Maximize your short-term rental profits with savvy financial strategies that go beyond just booking guests. Discover how rental property depreciation can help you recover the cost of wear and tear, reduce your taxable income, and increase your earnings.

Depreciation reduces your taxable income by letting you deduct the cost of wear and tear over 39 years, even if your property is increasing in value.

Bonus depreciation and cost segregation can accelerate those deductions, especially on items like furniture, appliances, and interior improvements.

Short-term rental owners who actively manage their properties may unlock extra tax perks, including Section 179 expensing and 100% bonus depreciation.

Rental income might steal the spotlight, but seasoned investors know the real wins happen at tax time.

That’s because rent checks can fluctuate, but tax strategies deliver year-after-year savings that go straight to your bottom line. Depreciation is one of those strategies, but it’s not automatic and the IRS doesn’t make it simple. 

There are rules about what qualifies, how long you can deduct it, and how to handle rental property depreciation when you sell. We cover all of those topics in this article.

Rental property depreciation is a tax deduction that lets real estate investors recover the cost of owning and maintaining a property over time. Instead of writing off the full cost of the property in the year you buy it, depreciation allows you to spread that deduction out gradually, typically over 39 years for short-term rentals.

This annual deduction helps account for the natural wear and tear of the property, even if its market value increases. It’s designed to reflect things like aging appliances, outdated finishes, or other components that decline in value over time.

Depreciation is one of the most valuable tax benefits available to rental property owners. It reduces your net rental income on paper, which lowers the amount of taxes you owe without requiring any new spending.

Whether you’re managing a long-term lease or running a short-term rental, depreciation can significantly improve your cash flow over time.

However, here’s what you absolutely need to know about rental property depreciation:

The IRS treats depreciation like you claimed it, even if you didn’t.
So when you sell, you’ll still owe taxes on the depreciation you could have claimed.
That means ignoring it now doesn’t save you. It just costs you later on down the line. 

We’ll get into the details later, but for now: if you own rental property, depreciation isn’t optional. It’s one of the most important tools for keeping more of your profits.

To calculate depreciation and stay compliant with IRS rules on rental property depreciation, you’ll need to understand a few key terms. 

Depreciable property: You can only depreciate the value of the building and any improvements made to it, not the land underneath. Land doesn’t “wear out,” so it’s excluded from depreciation.

Useful life: The IRS sets the depreciation period for residential rental property at 39 years. That’s the period over which you’ll spread out your depreciation deductions.

Cost basis: This is the total amount you spent to acquire and prepare the property for rental use. It typically includes the purchase price, eligible closing costs, and significant pre-rental improvements (like a new roof or HVAC system).

Depreciation formula: (Cost basis - land value) ÷39 = annual depreciation deduction.This gives you the amount you can deduct from your taxable rental income each year.

Depreciation recapture: When you sell a property, the IRS requires you to pay taxes on the total amount of depreciation you were allowed to take, even if you didn’t actually claim it. This is known as depreciation recapture, and it’s taxed separately from capital gains.

How to Calculate Rental Property Depreciation

Calculating how much depreciation you can deduct each year isn’t as complicated as it might seem. Once you know the numbers the IRS uses to calculate depreciation, it’s just a matter of plugging them into the formula.

To calculate your annual depreciation deduction, use this formula:

(Cost basis – Land value) ÷ 39 = Annual depreciation deduction

This gives you the amount you can deduct from your taxable rental income each year for 39 years.

Now, let’s break down each part of the formula so you can apply it to your own property.

The cost basis is the IRS’s starting point for calculating how much of your property’s value can be depreciated. It includes more than just what you paid for the property.

Purchase price: The amount you paid to buy the property.

Eligible closing costs: Fees like title insurance, deed recording, and attorney fees (but not loan-related costs like points or prepaid interest).

Capital improvements made before renting: These are major upgrades that add value or extend the property's life, like a new roof, HVAC system, or kitchen renovation.

Example
You buy a property for $250,000, pay $5,000 in closing costs, and spend $20,000 on pre-rental improvements.

