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.

How Rental Property Depreciation Increases Your Short-Term Rental Profits

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. 

 Understand the investment potential of any address in the world. 

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.

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. 

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.

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.

AirDNA’s vacation rental pricing tool uses data-driven recommendations to propose the best daily rates.

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.

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.

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.

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.

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)

Improve your financial returns from rental properties.

Plan your STR strategy based on real booking activity and trends—plus, see how things change year over year.

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.

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.

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 depreciation can reduce your taxable income and boost your 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. 

Calculate potential earnings

 Understand the investment potential of any address in the world. 

See your STR revenue potential
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. 

Keep an eye on your STR competition

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.

Boost Your Rental Revenue

AirDNA’s vacation rental pricing tool uses data-driven recommendations to propose the best daily rates.

Start for free
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.

Get custom insights for your Airbnb

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.
Ditch the guesswork

Plan your STR strategy based on real booking activity and trends—plus, see how things change year over year.

Get started
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.

 Learn about Dynamic Pricing

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.

Learn about Dynamic Pricing
Try AirDNA for free
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.

How Rental Property Depreciation Increases Your Short-Term Rental Profits

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