Short-term rental depreciation: 39 years, cost seg, recapture

By Max Medvedev · 6 Aug 2026

The mechanism, in one paragraph

Depreciation writes off a property's cost over its assigned life. A short-term rental with an average stay of 30 days or less is nonresidential — a 39-year building life, not 27.5. Cost segregation moves 20–30% of that basis into 5-, 7-, and 15-year buckets, and 100% bonus depreciation expenses those buckets in year one.

That is the engine. The rest is where the numbers land, and what the exit costs.

27.5 years or 39 — the fork most calculators get backwards

A building is residential rental property — 27.5 years — only if at least 80% of gross rents come from dwelling units. A unit rented on a transient basis, meaning an average stay of 30 days or less, is not a dwelling unit. §168(e)(2) puts it in the nonresidential bucket: 39-year straight-line, mid-month convention.

So the typical short-term rental depreciates its shell over 39 years. Most tools default to 27.5 and overstate the yearly shell deduction.

Two lines are easy to confuse:

Both run the same arithmetic: total nights ÷ reservations, never nights ÷ 365.

Land is never depreciated — the price splits between land and building, commonly by the county assessor's ratio. Depreciation starts when the property is placed in service: listed and genuinely available, not when the first guest arrives.

cost segregation splits the basis into faster buckets

A cost-seg study reclassifies building components out of the 39-year bucket into short-life ones:

A typical study moves 20–30% of building basis into the 5- and 15-year classes — on a $1M property, often $200,000–300,000 of first-year deduction once bonus applies.

The short-life buckets use the half-year convention — unless more than 40% of the year's personal property is placed in service in the fourth quarter, which forces the mid-quarter convention onto all of it. A December closing loses real money on timing alone.

A property bought in an earlier year without a study is not too late. Form 3115 (automatic consent, DCN 7), filed with the current return, claims the missed acceleration as a one-time §481(a) catch-up — no amended returns. The bonus rate stays fixed to the original placed-in-service year, so a 2023 purchase catches up at 80%, not 100%.

100% bonus depreciation and the 19 January 2025 line

OBBBA, signed 4 July 2025, made 100% bonus depreciation permanent for qualified property — anything with a MACRS life of 20 years or less, meaning the 5/7/15-year cost-seg buckets, never the 39-year shell. The condition carries two dates, not one: the property must be both acquired and placed in service after 19 January 2025. IRS Notice 2026-11, issued 14 January 2026, supplies the mechanics.

"Acquired" means the written binding contract date. A contract signed 15 January 2025 caps the property at 40% even if it is placed in service in 2026. For self-constructed property, acquisition is when physical construction begins.

The old TCJA phase-down — 40% in 2025, 20% in 2026, 0% in 2027 — survives only for pre-20-January-2025 acquisitions. A calculator showing 20% for 2026 is running a schedule that no longer exists.

Bonus is not always the best answer. Electing out under §168(k)(7) works by asset class — worth modeling against the loss cap below, or to keep a positive QBI base.

§461(l) decides how much of the loss lands this year

A large paper loss clears four gates in order: basis; at-risk under §465, where an ordinary real-estate mortgage counts as qualified nonrecourse financing and usually passes; passive under §469, where the average-stay test and material participation live; and the excess business loss cap.

For 2026 that cap is $256,000 single / $512,000 married filing jointly (Rev. Proc. 2025-32). It went down from $313,000/$626,000 in 2025 and $305,000/$610,000 in 2024, because OBBBA made §461(l) permanent and rebased its inflation index to a 2024 base, erasing the compounding since 2017.

So a $700,000 first-year cost-seg loss for a joint filer does not all land in year one. About $512,000 offsets income now; the remaining $188,000 becomes an NOL carryforward under §172 — good against up to 80% of taxable income in later years, carried forward indefinitely, no carryback. Nothing is lost; it is deferred.

Here is the whole path with the gates applied, computed by the engine:

the exit — recapture, and "how long must I hold it"

Part of this benefit is timing; the bill arrives at sale. Recapture splits in two, and the split is where most summaries go wrong:

• §1245 recapture on the 5- and 7-year personal property comes back as ordinary income at rates up to 37% — never capped at 25%.
• Unrecaptured §1250 gain — the building's straight-line depreciation — is taxed at a maximum of 25% under §1(h).
• Gain above the depreciation taken is long-term capital gain at 0/15/20%.
• NIIT adds 3.8% unless the property was a non-passive trade or business to the seller — so the top rate on unrecaptured §1250 gain is 28.8% passive, 25% for an owner who materially participates.
• A §1031 exchange defers the real-property gain, but since TCJA it no longer covers personal property — the §1245 slice recaptures anyway, inside an otherwise-deferred swap.
• Suspended passive losses release in full on a fully taxable sale to an unrelated party (§469(g)).

No holding period makes recapture disappear — which is what the question is really asking. What changes with time is the arithmetic: a deduction taken at today's marginal rate against ordinary-rate recapture later, and the years of deferral in between. That is a model, not a number of years.

One gate voids all of it. If personal use exceeds the greater of 14 days or 10% of days rented at fair value, the property becomes a residence under §280A(d)(1) and deductions are capped at rental income (§280A(c)(5)). Cost seg and bonus cannot create a usable loss under that cap.

run the fork on your own property

Put your purchase price, closing date, and reservation mix through the estimator — it applies the 30-day fork, the acquisition-date bonus rate, and the four gates in order, with a citation behind each number.