Cost segregation for short-term rentals
Cost segregation is the mechanism behind most of the large first-year write-offs short-term rental owners talk about. This page explains what it actually does, what it costs, when it pays off, and where the IRS guidance sits — written for investors buying furnished STRs in Florida.
In one paragraph
Residential rental buildings normally depreciate over 27.5 years. A cost segregation study breaks the purchase and renovation basis into components and reassigns the ones that qualify — furniture, appliances, certain finishes, land improvements — to 5, 7, and 15-year lives. Those short-life components are eligible for bonus depreciation under IRC §168(k), which pulls a large deduction into year one. On a short-term rental with a seven-day-or-less average stay plus material participation, that loss is non-passive and can offset W-2 or business income.
STRturnkey is not a tax advisor and this page is general information, not tax advice. Bonus depreciation percentages and eligibility rules change with legislation — confirm current rates with a CPA experienced in STR cost segregation.
What actually gets reclassified
The IRS Audit Techniques Guide organizes property by asset class and recovery period. On a furnished STR the split usually looks like this.
Furniture, appliances, decor
Beds, sofas, dining sets, TVs, kitchenware, window treatments, and removable fixtures. On a furnished STR this bucket is unusually large — it is the reason STRs cost-segregate better than long-term rentals.
Finishes and specialty systems
Carpet and certain flooring, cabinetry tied to equipment, dedicated electrical for appliances, pool and spa equipment, security and A/V systems.
Land improvements
Driveways, walkways, fencing, decking, landscaping, exterior lighting, and site drainage. Common on Gulf Coast single-family STRs with outdoor living space.
What stays put
The building structure itself — framing, roof, windows, HVAC distribution, plumbing. Land is never depreciable and is carved out before anything else.
How a study runs
Close and place in service
The property must be available for rent in the tax year you want the deduction. The placed-in-service date, not the closing date, is what controls.
Assemble the cost record
Closing statement, renovation invoices by trade, furnishing receipts, and appraisal for land allocation. Clean records are the difference between a detailed engineering study and a weaker estimate.
Engineer walks and classifies
A site visit or documented remote review, then component-by-component classification into 5, 7, 15, and 27.5-year lives with a written report supporting each call.
CPA applies it
Your CPA books the reclassification, applies the applicable bonus percentage, and — for a prior-year property — files Form 3115 for the catch-up adjustment.
Common questions
What is a cost segregation study?
An engineering-based analysis that breaks a building's purchase price into its components and assigns each the shortest depreciable life the tax code allows — typically 5, 7, or 15 years instead of 27.5. The IRS describes the accepted methodologies in its Cost Segregation Audit Techniques Guide; the 'detailed engineering approach' using actual cost records is the most defensible.
Why do short-term rentals benefit more than long-term rentals?
Two reasons. First, a furnished STR carries a large amount of 5-year personal property — furniture, appliances, electronics, decor — that an unfurnished long-term rental simply does not have. Second, under Reg. §1.469-1T(e)(3), a property with an average guest stay of seven days or less is not a rental activity for passive-loss purposes, so with material participation the resulting loss can offset active income rather than being suspended.
How much of the basis typically reclassifies?
It depends entirely on the property. Practitioners commonly report 20–40% of a furnished residential STR's depreciable basis landing in 5, 7, and 15-year buckets, with furnished coastal homes toward the upper end. Treat any percentage quoted before an engineer has seen your property and invoices as marketing, not an estimate.
What does bonus depreciation do to the result?
IRC §168(k) lets you expense a percentage of qualifying short-life property in the year it is placed in service, which is what turns a study into a large first-year deduction. The bonus percentage has changed repeatedly through legislation, so confirm the rate that applies to your placed-in-service year with your CPA before modeling anything.
What does a study cost and when is it worth it?
Residential STR studies commonly run in the low-to-mid four figures. The usual rule of thumb is that a study pencils when the property's depreciable basis is high enough that the first-year deduction meaningfully exceeds the fee — and when you actually have income to offset. Buying at a low basis, or having no active income to shelter, is how owners end up paying for a study they cannot use.
Can I do this on a property I already own?
Yes. A look-back study on a property placed in service in a prior year is handled through a Form 3115 change in accounting method, which lets you claim the missed depreciation as a §481(a) adjustment in the current year without amending old returns.
What happens when I sell?
Depreciation recapture. Accelerated deductions on personal property are recaptured as ordinary income under §1245 on sale, and structural depreciation is subject to §1250 unrecaptured gain rules. Cost segregation is a timing strategy — it moves deductions forward, it does not erase them. 1031 exchanges are the usual planning response; talk to your CPA before you list.
Does STRturnkey perform the study?
No. We are not a tax advisor or a cost segregation engineer. What we do is build the property so a study is straightforward: itemized renovation scopes, separated furnishing invoices, dated placed-in-service records, and photo documentation, all organized in your client portal for whoever performs your study.
Sources
Every rule described above traces back to primary guidance. Verify it yourself.
Buy it so the study is easy
We itemize renovation scope and furnishing spend from day one, so your cost segregation engineer and CPA get clean basis instead of a shoebox of receipts.