Your cost basis = $250,000 + $5,000 + $20,000 = $275,000

You can’t depreciate land, because it doesn’t wear out. You’ll need to subtract the value of the land from your total cost basis.

Land value is usually listed separately on your county tax assessment or appraisal report. If it's not provided, you may need to work with a tax professional to estimate it.

If the land is valued at $50,000, then:
$275,000 – $50,000 = $225,000 depreciable basis

Once you know your depreciable basis (the cost of the building and improvements, excluding land), divide it by 39 to get your annual deduction.

That’s how much you can deduct from your rental income every year, regardless of whether you paid for a new roof or not in that particular year.

Your cost basis is the starting number you use to calculate depreciation. It includes the purchase price, certain closing costs, and pre-rental improvements, minus the land value (which can’t be depreciated).

However, that number doesn’t stay fixed forever. Over time, your cost basis can change based on two main things:

Depreciation you’ve already claimed: Each year, the value of the building goes down for tax purposes, because you're “using it up.”

Capital improvements: If you make major upgrades (like installing a new roof, HVAC system, or kitchen), you add those costs to your basis.

This new, updated number is called your adjusted cost basis. It’s not something you file with the IRS each year, but it’s critical to track it for your own records, especially when you sell the property (to calculate capital gains and depreciation recapture), or you add new improvements and want to deduct them properly.

Let’s say you buy a rental property for $300,000. The land is worth $50,000, so your depreciable basis is $250,000.

You depreciate it over 39 years: $250,000 ÷ 39 = $5,769 per year

In Year 3, you install a new HVAC system for $10,000.

You continue claiming $5,769/year for the original building

Plus, you start depreciating the $10,000 HVAC (usually over 15 years, or possibly all at once with bonus depreciation)

So your total depreciation for the year increases, but your original building deduction stays the same.

Even though you don’t submit your adjusted cost basis to the IRS every year, keeping accurate records is essential.

You’ll need this information when you sell, calculate depreciation recapture, or file deductions for improvements. Without it, you could miss out on tax savings — or worse, overpay when it’s time to settle up with the IRS.

Export revenue data, estimate deductible expenses, and model depreciation scenarios — all from your AirDNA dashboard. Give your CPA the data they need to save you more.

Rental Property Depreciation Methods and Schedules

Once you’ve figured out your property’s depreciable value, there’s still one more decision and IRS rule you’ll need to follow: how your depreciation is scheduled.

This matters because it affects how much you can deduct each year, and how long those deductions last. The IRS offers two main systems for calculating depreciation: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Each one follows different rules about how fast you can deduct your expenses.

In most cases, the method you’ll use is already determined by the IRS. However, knowing which one applies and why helps you understand what to expect and how to plan for tax time.

This is the default and most common method used for residential rental properties in the U.S. It allows you to recover the cost of your building over time in a steady, predictable way.

Recovery period: 39 years for short-term rentals and 27.5 for everything else

Method: Usually straight-line depreciation under MACRS (Modified Accelerated Cost Recovery System), which means you deduct the same dollar amount each year for the building’s original depreciable value, unless you add new improvements later.

Mid-month convention: Your first year’s depreciation is prorated because the IRS treats the property as being placed in service at the middle of the month, regardless of the exact day

GDS gives you consistent, moderate-sized deductions year after year. It’s simple to apply and widely used.


ADS is a slower method with a longer depreciation schedule:

Recovery period: 40 years for residential property

Method: Straight-line only (no acceleration)

Downside: The deductions are spread out more thinly, so your annual tax savings are smaller

You’ll only need to use it in special situations, like:

The property is used mostly outside the U.S.

It’s considered tax-exempt use property

You elect to use ADS, sometimes done for long-term tax planning.

If you’re required to use ADS (or choose to), you’ll get less depreciation each year. That might be fine for long-term planning, but it’s something to factor into your financial forecasts.

Here’s one final rule that applies no matter which method you’re using: You can’t depreciate the land . . . only the building and qualifying improvements. Be sure you’ve subtracted land value from your cost basis before starting any depreciation schedule.

