Depreciation for Short-Term Rentals

Depreciation is a timing mechanism, not a free deduction

Start with what depreciation really is. When you buy a rental building, the tax law doesn't let you deduct the whole cost in year one — but it doesn't make you wait until you sell, either. Instead it lets you recover the cost of the building gradually, a slice each year, over a fixed recovery period. That annual slice is a real deduction against your rental income, and you take it without writing a check that year. That's why real estate feels tax-advantaged: a deduction that costs you no cash that year can offset income you actually received in cash.

Here's the part most owners miss. Depreciation is best understood as moving deductions through time rather than as a permanent free deduction. Every dollar you depreciate reduces your basis in the property. Lower basis means a larger gain when you eventually sell, and prior depreciation shapes the tax consequences at that point (more below). So the accurate way to see depreciation is as a timing and rate mechanism. You get the deduction now, against this year's income, and you settle up later. That later settling up often comes at a different rate and years down the road, which is exactly why it can still be worth a great deal. But it is a decision with two ends, and this guide's whole job is to make you look at both.

(This is educational information about how depreciation works, not individualized tax advice; the numbers on your return are for your qualified tax professional to determine. We'll flag where something is the rule versus our read.)

What you depreciate — and what you don't

You depreciate the building and its improvements. You do not depreciate the land. Land doesn't wear out, become obsolete, or get used up, so the tax law treats it as non-depreciable. That makes the very first step a basis allocation: split what you paid between the land and the building (and, later, between the building and any shorter-life components). Get that split wrong — put too much on the land — and you quietly shrink every year's deduction; put too much on the building and you've overstated it. The allocation depends on the facts, and it should be reasonable and supportable. That makes it a documentation question; see Documentation & Audit Defense for STR Tax Positions.

Improvements you make later — a new roof, an addition, a renovation — are generally capitalized (added to your basis) and depreciated on their own, not deducted all at once, while true repairs are a current expense you deduct that year. Where that line falls is a bookkeeping and tax-classification question the records have to support. The STR Chart of Accounts sets up a review account for ambiguous items. The point here is simply that depreciation attaches to capital cost, and land isn't part of it.

The recovery period is its own determination

How long you depreciate over depends on how the property is classified for depreciation, and that is a separate determination from the classifications you've made for other tax rules, such as the passive-activity rules. Two periods matter:

• Residential rental property — 27.5 years. This is the default for a building where 80% or more of the gross rental income comes from dwelling units (houses or apartments used to provide living accommodations, not counting a unit in a hotel, motel or other establishment more than half of whose units are used on a transient basis — §168(e)(2)(A)(ii)(I)).
• Nonresidential real property — 39 years. This is where real property lands when it isn't residential rental property.

The STR-specific wrinkle is that §168 has its own definition of residential rental property. It generally requires 80% or more of the building's gross rental income to come from dwelling units — and for this purpose the statute excludes from "dwelling unit" a unit in a hotel, motel, or other establishment more than half of whose units are used on a transient basis.

That creates a genuine classification question for transient lodging, but it does not create a simple rule that an STR with short stays uses a 39-year recovery period. The statute provides no numeric average-stay test for "transient basis." Applying its hotel, motel, or other establishment language to a particular STR can require interpreting the specific facts and the authorities.

Notice how that language works. It looks at the whole establishment and asks whether more than half the units in it are used transiently. So a standalone house, an individually owned condominium, and a multi-unit lodging operation should not simply be assumed to receive identical treatment, and short stays alone don't resolve it.

Most importantly, and this is the doctrine that ties the tax guides together: do not import the seven-day or 30-day tests from §469 to make this call. Those tests determine rental-activity treatment for the passive-activity rules; they do not determine the depreciation recovery period. Recovery period is a separate classification question under §168, decided on its own facts. The same property can be classified differently under different parts of the law: classification determines which rules apply, one purpose at a time. Here, the purpose is the recovery period.

Placed in service — when the clock starts

Depreciation begins when the property is placed in service — ready and available to rent — not when you bought it and not when the first guest checks in. Once the unit is ready and available for its specific use, it's in service even if it sits empty waiting for bookings. That timing matters: it fixes when your deductions start, and it's a factual point your records should establish (listing live, calendar open, property ready).

