Cost Segregation for Short-Term Rentals: What Airbnb and Vacation Rental Owners Should Know
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Owners of Airbnb, Vrbo and other short-term rental properties can use a cost segregation study to accelerate depreciation deductions. It’s common to see 15% to 30% of a short-term rental’s purchase price reclassified into components eligible for 100% bonus depreciation.
Owners of residential properties used in short-term rental (STR) activities can accelerate depreciation deductions the same way commercial real estate investors do, with a cost segregation study leveraging bonus depreciation as recently re-enacted and made permanent by the One Big Beautiful Bill Act (OBBBA) of July 2025. A cost segregation study breaks a real estate property into its components. It enables owners to immediately deduct the full value of certain items, such as furniture, appliances, kitchen cabinets, resilient floor coverings and outdoor improvements, instead of slowly depreciating the costs of these items over 39 years.
It’s a strategy worth a close look for Airbnb and Vrbo hosts, vacation rental investors, qualified real estate professionals, and high-income professionals materially participating in the management of their real estate portfolio.
How cost segregation works for short-term rentals
A cost segregation study is an engineering-based analysis that identifies the parts of a real estate property that qualify for shorter recovery periods. In general, the building itself and its structural components, such as the foundation, walls, roof and windows, as well as the HVAC, electrical and plumbing systems required for the basic operation or maintenance of a building, are real property. They are subject to straight-line depreciation over 39 years. Tile and stone flooring, doors and windows, as well as bathroom accessories and fixtures, are also generally classified as real property.
However, other components often found in a house or residential condo unit acquired for short-term rental activities can be classified as 5-year personal property. In general, these components have a shorter useful life, serve a specific function related to the short-term rental activities, and are not permanently attached to the building. Examples of 5-year personal property components generally found in a short-term rental property include, but are not limited to, furniture, appliances, kitchen cabinets and countertops, decorative millwork, blinds, decorative light fixtures and certain easily removable floor coverings such as carpeting, floating laminate wood and luxury vinyl planks. Cost segregation engineers can also usually identify certain parts of the electrical system, such as wiring, conduits and receptacles used to power specific equipment, and include them as 5-year personal property.
In a similar fashion, outdoor improvements can also be segregated and are subject to the same favorable treatment as 5-year personal property components. Known in the tax world as 15-year land improvements, this category of costs includes, but is not limited to, driveways, sidewalks, patios, swimming pools, fences, decks, retaining walls and certain landscaping items.
Which short-term rental components qualify for faster depreciation?
| Items found in short-term rental properties | Typical recovery period |
|---|---|
| Couches, beds, dining table, appliances, TVs, cameras, sound system, patio furniture | 5 years, eligible for bonus depreciation |
| Kitchen cabinets and countertops, carpeting, vinyl planks, blinds, fire extinguishers, chandeliers, decorative lighting, certain branches of the electrical system | 5 years, eligible for bonus depreciation |
| Swimming pool, decks, driveways, fencing, landscaping, outdoor lighting | 15 years, eligible for bonus depreciation |
| Exterior walls, partitions, windows, doors, roof, roof covering, HVAC, incoming electrical, bathroom fixtures and accessories | 39 years, straight-line depreciation |
How does bonus depreciation apply to short-term rentals?
The OBBBA, signed July 4, 2025, made 100% bonus depreciation permanent, under current law, for qualifying property acquired after January 19, 2025. Every component with a recovery period of 20 years or less can be deducted in full in the first year it is placed in service. As such, the costs assigned to the components segregated as 5-year personal property and 15-year land improvements are eligible for 100% bonus depreciation and can be fully depreciated when the property starts its short-term rental activities.
What should a cost segregation study include?
A cost segregation study performed on a short-term rental property should be prepared in accordance with the methodologies and techniques recommended by the Internal Revenue Service (IRS). It should be detailed, engineering-based and well documented. When prepared for a property that was purchased, the study should include a replacement cost new analysis that can be reconciled with the purchase price, with proper consideration of the value of the land underneath the property. When prepared for a property that was newly constructed or renovated, the study should be reconciled with the actual construction costs and other indirect costs incurred.
Tax impact of cost segregation on a short-term rental
Cost segregation studies allow owners of short-term rental properties to accelerate depreciation deductions. Instead of slowly depreciating the whole property over 39 years, a certain percentage of the purchase price is segregated and fully depreciated in the year the property is acquired and placed in service.
The proportion of costs segregated varies based on the type of property, its condition at the time of acquisition, its design, the appliances and furniture included in the purchase, the types and quality of the finishes, and the extent of the outdoor improvements that come with the property. It’s common to see 15% to 30% of the purchase price of a short-term rental property reclassified and subject to bonus depreciation.