What Is Bonus Depreciation and How Is It Different?

While regular depreciation spreads out deductions over many years, bonus depreciation lets you write off the entire cost of certain assets in the year you buy and place them in service. It’s a way to accelerate your tax savings and lower your taxable rental income much faster, potentially freeing up more cash in the early years of owning or updating a property.

Bonus depreciation applies only to specific types of property: namely, items that have a useful life of 20 years or less. That includes things like appliances, furniture, HVAC systems, and flooring. It does not apply to the building itself or the land.

This deduction can be used by both long-term and short-term rental property owners, as long as the rental activity qualifies as a business (which it usually does if you actively manage the property). For the asset to qualify, it must be new to you and placed in service, meaning ready and available for rental use, in the same year you claim the deduction.

If you’re furnishing a new short-term rental, replacing aging appliances in a long-term unit, or updating major systems like heating or air conditioning, bonus depreciation allows you to recover those costs right away instead of waiting five, seven, or even 15 years.

That kind of upfront tax break can make a real difference in the early stages of owning or scaling a rental property.

2025 update: 100% bonus depreciation is back

For a few years, bonus depreciation was phasing out. After 2022, the maximum deduction percentage started dropping: from 100% to 80% in 2023, then 60% in 2024.

However, the 2025 One Big Beautiful Bill Act (OBBBA) changed that. It brings back 100% bonus depreciation for qualifying property placed in service after January 19, 2025.

Bonus depreciation is a powerful tool for improving cash flow, especially when paired with strategies like cost segregation that help identify more assets that qualify.

AirDNA’s Rentalizer shows projected income and allows you to itemize expenses so you can estimate your cash flow. Then, layer in bonus depreciation and other tax benefits to understand your full after-tax ROI.

Cost Segregation Studies and Rental Property Depreciation

Depreciation is already a smart way to reduce your rental property's taxable income, but what if you could unlock even more of those deductions upfront?

That’s where cost segregation comes in. It’s a strategy you can use, usually with the help of a tax pro or engineer, to break your property into its individual parts. That way, you don’t have to treat everything like it wears out at the same pace. Let’s face it: your roof isn’t aging like your refrigerator.

With cost segregation, you separate qualifying items like flooring, lighting, appliances, and landscaping from the structure of the building itself. Instead of depreciating the entire property over 39 years, you can depreciate these components over much shorter timelines: 5, 7, or 15 years, depending on the asset.

Faster depreciation = bigger deductions sooner

You improve cash flow in the early years of ownership or renovation

It works with regular depreciation and pairs especially well with bonus depreciation (for even more upfront savings)

Cost segregation helps you match your tax deductions to how your property actually wears down, making your depreciation strategy more accurate and more efficient.

Even if you don’t spring for a full cost segregation study, understanding the concept helps you work with your tax pro to identify faster-depreciating assets when you buy, renovate, or furnish a rental, whether it’s long-term or short-term.

Claiming Rental Property Depreciation on Taxes

Depreciation can significantly reduce your taxable income, but only if it’s reported correctly.

Each year, you’ll need to complete IRS Form 4562 to claim depreciation. This form documents how much you’re deducting and the method you're using. Key details include the date the property was placed in service, its cost basis, and whether you're using bonus depreciation.

Once filled out, your depreciation expense gets reported on Schedule E (Form 1040), alongside your rental income and other expenses.

One final note: When you eventually sell the property, the IRS requires depreciation recapture, meaning you'll owe tax on all the depreciation you took (or could have taken) during ownership. This applies even if you never actually claimed the deduction. 

Still unsure how to apply depreciation to your specific property? Consult a qualified tax professional to maximize your deductions and stay compliant with IRS rules.

What to know about depreciation recapture

Depreciation is a powerful way to reduce your taxable income while you own a rental property, but the IRS doesn’t let those tax savings go permanently untaxed.

When you sell the property, the IRS requires you to “recapture” the depreciation you claimed (or could have claimed) over the years. This means you’ll owe taxes on the total amount of depreciation deductions allowed or allowable, regardless of whether you actually claimed them.

