The Oswald Group at eXp Realty
A cost segregation study splits a property into its parts so the shorter-lived ones can be depreciated faster. On a rental bought now, those parts can be written off in full in the first year. Whether that write-off can offset anything other than rental income is a separate question, and it is the one most owners get wrong.
This page is investment insight, not tax advice. The rules below are current federal law as of 22 September 2026 and the sources are named. What they do for your return depends on facts only your tax advisor can confirm.
What it is
A furnished rental is not one asset. It is a building, plus the land improvements around it, plus everything inside it. A study separates those parts and puts each one in its own depreciation class, which is what lets the shorter-lived items be written off years earlier.
| Class | Recovery period | What sits in it |
|---|---|---|
| Personal property | 5 years | Appliances, carpets and furniture, which is most of what a furnished short-term rental is filled with. |
| Office furniture and equipment | 7 years | Desks, files and other office equipment used to run the rental. |
| Land improvements | 15 years | Roads and driveways, fences, shrubbery and other landscaping. |
| The building | 27.5 or 39 years | The structure itself, over decades either way. A study does not speed this part up. |
Classes and examples are from IRS Publication 527, Table 2-1. Which of the two recovery periods applies to the building of a short-term rental is a judgment call that tax professionals disagree on, so ask your advisor which one they will use before you rely on a projection. The IRS has not set standards for how a study is prepared. Its audit guide, Publication 5653, describes what a quality study contains, so who prepares it matters.
Why now
This is the part that changed. The One Big Beautiful Bill Act made 100 percent first-year bonus depreciation permanent for qualified property acquired after 19 January 2025. The five, seven and fifteen year components a study identifies can be deducted in full in year one instead of spread across decades.
Section 70301 of the act, confirmed in IRS Notice 2026-11 and in the guidance Treasury and the IRS announced on 14 January 2026. If you read somewhere that bonus depreciation is 60 or 40 percent, that is the older phase-down schedule, which still applies to property acquired before 20 January 2025.
The part owners get wrong
A large first-year deduction is only worth what it can offset. For most owners a rental is passive, which means the loss waits for rental income or for the sale. Two things have to be true before it can do more than that.
Treasury Regulation 1.469-1T(e)(3)(ii)(A) says an activity is not a rental activity when the average period of customer use is seven days or less. IRS Publication 925 works that average out by dividing the total days in all rental periods by the number of rentals in the year.
Clearing seven days only removes the automatic rental label. The activity is still passive unless you materially participate, which the regulations put at more than 500 hours in the year, or more than 100 hours and at least as much as any other individual involved.
Investor work, such as reviewing statements from outside the day-to-day running of the property, does not count toward the hours. A spouse's hours do count. If anyone else is paid to manage the property, your own management work stops counting toward the facts and circumstances test.
The regulations accept any reasonable means, and name appointment books, calendars and narrative summaries. Write the hours down through the year rather than reconstructing them afterwards.
Section 469 was not changed by the 2025 act. The seven-day rule and the participation tests are the same ones that have been in the regulations for years, and they are applied to the facts of your year rather than to the strategy in the abstract.
The other side
A study moves deductions forward. It does not erase them, and the bill arrives when you sell.
The five, seven and fifteen year property comes back as ordinary income to the extent of the depreciation taken, at rates that reach 37 percent.
Depreciation on the structure itself is taxed at up to 25 percent as unrecaptured section 1250 gain.
Even a loss that is not passive can be capped in the year you take it by the at-risk rules and the excess business loss limit.
The deduction is worth most in a year with income to absorb it. That is a planning question for your advisor, not a property question.
Vacation Ventures
Material participation is measured in hours you actually spend running the property. Owners who hand everything to a manager rarely have them, and owners who run it themselves rarely log them. It is worth deciding which of those you are before you buy, because it changes what the deduction is worth to you.
The purchase sequence is on the how to buy a short-term rental in Charleston page and what the borrowing costs is on the financing page. For how we work with short-term rental investors, start at the Charleston short-term rental investment specialist page.
If there is an address you are looking at right now, send it over. You will get the permit position, the revenue projection, the full cost to open, the financing options and the cash flow, whether or not it turns out to be a deal worth doing.
Book a ConsultationThe Oswald Group at eXp Realty. This page is investment insight, not tax, legal or financial advice. The federal rules described are current as of 22 September 2026, are summarized rather than quoted in full, and can change. Whether a cost segregation study helps you, and whether a loss from a short-term rental can offset other income, depends on facts specific to you and to your tax year. Confirm them with your tax advisor before you file, and confirm short-term rental permit rules with the municipality before you buy. Equal Housing Opportunity.