Cost Segregation for Short-Term Rental Hosts
By Amar Patel, Principal, Cost Segregation
If you’re an Airbnb, Vrbo, or HomeAway host, you’re likely familiar with the complexities of managing and optimizing rental properties. What you may not be aware of, however, is a powerful financial tool that can help you maximize your property’s financial benefits while minimizing your tax liability – CostSegregation.com.
Residential cost segregation can help property owners identify certain components within a rental property that may qualify for accelerated depreciation for Federal and State Income tax purposes. For short-term rental owners, this can create meaningful tax benefits when properly applied.
Key Takeaways
- Short-term rental owners can complete a cost segregation study when they purchase, furnish, renovate, or improve an Airbnb, Vrbo, or other vacation rental. Hosts who did not complete a study when the property was first placed in service may still be able to catch up on missed depreciation through a look-back cost segregation analysis, generally using Form 3115 and a Section 481(a) adjustment rather than amending each prior-year return.
- For short-term rentals, commonly reclassified assets may include furniture, appliances, flooring, specialty fixtures, patios, fencing, landscaping, and other improvements more appropriately assigned to 5-, 7-, or 15-year recovery periods for Federal and State Income Tax purposes. Certain qualified property acquired and placed in service after January 19, 2025 may qualify for a 100% write off through the use of bonus depreciation, potentially increasing the host’s first-year deductions.
- KBKG’s engineering-based cost segregation methodology is backed by more than 25 years of experience and a 99% IRS audit success rate, helping short-term rental owners and their CPAs pursue accelerated depreciation with supportable analysis and documentation.
Understanding Cost Segregation for STR Properties
Cost segregation is a tax strategy that allows eligible property owners to separate certain property components from the building structure and depreciate those components over shorter recovery periods. Under IRC Section 168, the IRS allows certain building components to be depreciated over 5, 7, or 15 years rather than the standard 27.5-year residential recovery period described in IRS Publication 946.
Under the Tax Cuts and Jobs Act of 2017 bonus depreciation rules, qualifying assets were eligible for 100% first-year bonus depreciation through 2022, 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026 Based on new guidance outlined in the One Big Beautiful Bill Act, there is a permanent extension of 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.
KBKG’s STR Depreciation Framework applies cost segregation specifically to Airbnb, Vrbo, and other short-term rental properties by separating eligible components into shorter recovery periods. This can help increase deductions in the earlier years of ownership, improve cash flow, and potentially allow property owners to capture missed depreciation opportunities from prior years. While cost segregation is widely used for commercial real estate, short-term rental property owners may also benefit from this strategy.
What STR Assets Qualify for Cost Segregation?
A residential cost segregation analysis may identify multiple short-term rental property assets that can be reclassified into shorter depreciable lives.
These may include:
- Major appliances, such as refrigerators, dishwashers, and laundry machines; as well as infrastructure tied to these pieces of major equipment
- Certain lighting fixtures, plumbing fixtures, cabinets, countertops, and removable flooring
- Decorative items, including window treatments and furnishings
- Land improvements, such as driveways, landscaping, fencing, and patios
By separating eligible assets from the building itself, property owners may be able to depreciate those items more quickly instead of depreciating the full property over a longer building recovery period.
Worked Example: A $400,000 Airbnb Property
KBKG’s expert analysis of a representative $400,000 short-term rental property estimates that $80,000–$140,000 in property components may qualify for accelerated depreciation, potentially generating $60,000–$75,000 in additional first-year deductions. The analysis reflects assets commonly found in Airbnb, Vrbo, and other STR properties—including furnishings, appliances, flooring, specialty fixtures, patios, fencing, and landscaping—although actual results depend on land allocation, asset mix, placed-in-service date, bonus depreciation eligibility, and the owner’s tax position.
| Approach | Illustrative Allocation | Illustrative First-Year Deduction |
|---|---|---|
| Standard residential depreciation | $400,000 depreciated over 27.5 years | Approximately $14,545 annually |
| Cost segregation example | $320,000 building structure over 27.5 years and $80,000 reclassified to shorter-life assets | Approximately $60,000–$75,000 in the first year, depending on asset mix and bonus depreciation eligibility |
This example is hypothetical and intended for illustration only. Actual results depend on the property’s purchase price allocation, placed-in-service date, land value, asset mix, and the taxpayer’s facts and circumstances.
Why STR Owners Choose KBKG for Cost Segregation
KBKG is the oldest independent cost segregation firm in the United States, and its cost segregation leadership has provided feedback to the IRS on amendments to the Cost Segregation Audit Techniques Guide. That experience is integral to KBKG’s approach to engineering analysis, construction cost estimating, asset classification, and documentation for residential and short-term rental studies.
Key reasons short-term-rental owners choose KBKG include:
- Expertise: KBKG’s team includes CPAs, engineers, and tax professionals experienced in cost segregation for real estate and residential rental properties.
- Educational Resources: KBKG offers webinars, articles, and guides designed to help property owners understand cost segregation and related tax strategies.
- Thorough Process: We provide comprehensive cost segregation studies tailored to your residential rental property. Our studies are thorough and compliant with tax regulations, ensuring that you can confidently claim and sustain the deductions you deserve.
- Customized Solutions: Each property is different, so KBKG tailors the analysis to the specific property and taxpayer situation.
Getting Started With KBKG
Cost segregation can be a valuable tax planning strategy for Airbnb, Vrbo, 9flats, and other short-term rental property owners. By identifying eligible assets and applying accelerated depreciation, property owners may be able to increase deductions and improve cash flow.
Property owners interested in exploring cost segregation can use our free cost segregation savings calculator to estimate their potential tax deductions!
Real estate investors with specific questions or requests can connect with KBKG’s cost segregation professionals for a free, no-obligation consultation. This will allow our team of experts to review your property, estimate your benefits, and answer any questions you may have.
For investors with properties under $1.5m (excluding land), we would suggest using CostSegregation.com, a self-guided software built and backed by KBKG. The solution has a 5-star rating on Google, is free to use, and is the next best option if a full study is not necessary.
Frequently Asked Questions
Can I perform a cost segregation study on a property I purchased years ago?
Yes. Property owners may still be able to benefit from a cost segregation study on a property they already own and may be able to catch up missed depreciation, depending on their facts and tax filing position.
Does cost segregation apply to part-time short-term-rentals?
It can, but eligibility and tax treatment depend on how the property is used, whether it is treated as a rental for tax purposes, and the owner’s overall facts and circumstances.
How much does a cost segregation study cost?
Study costs vary based on property size, complexity, and documentation. A preliminary review can help estimate both the study cost and the potential tax benefit before moving forward.