This is known as depreciation recapture, and it’s taxed at a maximum rate of 25% under the federal unrecaptured Section 1250 gain rules. It only applies to the portion of your gain related to depreciation, not your entire profit or sale price.

Important: Even if you didn’t claim depreciation, the IRS still reduces your cost basis as if you did. So skipping depreciation doesn’t save you. It just means you miss out on years of tax savings but you’ll  still owe taxes at sale.

Think of depreciation like a tax deferral, not a permanent discount:

You pay less tax each year while you own the property

Then pay part of that back later when you sell

The good news? For most rental owners, the annual tax savings far outweigh the recapture owed later. Still, it’s smart to plan ahead, especially if you’re considering a sale or a 1031 exchange, which may allow you to defer the recapture further.

How Rental Property Depreciation Works for STRs

If your short-term rental (STR) property is rented for less than 30 days at a time, and you actively manage it (think guest communication, cleaning, and maintenance), the IRS may treat your short-term rental like a business rather than a passive investment. That classification opens the door to larger and faster deductions, even if you don’t qualify as a real estate professional.

This unique treatment, often referred to as the short-term rental tax loophole, can give STR owners a leg up when it comes to claiming depreciation and other tax benefits. For example, you may be able to deduct rental losses against your regular income, something long-term landlords often can’t do without meeting stricter IRS criteria.

The takeaway? With the right setup and active involvement, short-term rental depreciation can significantly lower your tax burden, making your investment more profitable without spending more out of pocket.

Understand your annual short-term rental income potential and enter expected expenses. From there, you have everything you need to project how bonus depreciation, QBI, and SALT deductions could reduce your taxable income.

Short-Term vs. Long-Term Rental Depreciation

Long-term rentals are usually more hands-off and treated as passive investments. You can still claim standard depreciation, and in some cases, bonus depreciation too, but only if your rental activity qualifies as a business (like if you’re a real estate professional). Since LTRs often involve less active involvement, owners usually don’t meet the IRS’s requirements to unlock those extra tax deductions.

Short-term rentals have a recovery period of 39 years since they’re used for commercial activity. Long-term rentals depreciate over the course of 27.5 years because the average tenant stay is 30 days or longer, making it a residential use according to the IRS.

STRs also tend to have more wear and tear due to frequent guests. That means more upgrades, which you can factor into your cost basis and possibly depreciate faster through strategies like cost segregation.

Both short- and long-term rentals qualify for standard depreciation. However, short-term rentals (when actively managed) can unlock even more powerful tax strategies. Understanding the differences helps you plan smarter, save more, and stay on the IRS’s good side.

Because AirDNA is a business tool used for analyzing, managing, and launching your STR, its cost is usually deductible. Reduce your taxable income while accessing the data that drives stronger ROI.

Depreciation is a tax deduction that lets you recover the cost of buying and improving a rental property over time. It reflects the idea that buildings wear out or become outdated, even if they’re gaining market value.

How do you calculate depreciation on a rental property?

To calculate depreciation, take your cost basis (purchase price + eligible closing costs + improvements), subtract the land value, then divide the result by 39 years. Use 39 years for commercial property (short-term rentals) and 29 years for residential properties (long-term rentals). That gives you the annual amount you can deduct.

How much depreciation can you claim on a rental property?

It depends on your cost basis after removing the land value. For example, if $275,000 of a $300,000 property is depreciable, you'd claim $275,000 ÷ 39 = about $7,000 per year.

Is the depreciation period 27.5 or 39 years?

It depends on how the IRS classifies your property:

27.5 years applies to residential rental properties, like single-family homes, apartments, and long-term rentals used primarily for living accommodations.

39 years applies to commercial properties, such as office buildings, retail spaces, or warehouses. Short-term rentals are treated like hotels or motels and fall within this category as well.

The IRS sets these depreciation periods under the General Depreciation System (GDS), which is the most commonly used method. If you're renting to individuals for living purposes, the average stay must be 30 days or longer for it to qualify as residential and follow the 27.5-year schedule.