Example: $1 million single-family home purchased for short-term rental activities
Assumptions:
A single-family home in Fort Lauderdale, Florida is purchased and placed in service on June 1, 2026, for $1,000,000. The property is used for short-term rental activities. The house includes 3 bedrooms, 3 bathrooms and a two-car garage. The property is located on a canal, and its outdoor improvements include a boat dock, seawall, swimming pool and fencing. The house is in very good condition, with interior finishes renovated within the last five years. The kitchen includes marble countertops, wood cabinets and standard stainless-steel appliances. Flooring is wall-to-wall ceramic tile. Furniture was not included in the purchase price.
Based on a professional appraisal, 20% of the purchase price is assigned to the non-depreciable land, leaving a depreciable basis of $800,000. A cost segregation study is performed and identifies $120,000 (12%) in 5-year personal property and $104,000 (10.4%) in 15-year land improvements.
The following table shows the impact of the cost segregation study. Figures are rounded.
| Without cost segregation | With cost segregation | |
|---|---|---|
| 2026 depreciation deduction | $11,000 | $232,000 |
| Increase in 2026 depreciation deduction | $0 | $221,000 |
| Potential Impact on 2026 Taxes (37% rate) | $4,000 | $86,000 |
Cost segregation studies do not add or create depreciation deductions. They accelerate depreciation deductions and can potentially defer taxes to later years. By front-loading depreciation deductions into the first year of ownership, cost segregation studies leverage the time value of money.
The concept is to defer taxes into future years, keep that money and reinvest it in the present, either at a certain rate of return or in the next real estate acquisition.
Louis Guay, Principal, Kaufman Rossin
When should you do a cost segregation study on a short-term rental?
The best time is the year the property is placed in service, before that year’s return is filed. Owners who bought in earlier years can still pursue a look-back study and claim the missed depreciation in the current year with Form 3115, Application for Change in Accounting Method.
Key tax considerations before you commission a study
A cost segregation study can be a very powerful tool for owners of short-term rental properties. However, it’s important to be aware that different rules and interplay with other tax attributes could potentially mitigate or significantly limit how owners of short-term rental properties can benefit from the bonus depreciation triggered by the study.
The “short-term rental loophole,” as it is often referred to on social media, comes with caveats and considerations that should be discussed with a trusted tax advisor before a cost segregation study is commissioned. The sources of income to be offset, the projected holding period, the owner’s involvement in day-to-day short-term rental activities, the average length of stays and the rules around passive losses should all be considered and reviewed as part of the overall tax strategy when investing in short-term rental properties.
For advisors who refer short-term rental clients
Financial advisors, real estate agents, property managers and CPA firms without in-house cost segregation expertise often spot the opportunity first. When a client buys or already owns a short-term rental property, a quick introduction can uncover significant tax benefits.
After a referral, our team prepares a complimentary cost-benefit estimate so the client knows whether a study makes sense before committing. If it does, our engineers and CPAs complete the study and deliver a report with the asset schedules the client’s tax preparer needs. We coordinate directly with the existing CPA and keep the referring advisor in the loop throughout the process.
Frequently asked questions
Any single-family home or residential condominium owned and used to earn income through Airbnb, Vrbo or other vacation rental activities could potentially benefit from a cost segregation study. There is no minimum purchase price. The tax benefits triggered by the study, however, depend on various factors and should be discussed with your tax advisor.
Yes, it could, but only if certain tests are satisfied. Individuals with real estate professional status and those who materially participate in their short-term rental activities are more likely to be able to use a cost segregation study for this purpose. Different rules about the average length of stays, and about who is involved in the rental activities and to what extent, must also be satisfied and should be discussed with your tax advisor.
Yes, an owner can use the property personally but for no more than 14 days or 10% of the rental days in a given year. Any personal use beyond that will trigger significant limitations. It is important to consult with your tax advisor if you plan on using the property for personal use.
The ideal time is the tax year the property is placed in service, before that year’s return is filed. Owners who bought in a prior year can still do a look-back study and claim missed depreciation in the current year using Form 3115, in many cases without amending earlier returns. The bonus depreciation rate depends on when the property was acquired, so the study date doesn’t change it.
Yes. Under the One Big Beautiful Bill Act, signed July 4, 2025, 100% bonus depreciation is permanent under current law for qualifying property acquired after January 19, 2025. Property acquired or under a binding contract before January 20, 2025 follows the earlier phase-down, which allows 20% for property placed in service in 2026. These rules are current as of October 2026.
In general, no. Cost segregation studies are better suited for long-term holds because they leverage the time value of money.
Wondering if your short-term rental qualifies?
Talk to our cost segregation team for a complimentary, no-obligation estimate of what a study could mean for your property.
Disclaimer
This article is for general informational purposes only and is not tax, legal or accounting advice. Tax rules change, and how they apply depends on your specific facts. Consult a qualified tax professional before acting on any information in this article. The figures shown are illustrative and do not represent the results of any specific client or property.
Louis Guay Cost Segregation, Tax Credits & Incentives Principal at Kaufman Rossin, one of the Top 50 CPA and advisory firms in the U.S.
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