Bonus Depreciation for Short-Term Rental Investors: The Complete 2026 Guide

Bonus depreciation is the tax provision that transforms cost segregation from a useful accelerator into a year-one deduction machine. For short-term rental investors, the combination of cost segregation + 100% bonus depreciation + the STR loophole is the most powerful legal tax reduction strategy available. This guide explains how bonus depreciation works, what the One Big Beautiful Bill Act changed, the critical January 19, 2025 cutoff, state conformity issues, and how to apply these rules to your specific situation.

What Bonus Depreciation Is

Under IRC §168(k), qualifying assets placed in service during a tax year may be deducted in full in that year rather than over the asset's normal MACRS recovery period. This "additional first-year depreciation" is what most investors refer to as bonus depreciation. The "bonus" is the immediate deduction you get over and above what straight-line depreciation would have produced in year one.

Before bonus depreciation, a $100,000 piece of 5-year property would be deducted over 5 years using the 200% declining balance method — roughly $20,000 in year one, then decreasing amounts in years 2–5. With 100% bonus depreciation, the entire $100,000 is deducted in year one. The time value of that acceleration is enormous — especially for high-income investors in the 35–37% tax bracket who are paying taxes in real dollars today.

What Assets Qualify

Qualifying property for bonus depreciation includes:

• 5-year MACRS personal property: Appliances, furniture, carpeting, certain fixtures, electronics, window treatments — the bulk of what gets reclassified in a cost segregation study on a furnished STR.
• 7-year MACRS personal property: Office equipment, specialized equipment.
• 15-year MACRS land improvements: Pools, patios, decks, landscaping, driveways, fencing, outdoor lighting — significant for vacation rental properties.
• Qualified Improvement Property (QIP): Interior improvements to existing nonresidential real property, assigned a 15-year life — eligible for 100% bonus depreciation.
• Used property: OBBBA maintained the TCJA extension of bonus depreciation to used (not just new) property, as long as the taxpayer or predecessors haven't previously used the property.

The 39-year building structure does not qualify. This is why cost segregation is the essential prerequisite — without it, there's virtually nothing in a real property acquisition to apply bonus depreciation to beyond separately-purchased furnishings.

OBBBA: Permanent 100% Bonus Depreciation

The Tax Cuts and Jobs Act of 2017 introduced 100% bonus depreciation but built in a scheduled phase-down: 80% in 2023, 60% in 2024, 40% in early 2025, eventually reaching 0%. The One Big Beautiful Bill Act, signed July 4, 2025, permanently halted and reversed this phase-down by restoring 100% for property acquired after January 19, 2025 and removing the expiration.

The effect is dramatic. An investor who purchased a $700,000 STR in 2024 could deduct only 60% of their reclassified assets in year one. The same investor purchasing in October 2025 deducts 100%. OBBBA restored approximately $60,000–$100,000 in additional year-one deductions on a typical STR property compared to 2024 economics. For a full breakdown of the OBBBA changes, see our OBBBA bonus depreciation article.

The January 19, 2025 Cutoff

Properties placed in service between January 1 and January 19, 2025 fall under the TCJA 40% rate. Properties placed in service January 20, 2025 or later receive 100% under OBBBA. The relevant date is placed-in-service date — when the property is ready and available for its intended rental use — not the purchase contract date or closing date.

A property that closed January 12 but wasn't ready for guests until February 3 was placed in service in February — qualifying for 100%. Investors in this situation should document their placed-in-service date carefully (first guest booking, first listing date, completion of repairs). For the complete breakdown of how this bifurcation works, see our bifurcated 2025 rules article.

How Bonus Depreciation and Cost Segregation Interact

Cost segregation identifies and reclassifies the components of your property that qualify for shorter depreciation lives. Bonus depreciation then applies to those reclassified components, deducting their full cost in year one. The two strategies are multiplicative — cost seg expands the eligible pool, bonus depreciation maximizes the immediate deduction from that pool.

For a complete walkthrough of the math on different property types and price points, see our cost seg + bonus dep together article.

Bonus Depreciation and the STR Loophole

Bonus depreciation creates the large first-year loss. The STR loophole determines whether that loss is active (deductible against W-2 income) or passive (trapped in carryforward limbo). For high-income investors, the loophole is what makes the deductions immediately useful — converting what would otherwise be a passive carryforward into real tax savings in the current year.

Without the STR loophole, bonus depreciation still produces losses — but for investors above the $150,000 MAGI threshold, those losses cannot offset W-2 income and sit in carryforward. The STR loophole eliminates this limitation by reclassifying the activity as non-passive.

Section 179 vs. Bonus Depreciation

Both Section 179 and bonus depreciation allow 100% first-year deductions, but they differ in one critical way: Section 179 cannot create a net operating loss, while bonus depreciation can. For STR investors whose strategy is to generate a large current-year loss to offset W-2 income, bonus depreciation is the primary tool. Section 179 is useful for specific asset types or state tax planning. See our full comparison: Section 179 vs. bonus depreciation for STR investors.

State Tax Conformity

The federal benefit of bonus depreciation is unambiguous. The state picture is more complex. Many major states — including California, New York, New Jersey, Illinois, Pennsylvania, and Massachusetts — do not conform to federal bonus depreciation. In these states, taxpayers must add back the federal bonus depreciation deduction on their state return and compute a separate state depreciation schedule under MACRS.

The state add-back is a timing difference — not a permanent disallowance. The deductions accumulate on the state return and offset future state income over the regular recovery period. Federal savings remain fully intact in all states. For a state-by-state breakdown, see our state conformity guide.

The QBI Deduction: The Bonus Benefit

OBBBA also permanently extended the 20% qualified business income (QBI) deduction under §199A. For STR investors who materially participate and treat the activity as a trade or business, net income from the STR may qualify for the QBI deduction — reducing effective tax rates further in years when the property generates positive taxable income (typically years 2+ after first-year bonus depreciation is exhausted). See our QBI deduction guide for STR investors.

Planning Considerations: Recapture and Exit Strategy

Bonus depreciation defers taxes — it does not eliminate them. When you sell, the depreciation claimed creates unrecaptured §1250 gain taxed at a maximum 25% federal rate. Three strategies defer or minimize recapture: 1031 exchanges into like-kind replacement property, holding until death (stepped-up basis eliminates recapture), or purchasing a new property in the sale year to generate fresh deductions.

Frequently Asked Questions