What happens if I don’t claim depreciation?

Even if you skip claiming depreciation, the IRS treats it as if you did. That means when you sell the property, you’ll still owe depreciation recapture tax (usually up to 25%) on the amount you could have deducted. If you don’t claim it, you lose the yearly tax savings but still owe the taxes later. That’s why it’s important to track and report depreciation correctly, even if you don’t think you need it right now.

What is the downside of depreciation rental property?

The biggest downside comes when you sell. The IRS requires you to pay recapture tax on the depreciation you’ve claimed (or were allowed to claim), which is usually taxed at up to 25%. If you haven’t planned for it, this can reduce your profit from the sale.

Another risk is not keeping good records. If you don’t track your cost basis and improvements accurately, you could end up paying more tax than you need to or face IRS issues.

Still, most investors find that the yearly tax savings outweigh the future recapture. If you're thinking long term, strategies like a 1031 exchange can help delay or reduce the tax hit when you sell.

Can I claim depreciation on a short-term rental?

Yes, as long as the property is used to produce income and you meet IRS requirements. Short-term rentals may even qualify for bonus depreciation or additional tax benefits if you actively manage the property.

Are there any special depreciation rules or loopholes for short-term rentals?

Yes, and we have a guide dedicated to this subject: How to Leverage the Short-Term Rental Tax Loophole to Reduce Your Tax Burden.

Short-term rentals might qualify for bonus depreciation or Section 179 expensing, which allows you to deduct the full cost of new furniture in the year you buy it. Both of these strategies allow for the immediate deduction of certain expenses. Keeping up with legislative changes and IRS updates is vital. Consult a qualified tax accountant to help navigate these complexities.

Can you take bonus depreciation on rental property in 2025?

Yes, and the 2025 One Big Beautiful Bill Act (OBBBA) has made this even more attractive. OBBBA reintroduced 100% bonus depreciation for qualifying new and used property placed in service after January 19, 2025. This means you can immediately deduct the full cost of eligible assets, like appliances, furniture, HVAC systems, and certain building components, rather than spreading deductions over multiple years. 

When paired with a cost segregation study, this can create substantial upfront tax savings for short-term rental owners. Keep in mind that bonus depreciation applies to tangible personal property and qualified improvement property, not the building structure itself.

Struggling with high taxes on your short-term rental? Learn how rental property depreciation can reduce your taxable income and boost your profits.

How Rental Property Depreciation Works

How Rental Property Depreciation Increases Your Short-Term Rental Profits

Key Takeaways
Rental property depreciation allows you to recover the cost of wear and tear on your property over 27.5 years, reducing your taxable income.
Short-term rental owners can benefit from the same depreciation rules as long-term landlords, making it a valuable strategy for increasing profits.
You can use cost segregation to accelerate depreciation on certain parts of your property.

Tax season—just hearing those words can make you groan, right? It's that time of year when most of us scramble to find every receipt, form, and deduction we can to make the process a little less painful. 

What if we told you there's a hidden gem in the tax code that could save you a significant chunk of change on your short-term rental (STR) investment real estate? Enter rental property depreciation, a savvy tax deduction that lets you recover the cost of wear and tear on your property. It's not just a trick for long-term landlords—short-term rental owners can cash in on this, too. 

This guide will show you how to depreciate rental property effectively, maximize your investment, and keep more money in your pocket. 

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What Is Rental Property Depreciation?

Depreciation is a tax deduction that lets you recover the cost of your rental real estate over a specified period. Instead of deducting the entire purchase price in the year you bought the property, you spread out the deduction over several years. This gradual deduction reflects the property’s declining value due to use and aging. The IRS provides specific guidelines for real estate depreciation.

Key Points:
Depreciable Property: Includes assets like buildings but excludes land.
Useful Life: Residential rental properties have a useful life of 27.5 years.
Depreciation Calculation: Determine the cost basis of the property (primarily the property’s purchase price), subtract the land value, and divide the remaining amount by 27.5.

