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Airbnb hosts often assume the familiar 27.5-year schedule applies to them. The IRS frequently disagrees. This article covers US federal tax treatment for short-term rental owners: the 30-day test setting the recovery period, the seven-day rule deciding if a loss is usable, and what cost segregation adds.
Nightly bookings changed how millions of Americans invest in real estate, though short-term rental tax rules haven’t caught up. Owners sorting this out often land on BonusDepreciation.com, an educational resource covering how bonus depreciation and cost segregation work under current law.
Residential rental property depreciates over 27.5 years under MACRS. Once the average guest stay drops to 30 days or less, IRC Section 168(e)(2)(A) excludes it from residential rental property, a dwelling unit doesn’t include a unit in an establishment where more than half the units are used on a transient basis, leaving it as nonresidential real property under Section 168(e)(2)(B), on a 39-year schedule. Stretching to 39 years slows the building deduction down. But the bigger lever is what counts as ‘the building’ in the first place.
A cost segregation study separates a unit’s contents from its shell, moving appliances, flooring, and cabinetry into 5-, 7-, or 15-year MACRS classes. Recovery periods of 20 years or less qualify for 100% bonus depreciation, permanent under the One Big Beautiful Bill Act for property acquired and placed in service on or after January 20, 2025; earlier acquisitions stay on the phase-down of 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% from 2027. Only property meeting the IRS’s requirements, covered in what property qualifies for bonus depreciation, gets the write-off.
IRS Publication 527 sets out these recovery periods in plain language and introduces the passive-activity rules covered next.
A $725,000 cabin in Sevierville, Tennessee, running an average guest stay of four nights, with land allocated at 20% ($145,000), leaves a depreciable building basis of $580,000. Because the average guest stay is under 30 days, the building is generally treated as nonresidential real property on a 39-year schedule rather than residential rental property on 27.5 years.
A cost segregation study reclassifies 32% of that basis, $185,600, into 5-, 7- and 15-year property: appliances, cabinetry, decorative lighting, the hot tub and its dedicated electrical, decking, the gravel drive, landscaping. All of it is deductible in year one under restored 100% bonus depreciation. The owner also placed $45,000 of separately purchased furniture, linens and electronics in service, all 5-year property, bringing year-one bonus depreciation to $230,600.
The remaining $394,400 of building basis produces $10,113 on the 39-year schedule, for a first-year total of $240,713.
Without the study, the same owner would still deduct the $45,000 of furniture plus $14,872 of building depreciation – $59,872. The study is responsible for the remaining $180,841 of first-year deduction, worth $63,294 to an owner at a 35% federal marginal rate.
Reclassification percentage decides how large the deduction gets. Whether it can be used at all runs through material participation instead.
The 30-day threshold decides your recovery period. A different threshold decides whether you can use the deduction at all. Under Reg. 1.469-1T(e)(3)(ii)(A), an activity with an average period of customer use of seven days or less is not a “rental activity,” so the automatic passive classification in Section 469 does not apply and real estate professional status is not required. That is the rule people mean when they refer to the short-term rental loophole.
Clearing that hurdle is not enough on its own. The owner must still materially participate under one of the seven tests in Temp. Reg. 1.469-5T. If they do not, the loss is passive, suspended, and carried forward until there is passive income to absorb it or the property is sold. Contemporaneous time logs are the documentation standard, and reconstructed calendars have not held up well on examination. Those seven tests, plus the carryforward rules for suspended losses, sit in IRS Publication 925, the IRS’s guide to passive-activity losses.
Note that these are two separate tests doing two separate jobs: 30 days or less for the depreciation classification, seven days or less for the passive activity exception. A property can be nonresidential for depreciation purposes and still fail the seven-day test for loss treatment.
Bonus depreciation is not optional in the way most owners assume. It applies automatically to qualifying property unless the taxpayer elects out, and that election out applies to an entire class of property for the year – it cannot be made asset by asset.
Form 4562 identifies asset class, recovery period, and convention. Selling resets the clock: reclassified components return as Section 1245 property, recaptured as ordinary income, while the building itself is unrecaptured Section 1250 gain, taxed at up to 25%. Recapture reaches depreciation an owner could have claimed but never did.
While property selection and data across short-term rental markets shape top-line revenue, tax strategy determines how much of that return you keep. Beyond depreciation, routine filings also cover deductible operational costs such as cleaning, insurance, and platform fees. Keeping track of guest stays along with a professional cost segregation study can help ensure that these technical tax details actually save money in the long run.
Disclaimer: the above is general information rather than tax advice. Short-term rental tax positions are fact-specific; have an accountant review the numbers before filing.