Cost segregation for Airbnb and VRBO homes: what it's worth

On a furnished single-family short-term rental, a cost segregation study usually moves 27% to 38% of the depreciable basis onto 5- and 15-year schedules. With 100% bonus depreciation, that portion is deducted in the first year. On a $600,000 home, the first-year deduction can go from under $40,000 to over $180,000, which is worth about $50,000 of federal tax at a 35% rate if you can use the loss.

That condition matters more than the percentage. A deduction you can’t use this year is a carryforward, not a refund.

What gets reclassified in a furnished rental

A study looks at the house the way an engineer would and splits it into parts with different tax lives. In a typical Airbnb, the parts that come off the 27.5- or 39-year building schedule fall into two groups.

Five-year property is personal property used in the rental. That means appliances, carpet and other removable flooring, window coverings, freestanding cabinets and shelving, decorative lighting, and wiring that serves a specific appliance rather than the house. It also covers furniture, TVs, mattresses, grills and outdoor furniture.

Fifteen-year property is land improvements. Driveways, walkways, patios, fencing, retaining walls, landscaping, outdoor lighting, an in-ground pool and its decking, and a detached deck usually land here.

The building keeps what holds it up and keeps it running. Foundation, framing, roof, windows, HVAC, plumbing and the main electrical system stay on the long schedule. Built-in kitchen cabinets are a judgment call. Many residential studies treat them as 5-year property, and some leave them on the building schedule because they’re attached to the structure. Ask any provider which way they go and why. Linens, towels and dishes are usually supplies you deduct when you buy them, so they don’t belong in a study at all.

Furniture: bought separately or included in the price

If you bought furniture after closing, it already has its own receipts and its own 5-year schedule. Your CPA depreciates it with bonus whether or not you get a study. It sits outside the study’s reclassification percentage.

If the seller included furnishings in the purchase price, the price covers land, building and furniture together. Someone has to split it. A bill of sale or an inventory with values makes that easy. Without one, the study allocates part of the price to furnishings based on what’s there. A turnkey purchase with a full house of furniture is one reason furnished rentals sit at the high end of the range.

Either way, the same furniture should never be counted twice. If your CPA already listed the sofa and beds as separate assets, tell us before the study starts.

27.5 or 39 years: an unsettled question

Residential rental property uses 27.5 years if at least 80% of its rent comes from dwelling units. The definition of a dwelling unit excludes units in a hotel, motel or other establishment where more than half the units are used on a transient basis. That rule lives in section 168(e)(2)(A) and the related regulations.

One reading says a home rented mostly for short stays is used on a transient basis, so it isn’t a dwelling unit and the building goes on the 39-year nonresidential schedule. Another says a single house isn’t an “establishment” like a hotel, so the transient rule doesn’t reach it and 27.5 years still applies. Practitioners disagree, and we haven’t seen guidance that settles it for a single home. Your CPA should make the call. Our calculator defaults short-term rentals to 39 years and lets you switch.

The choice changes less than you’d think after a study, because the reclassified parts don’t care. They’re 5- and 15-year property either way. It changes a lot without a study. On 39 years, a building deducts about 2.6% of its basis per full year instead of about 3.6%. The longer schedule makes the default depreciation smaller, which makes the study a bigger share of the total benefit.

A worked example on a $600,000 furnished home

Illustration. An owner buys a furnished beach house for $600,000 and places it in service as a short-term rental in March. The assessor ratio supports $100,000 for land. The bill of sale values the furnishings at $30,000. That leaves $470,000 for the house and site work.

The study finds $103,400 of 5-year property (22% of $470,000) and $42,300 of 15-year property (9%). Add the $30,000 of furnishings and $175,700 is eligible for bonus. That’s 35% of the $500,000 depreciable basis.

The building keeps $470,000 − $145,700 = $324,300. For a March start, the mid-month convention gives 9.5 months in year one, so the first-year building deduction is basis × 9.5 ÷ 12 ÷ the recovery period.

Item	No study, 39 years	Study, 39 years	No study, 27.5 years	Study, 27.5 years
Furnishings (bonus)	$30,000	$30,000	$30,000	$30,000
5- and 15-year parts (bonus)	$0	$145,700	$0	$145,700
Building	$9,541	$6,583	$13,530	$9,336
First-year depreciation	$39,541	$182,283	$43,530	$185,036

The no-study columns assume the CPA still books the furnishings separately. If the whole $500,000 went on the building schedule, the no-study numbers would be lower still.

On the 39-year schedule, the study adds $142,742 of first-year depreciation. At a 35% federal rate, that’s about $49,960 of tax, if the owner materially participates and the average stay is short enough to make the loss nonpassive. The short-term rental tax loophole guide covers those tests. On the 27.5-year schedule, the study adds $141,506, worth about $49,530.

This home fits our Express Study at $895. Pricing is on the pricing page.

Some of this comes back later. Depreciation on the 5-year parts is recaptured at ordinary rates on a taxable sale, to the extent of gain. The recapture guide walks through a full sale.

When a study isn’t worth it

Plenty of hosts shouldn’t buy one, at least not this year.

Skip it, or wait, if the loss will be passive and you have no passive income to absorb it. That’s the case when your average stay is over 7 days without hotel-style services, or when you don’t materially participate. The deduction isn’t wasted, because suspended losses carry forward and are released when you sell. But you’ve paid now for a benefit you’ll get years later.

It also rarely pays if you plan to sell within a year or two. You’d deduct at 35%, give much of it back as recapture at 35%, and be out the fee.

A high land share hurts too. In some coastal markets land is half the price or more, and a study can only work on the other half. The same goes for a low tax bracket. A deduction is worth less at 12% than at 35%.

If you’re unsure, run the property through the Airbnb and STR depreciation calculator. Try both 27.5 and 39 years and different land values. Then request a free proposal. We’ll give you a fixed fee and a property-specific estimate, and we’ll say so if the fee doesn’t pay for itself. More answers are in the FAQ.

This is general information, not tax advice. Your CPA should confirm how it applies to you.