How Short-Term Rental Property Depreciation Works

Let’s jump into the nuts and bolts: IRS classifications, depreciation periods, depreciation systems, cost basis, annual calculations, cost segregation, and when to start depreciating your short-term rental property. If this jargon means nothing to you, hang tight. We’ll  break it down below. 

What does the IRS consider to be a short-term rental?

Navigating the IRS rules can feel like deciphering a foreign language, but AirDNA is here to help translate. The IRS defines short-term rentals as properties rented for less than 30 days at a time. This classification directly impacts how rental property owners can claim expenses and depreciation on their real estate.

Owners must actively participate in managing the property to benefit from short-term rental depreciation. This means you’re involved in tasks such as booking guests, coordinating cleaning and maintenance, and handling guest communications. Active participation meets the IRS criteria for short-term rentals, allowing you to claim the associated tax deductions.

It's also important to note that different rules may apply if your property is a mixed-use property, involving both personal use and rental activity. For example, if you use the property for personal vacations while also renting it out, you'll need to carefully track the days used for personal versus rental purposes to accurately report your income and expenses.

For a deeper dive into how the IRS classifies short-term rentals and the tax benefits you can claim, check out our comprehensive article on the short-term rental tax loophole. 

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Depreciation Systems and Recovery Periods

There are two main systems for calculating rental property depreciation: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). 

For most rental properties, GDS is the standard method. GDS provides a set recovery period, which is the time span over which you can depreciate your property.

For commercial properties, the recovery period is 39 years. For residential rental properties under GDS, the recovery period is 27.5 years. This means you can gradually deduct the purchase price of your property over that time, spreading the cost evenly.  Under a straight-line depreciation method, you deduct an equal amount of the property's cost annually over the course of the recovery period. This method provides a consistent deduction amount throughout the entire time, making it simpler to calculate and plan for.

Under the GDS, short-term rental owners can claim larger deductions in the early years of the recovery period through a declining balance method. In short, depreciation is calculated based on a fixed percentage of the remaining balance of the property’s value each year. 

Let’s say you purchase a home for $275,000. That first year, you use a 200% balance rate to deduct $20,000. The choice of a 200% balance rate comes from the Modified Accelerated Cost Recovery System (MACRS) rules set by the IRS. For accelerated depreciation under MACRS, the rate is double the straight-line depreciation rate, hence the term “200%.” Instead of deducting 3.6%, residential rental property owners can use a 7.2% rate ($275,000 x 7.2% = $20,000).

The second year, however, your depreciable property is $255,000 ($275,000 - $20,000 first year deduction) so your deductible is lower. Applied to a $255,000 property value, a 200% balance rate is $18,545 for your second-year depreciation.

Under the Alternative Depreciation System (ADS), residential rental properties have a recovery period of 40 years. This is a straight-line method over a longer recovery period. It offers a simpler and more straightforward approach but usually results in smaller annual deductions. It might be required for certain types of properties or taxpayer situations.

Choosing Between GDS and ADS:

GDS Benefits: Larger early deductions, better short-term tax benefits.
ADS Benefits: Simplicity, consistency, compliance with specific requirements.

Understanding these systems helps you make informed decisions that align with your investment goals and keep you compliant with IRS guidelines.

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How to Calculate Annual Depreciation

Calculating annual depreciation for your residential rental property might sound complex, but it’s pretty straightforward once you break it down. Here’s how you can do it step-by-step:

Determine the Cost Basis:  This includes the purchase price plus any initial repair costs or improvements. Think of it as the total amount you’ve invested in getting your property ready for guests. We cover how to determine the cost basis in more detail below!
Divide by the Recovery Period:Next, you’ll use the recovery period for residential rental properties, which is 27.5 years. This means you spread the cost of your property over this time period for tax purposes.
Example: If your property’s cost basis is $275,000, the annual depreciation would be $10,000 ($275,000 ÷ 27.5 years).
Use MACRS Tables: The IRS requires you to use the Modified Accelerated Cost Recovery System (MACRS) for calculating depreciation. MACRS tables provide the applicable percentage to depreciate each year, making sure your deductions are correctly applied on your tax returns. These tables account for the fact that properties don’t wear down evenly over time and often have higher deductions in the early years. 
Regularly Update Calculations: Keep track of these calculations and regularly update them to maintain accurate financial planning.
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How to Determine the Cost Basis or Adjusted Cost Basis