You can't skip it to avoid the consequence

Depreciation is, in effect, not optional. The rule that catches people is the allowed-or-allowable rule: your basis is reduced by the depreciation you could have claimed, whether or not you actually claimed it. Decline to depreciate, and you don't preserve your basis or dodge the settle-up at sale. You simply give up the deduction — unless it is later corrected, which Is Cost Segregation Worth It for My STR? covers — while still taking the basis reduction that drives the future gain. That's why "I just won't depreciate it" is not a strategy; it's the worst of both ends. Depreciation you were entitled to take but did not claim still lowers your basis, so it still adds to your gain (§1016(a)(2)). But if your records establish that you claimed less than you were entitled to claim, the ordinary recapture is generally measured by what you actually claimed, and the rest of that gain is not §1245 recapture (§1245(a)(2)(B)). Both points are worth confirming with your tax professional.

Acceleration is a lever — and a separate decision

The recovery periods above are the straight-line default. The tax law also lets you pull deductions forward, faster. Straight-line means the cost is spread evenly across the years. Two ways of pulling deductions forward matter for STRs:

• Cost segregation breaks the building into its components and reclassifies the ones that qualify — certain fixtures, finishes, and land improvements — into shorter recovery classes (commonly 5-, 7-, and 15-year property) instead of the 27.5- or 39-year building. It doesn't invent new deductions; it re-times the ones you already have, pulling more into the early years.
• Bonus depreciation can accelerate deductions for qualifying shorter-life property, deducting a large share up front rather than over its class life. That is what makes cost segregation so powerful when the two are combined. Section 179, a separate provision that lets you elect to deduct the cost of certain qualifying property up front, may also apply when its separate requirements are met.

This guide draws two boundaries on purpose. Whether cost segregation is worth it for your property is its own decision. The study has a cost, the benefit depends on your facts, and the acceleration increases the tax consequence at sale. That decision gets its own guide (Is Cost Segregation Worth It for My STR?). And the bonus-depreciation percentage and §179 limits are set by current law and have changed often: for tax year 2026 (reviewed October 2026), bonus depreciation is 100% for qualifying property acquired after January 19, 2025 — made permanent by the 2025 tax act (§168(k); IRS Notice 2026-11), while §179 carries its own annual dollar limits and eligibility rules. What belongs here is the doctrine: acceleration changes when you take deductions, and pulling more deduction forward now means more of the tax consequence waits at the sale.

The date that controls is the binding-contract date, not the closing date. Property acquired under a written binding contract is treated as acquired on the date that contract was entered into, so a purchase that closed after the cutoff can still fall on the earlier side of it if the binding contract was signed before. Whether a particular contract was binding for this purpose turns on that contract's terms, not on the closing date. Self-constructed property is tested differently again, under a rule keyed to when manufacture, construction or production of the property began, with its own requirements your tax professional applies to the facts. So two STR owners who closed in the same month can face different percentages, and the contract — not the settlement statement — is usually the document that decides which one applies.

Qualified improvement property is a specific category, not a general label for renovation spending. It covers improvements to the interior portion of a building that is nonresidential real property, placed in service after the building itself was first placed in service. So it covers an STR's interior work only where the property is classified as nonresidential real property for depreciation purposes, which is the recovery-period question above. That classification turns on how the property is used. It is a determination for your tax professional, not something a renovation invoice shows. Where the category does apply, it is 15-year property, which is why qualifying interior work can be recovered far faster than the building it sits inside. Enlargements of the building, elevators and escalators, and work on the internal structural framework are excluded in any case, so a renovation invoice usually has to be read line by line rather than treated as one qualifying number.

Your state return may not follow. States set their own depreciation rules, and several decouple from federal bonus depreciation entirely or cap it, meaning they don't allow it at all or they limit it. So the same property can be fully expensed federally and depreciated over its full life at the state level, with the difference carried as a separate basis for years. Before you count a first-year deduction twice, check whether and how each state where you own or operate follows the federal depreciation rules (its conformity position).

Today's deduction, tomorrow's disposition consequence

Depreciation you take — and depreciation that was allowable — reduces adjusted basis and therefore affects the tax consequences when you dispose of the property. That's the second end of the timing decision. At a doctrine level, the direction is what matters:

• The building (real property) — prior depreciation can contribute to unrecaptured §1250 gain, subject to the special rate rules for unrecaptured §1250 gain.
• Cost-seg components — shorter-life components that are §1245 property can have ordinary-income recapture, which is why aggressive acceleration on components brings a heavier tax consequence at sale. Land improvements may be §1245 or §1250 property, depending on the asset.

The mechanics of §1250 and §1245 treatment, basis, gain, and the net investment income tax at sale are covered in the Wealth & Exit guides, starting with Depreciation Recapture: Why Your Gain at Sale Isn't All Capital Gain. This guide's job is to make sure you never treat the deduction up front as the whole story. Take the deduction knowing the consequence at sale exists, and time your decisions accordingly.