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Cost Segregation for Short-Term Rental

Last updated on January 31st, 2024

Cost Segregation for Short-Term Rental

cost segregation for short-term rental

Cost Segregation for Short-Term Rental

Unlock the secrets of cost segregation for short-term rentals to accelerate the tax perks you can enjoy.

Do you want to maximize your property depreciation now? Then, we have good news for you! You can benefit from cost segregation for short-term rental!

In a nutshell, this allows you to speed up the depreciation of some Airbnb assets. Different assets have different depreciation. So, cost segregation does not cover properties in a lump sum. This makes it different from Airbnb depreciation. In this blog, we will tackle the following:

  • Defining cost segregation analysis
  • Requirements 
  • Deductible items in the cost segregation 
  • Qualified people to do cost-segregation
  • Benefits and downsides

What is Cost Segregation for Short-Term Rental?

Cost segregation for Airbnb is the method to know the portion of your rental property’s cost. This is claimable as tax deductions in a shorter period of time. Hence the name, it involves segregating or separating different properties that depreciate faster for tax purposes. By doing so, you save more money by reducing your taxable income.

What Are the Requirements for a Cost-Segregation?

The Internal Revenue Service sets out the following requirements for depreciation. All of these have to be met for you to qualify:

  • Property ownership
  • Income-generating nature of the property
  • Determinable useful life (it will wear out over time)
  • Expected use for more than 1 year

Just to be clear, tangible property is not only limited to real estate. It also includes furniture, plumbing, and machinery, among others.

What Properties Qualify for Cost Segregation for Short-Term Rental?

Tax segregation is the buzzword for this form of deduction. So if you’re wondering about those properties, below is the list of assets applicable to short-term rentals:

1. Moveable Assets

These are properties not attached to your Airbnb. These are the furniture, carpets, appliances, and electronics used in your rentals.

Recovery period: 5 years

2. Electrical and Plumbing

Electrical and plumbing systems are essential components of a building. These include wiring, outlets, lighting fixtures, pipes, and drains.
Recovery period: 5 years

3. Technological Equipment

These are the equipment that may be essential for the property. These include HVAC systems, fire alarms, and security systems.

Recovery period: 5 years

4. Office Furniture and Fixtures

Furniture and fixtures in the office space for your Airbnb are also covered. This includes desks, filing cabinets, and safes. 

Recovery period: 5 years

5. Land Improvements

Land cannot be depreciated, but improvements made directly to it have a usable life. These include fences, landscaping, sidewalks, roads, and bridges.

Recovery period: 15 years

Who Should Do a Cost Segregation for Short-Term Rental?

Anyone can do their own cost segregation analysis. However, it may be at risk of errors due to the lack of skills and experience doing it. The IRS will not overlook such mistakes. So, it’s still better to get guidance from professionals in engineering, construction, or accounting. It is also crucial to ensure that they have a proven track record in making the study.

Is Cost Segregation Study Worth It?

Before pursuing this tax planning strategy, property owners should carefully consider these factors:

  • Accelerating Depreciation Deduction: by segregating components, taxpayers can speed up depreciation. This can lead hosts to enjoy tax savings in the early years of property ownership.
  • Reduced Tax Liability: With increased deductions in the early stages, owners can have lower taxable income.
  • Increased Cash Flow and ROI: By lessening taxes, cost segregation can improve cash flow which can impact ROI for property owners.
  • Cost and Complexity: Doing this study is expensive and time-consuming. The cost may sometimes outweigh the immediate tax savings for some smaller properties.
  • IRS Scrutiny: While completely legal, cost-segregation analyses are subject to IRS’s strict audit to ensure compliance and prevent abuse.
  • Recapture of Depreciation: accelerated depreciation does not increase the total amount of depreciation of the property. Also, any additional depreciation may be subject to recapture when the property is sold. This results in higher taxes at the time of sale. 

Conclusion

You may opt for a cost segregation analysis for short-term rentals if you’re an Airbnb host wanting to increase cash flow! By categorizing and segregating certain components of your property for accelerating depreciation, you enjoy such tax deductions in the early years of property ownership. In this article, we have learned that furniture, electronics, and land improvements are only a few properties applicable to the analysis.

However, the cost segregation for rental property can be complex, expensive, and time-consuming. So, consulting with professionals to better understand the pros and cons is essential to making an informed decision that aligns with your financial goals.

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