Let’s break down the concept of cost basis in a way that’s easy to understand. Think of the cost basis as the starting point for calculating how much you can deduct from your taxes each year through rental property depreciation. It’s not just the purchase price of your investment property—it’s a bit more comprehensive.

Determining the Cost Basis

The cost basis of your rental property is essentially the total amount you spent to acquire it. This includes:

Purchase Price: The actual price you paid for the property.
Closing Costs: Fees you paid at closing, such as title insurance, recording fees, and legal fees.
Improvements: Any significant upgrades or additions you made to the property before it was available for rent, like a new roof, major landscaping, or adding a deck.

For example, if the property’s purchase price was $250,000 and you paid $5,000 in closing costs and spent $20,000 on improvements, your initial cost basis would be: $250,000 + $5,000 + $20,000 = $275,000.

Adjusting the Cost Basis

Over time, the cost basis may need to be adjusted to reflect changes in the property’s value. The adjusted cost basis takes into account:

Depreciation Already Claimed: The total amount of depreciation deductions you’ve taken over the years.
Major Renovations: Significant improvements that add value to the property or extend its useful life.

For instance, if after a few years you’ve claimed $30,000 in depreciation and spent $10,000 on a major renovation, you would adjust your cost basis like this: $275,000 - $30,000 + $10,000 = $255,000.

Regularly updating the adjusted cost basis keeps your depreciation deductions accurate and ensures you’re in compliance with IRS regulations. It’s an ongoing process that helps you maintain proper financial records and maximize your tax savings.

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Cost Segregation Strategies for Qualified Improvement Property (QIP)

Cost segregation is a powerful strategy that involves breaking down your property into its various components, allowing you to depreciate certain parts faster.

One key area where cost segregation shines is with Qualified Improvement Property (QIP). QIP includes interior renovations such as new lighting, updated flooring, or interior walls. Normally, you would depreciate your property over 27.5 years, but QIP can often be depreciated over just 15 years. This accelerated depreciation can provide you with much-needed tax relief sooner rather than later.

By categorizing parts of the property into shorter-lived assets, rental property owners can:

Improve cash flow (faster depreciation means larger deductions sooner)
Reduce taxable income more rapidly
Improve your financial returns from rental properties.
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When to Start Depreciating Your Short-Term Rental Property

Rental property depreciation starts ticking when your property is officially "placed in service." This means it's ready and available for rent, even if no guests have checked in yet. For short-term rentals, this often involves prepping and listing your property on platforms like Airbnb and Vrbo. Tracking the exact placed-in-service date is crucial because it marks the start of your depreciation timeline.

Make sure to keep detailed records of when your property was placed in service. Accurate documentation allows you to claim the appropriate depreciation deductions from day one, and it’s vital if the IRS ever comes knocking with questions.

How to Claim Short-Term Rental Depreciation on Your Tax Return

Claiming depreciation on your short-term rental property can significantly lower your taxable income, but it’s essential to get the paperwork right.

The key form you’ll need to file is IRS Form 4562, "Depreciation and Amortization." This form is used to document your annual depreciation and amortization expenses. Here’s how to fill it out:

Part I and Part II: These sections are generally for special depreciation allowances and the total depreciation amount. If your property qualifies for any special allowances, you’ll note them here.
Part III: This is where you detail the information about your property, including the date it was placed in service, its cost, and the depreciation method used (MACRS).
Part V: This section is for listed property, which includes assets like vehicles, computers, and entertainment equipment that can be used for both personal and business purposes. If your rental property involves such listed property, you'll need to report the business use percentage and other relevant details here. If not, you can skip this section.

