What Is Depreciation for Short-Term Rentals?

Summary

What is depreciation?

A way to account for the loss in value of a short-term rental property over time due to wear and tear. It also provides a tax benefit by letting owners deduct part of the property’s cost each year.

Why it matters

Depreciation is one of the largest tax benefits available to rental property owners, reducing your tax burden by lowering the amount of rental income you're taxed on each year.

Who should know it

Short-term rental owners, property managers, and anyone looking to reduce taxes and manage property costs effectively.

Where you'll see it

You'll report depreciation on tax returns (Form 4562 and Schedule E), use it in financial planning for future investments, and include it in your annual rental income calculations for a complete picture of your property's performance.

Short-Term Rental Depreciation Overview

Depreciation is a powerful tax strategy that helps short-term rental (STR) owners recover the cost of their property over time. Since STRs experience frequent guest turnover, wear and tear add up quickly—but instead of taking one massive deduction upfront, the IRS allows owners to spread out the cost over 27.5 years. This not only lowers taxable income but also improves cash flow, making it easier to reinvest in property upgrades and maintenance. Understanding how depreciation works can help STR owners maximize profits while staying tax-efficient.

Who Qualifies for Depreciation? 

You must meet specific IRS criteria to qualify for depreciation on short-term rentals:

• Rental income requirement: Your property must generate rental income, whether it's through nightly bookings or seasonal rentals, to qualify for depreciation. Properties used exclusively for personal use are not eligible.
• Active management: The IRS often requires you to actively participate in the property’s operations, such as guest communication, booking coordination, maintenance, and cleaning. Passive ownership without involvement may disqualify you.
• Eligible property features: Depreciation applies to the structure and improvements like renovations, appliances, or furniture, but the value of the land itself cannot be depreciated.

How to Calculate STR Depreciation

Here’s how to calculate depreciation for your short-term rental:

Step 1: Determine the property’s cost basis

Your cost basis is the amount you’re allowed to depreciate, which is not always the same as the purchase price. To calculate it:

1. Start with the property’s purchase price – the total amount you paid for the property.
2. Add eligible costs that were necessary to acquire or improve the property before renting:
3. - Closing costs like legal fees, title insurance, and recording fees.
4. - Major renovations or upgrades made before the property was available for rent.
5. Subtract the value of the land – land is not depreciable since it doesn’t wear out.

Example

You buy a short-term rental for $300,000, with:

• Land valued at $25,000 (must be excluded).
• Closing costs of $10,000 (can be added).

Your cost basis would be:

300,000−25,000+10,000=285,000

This $285,000 is the amount you can depreciate over time—not the full purchase price.

Step 2: Calculate annual depreciation

Once you know your cost basis (the amount of the property you can depreciate), you’ll calculate how much you can deduct each year for depreciation.

The IRS requires short-term rental properties to be depreciated over 27.5 years using the General Depreciation System (GDS). This means you spread the deduction out evenly over time.

Use this simple formula:

Cost basis ÷ 27.5 years = Annual depreciation deduction

Example Calculation

If your cost basis is $285,000, then:

$285,000 ÷ 27.5 = $10,364 per year

This means you can deduct $10,364 every year from your taxable income.

On your tax return, you’ll report this number on IRS Form 4562 (Depreciation and Amortization), and it will be included in your rental income calculations on Schedule E (Supplemental Income and Loss).

Step 3: Adjust for the first year

Depreciation starts when your rental is ready and available for guests—not when you buy it. Since rentals don’t always start on January 1st, the IRS requires you to adjust your first-year deduction using the mid-month convention.

• You don’t get a full year of depreciation if your rental wasn’t available the entire year.
• Instead, you calculate depreciation based on the number of months the property was in service.
• The IRS assumes your rental starts in the middle of the month, so you count half a month for the first month and full months after that.

Example calculation for a July start

If your property was ready to rent in July, you count 5.5 months of depreciation in the first year:

(5.5 ÷ 12) × $10,364 = $4,749

In Year 1, you can deduct $4,749 on your tax return.
Starting in Year 2, you’ll deduct the full $10,364 each year.

These numbers will be reported on IRS Form 4562 and included in your rental income calculations on Schedule E.

What Depreciation Means for Your Taxes

• In your first year, your depreciation deduction is prorated based on when your rental was placed in service.
• Every year after that, you take the full depreciation deduction until you’ve fully depreciated the property over 27.5 years.
• These deductions reduce your taxable income, which can help lower the amount of taxes you owe.

This is one of the key tax benefits of owning a short-term rental. If you keep track of your depreciation properly, you can maximize your tax savings every year.

How Short-Term Rental Depreciation Works

Short-term rental properties, like long-term rentals, qualify for depreciation under the IRS’s 27.5-year depreciation schedule. However, short-term rentals operate differently, which can impact how owners claim depreciation. Unlike long-term rentals, where tenants stay for months or years at a time, short-term rentals experience frequent guest turnover. This increased use can lead to faster wear and tear, more frequent repairs, and unique tax considerations.

• More frequent guest stays mean more deductions matter. With higher occupancy rates and ongoing maintenance costs, depreciation plays a bigger role in offsetting taxable income.
• The property must qualify as a rental. The IRS has specific rules on rental use. If an owner uses the property too often for personal stays, they may lose some depreciation benefits.
• Owners may need to actively participate. Managing bookings, handling guest communication, and overseeing maintenance may affect tax treatment and depreciation eligibility.
• Cost segregation can increase deductions. Some short-term rental owners use cost segregation to accelerate depreciation on certain assets, such as appliances or furniture, allowing for larger deductions upfront.

By understanding and applying depreciation correctly, short-term rental owners can reduce their tax burden, reinvest in their property, and increase their long-term profitability.

For more detailed insights, check out our article on how rental property depreciation can increase your short-term rental profits.