Requirements

Short-Term Rental Qualification

• Average guest stay of 7 days or less across the tax year.
• Material participation under one of the IRS tests.
• The property is placed in service — available and ready to rent — during the tax year for which bonus depreciation is claimed.

What About Hiring a Property Manager?

A hands-off property manager will often out-participate you, making it difficult to pass the 100-hour or substantially-all tests. Co-hosting arrangements where you stay meaningfully involved tend to work better if material participation matters.

Used vs. New Property

The TCJA extended bonus depreciation to used property as long as it is new to you. A resale STR qualifies just like a newly-built one.

State Considerations

Not all states conform to federal bonus depreciation. California, New York, and several others decouple, meaning you may still owe state tax on amounts fully deducted federally. Check your state's rules before projecting state-level savings.

Common Mistakes STR Owners Make with Bonus Depreciation

• Assuming the 7-day rule is enough: It gets you out of passive activity classification, but you still need to materially participate.
• No contemporaneous log: Reconstructing hours from memory at tax time is an audit risk.
• Skipping cost segregation: Without a study, the entire depreciable basis defaults to 27.5-year treatment and bonus depreciation has nothing to apply to.
• Ignoring recapture: Accelerated depreciation reduces basis. If you sell within a few years, expect depreciation recapture taxed at up to 25%.
• Treating the property as a second home: Personal use above 14 days (or 10% of rental days) can push the property out of rental treatment entirely.

Bonus Depreciation Calculator for Short-Term Rentals

The exact year-one deduction depends on purchase price, land allocation, cost seg percentages, placed-in-service month, material participation status, and your marginal tax rate. Use the calculator below to model your scenario — it shows the estimated deduction, whether it's usable this year, and the resulting tax savings.

Prefer the standalone version? Open the full STR Bonus Depreciation Calculator.

Frequently Asked Questions

The Bottom Line

For W-2 earners and business owners who can dedicate time to their rental, short-term rentals plus cost segregation plus 100% bonus depreciation can produce some of the largest legal tax savings in the individual code. But the details matter. Here's the short path:

1. Confirm your property's average guest stay is 7 days or less.
2. Log your participation hours as you go.
3. Order a cost segregation study.
4. Work with a CPA who has done STR bonus depreciation before.
5. Model the numbers with a calculator before you close on the property.