Once you’ve filled out Form 4562, you’ll report your depreciation expense on Schedule E (Form 1040), "Supplemental Income and Loss." Schedule E is where you report rental income and rental expenses, including depreciation.

If you provide substantial services to your guests, such as daily cleaning, concierge services, or meal preparations, your rental activity might be classified as a trade or business. In this case, you may need to report your income and expenses on Schedule C (Form 1040), "Profit or Loss from Business," instead of Schedule E.  Income reported on Schedule C is subject to self-employment tax, which includes Social Security and Medicare.

Tax laws can change, so stay up-to-date with the latest IRS guidelines or consult a tax professional.

For more details on how rental income is taxed, check out our article on how rental income is taxed when you have a mortgage.

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How Short-Term Rental Depreciation Differs from Long-Term 

Both short-term and long-term residential rental properties fall under the General Depreciation System (GDS), with a recovery period of 27.5 years. This means you depreciate the property over the same timeframe for both types of rentals. However, depreciating short-term rental properties involves some unique considerations compared to long-term rentals. 

The IRS classifies short-term rentals as properties rented for less than 30 days on average. To fully benefit from depreciation deductions, you need to actively participate in managing the property. This means being involved in tasks like booking guests, coordinating cleanings, and handling maintenance. 

There are some limits on the depreciation deductions for a short-term rental property based on the number of days that the property is rented out annually. If you rent the property out year round without using it personally, you shouldn’t experience much of a limitation on the depreciation.

Long-term rentals, on the other hand, typically have longer rental periods and active participation is less critical for tax purposes.

Short-term rentals experience higher tenant turnover, leading to more frequent repairs and maintenance. These factors should be factored into your cost basis and adjusted cost basis calculations. Frequent updates and renovations in short-term rentals can provide more opportunities to use cost segregation strategies to accelerate depreciation and enhance tax benefits.

Long-term rentals, with fewer updates and lower turnover, may have fewer opportunities for accelerated depreciation but generally require less active management.

While the basic principles of depreciation apply to both types of rentals, these distinctions highlight the unique tax and management strategies needed for short-term rental owners to maximize their financial benefits and comply with IRS regulations.

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Frequently Asked Questions
How do you calculate depreciation on a short-term rental property?

Depreciation is calculated by taking the cost basis of the property—which includes the purchase price, closing costs, and the value of improvements made before renting—and dividing it by its useful life. For residential properties, this period is typically 27.5 years. It’s important to exclude the land value from the property cost, as land cannot be depreciated.

Can you write off depreciation for a rental property and how?

Yes, you can write off depreciation for a rental property. This involves deducting a portion of the property's value each year on your tax return. 

Owners must actively participate in managing the property or meet one of the IRS exclusions for non-Passive income to benefit from short-term rental depreciation. Our guide on the short-term rental tax loophole can help you determine if you qualify. 

Once you’ve verified that you’re eligible to write off depreciation, fill out IRS Form 4562 when filing your taxes.

What is the IRS's classification for a short-term rental?

The IRS classifies short-term rentals based on the rental period and services offered. If the average rental period is less than 30 days and substantial services are provided, it’s considered a trade or business, not just rental income. Substantial services go beyond the basic amenities typically provided in a rental. They include activities similar to those offered in a hotel, such as daily cleaning, concierge services, or meal preparations. 

Are there any special depreciation rules or loopholes for short-term rentals?

Yes, and we have a guide dedicated to this subject: How to Leverage the Short-Term Rental Tax Loophole to Reduce Your Tax Burden.

Short-term rentals might qualify for bonus depreciation or Section 179 expensing, which allows you to deduct the full cost of new furniture in the year you buy it. Both of these strategies allow for the immediate deduction of certain expenses. Keeping up with legislative changes and IRS updates is vital. Consult a qualified tax accountant to help navigate these complexities.

Struggling with high taxes on your short-term rental? Learn how rental property  epreciation can reduce your taxable income  nd boost your profits.

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Publication 946 (2023), How To Depreciate Property | Internal Revenue Service

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