Depreciation
Depreciation is a tax deduction that allows short-term rental owners to recover the cost of their property and its improvements over a defined useful life — reducing taxable income each year without any cash outlay. The IRS depreciates residential rental buildings over 27.5 years, making this phantom deduction one of the most valuable financial levers available to Airbnb hosts and STR investors. On a $400,000 property, the building component alone generates roughly $11,000–$13,000 in annual deductions before a single receipt is filed.
Key Takeaways
- Residential rental buildings depreciate over 27.5 years; furnishings and appliances over 5-7 years, starting the month a property is placed in service
- Depreciation is a non-cash deduction — it reduces taxable income without requiring any out-of-pocket payment
- STR hosts who meet the material participation or real estate professional tests can apply depreciation losses directly against W-2 and other active income
- Cost segregation studies reclassify 20-40% of building value into 5- or 15-year schedules, dramatically front-loading deductions
- Depreciation is recaptured at up to 25% on sale, but a 1031 exchange defers that tax indefinitely
How Depreciation Works for Rental Properties
Standard Depreciation Schedules
| Asset Type | Useful Life | Annual Deduction Rate |
|---|---|---|
| Residential building (structure) | 27.5 years | 3.636% of basis per year |
| Appliances and equipment | 5 years | 20% per year (straight-line) |
| Furniture and fixtures | 7 years | 14.29% per year (straight-line) |
| Land improvements (landscaping, driveways) | 15 years | 6.67% per year |
| Land | Not depreciable | N/A |
The clock starts the month the property is first rented — not the month of purchase. A property acquired in December and listed in January begins depreciating in January.
Calculating Annual Depreciation
Step 1: Establish the depreciable basis — purchase price minus the land value allocation.
Step 2: Divide the building basis by 27.5; add separate calculations for personal property (5-7 years).
Example — $450,000 property:
| Item | Amount |
|---|---|
| Purchase price | $450,000 |
| Land value (20% allocation) | -$90,000 |
| Building depreciable basis | $360,000 |
| Annual building depreciation (÷ 27.5 yrs) | $13,091 |
| Furnishings and setup costs | $30,000 |
| Annual furnishing depreciation (5-7 yrs) | $4,286–$6,000 |
| Total annual depreciation | $17,377–$19,091 |
At a 32% marginal tax rate, this saves $5,561–$6,109 per year in taxes — without spending a dollar.
The Tax Savings Math by Bracket
| Tax Bracket | Annual Depreciation | Annual Tax Savings | 10-Year Cumulative |
|---|---|---|---|
| 22% | $15,000 | $3,300 | $33,000 |
| 24% | $15,000 | $3,600 | $36,000 |
| 32% | $15,000 | $4,800 | $48,000 |
| 35% | $15,000 | $5,250 | $52,500 |
| 37% | $15,000 | $5,550 | $55,500 |
Higher-bracket investors capture the most absolute value, but depreciation is worth claiming at every bracket — it is the only major real estate deduction that requires zero spending to earn.
Accelerated Depreciation: Bonus Depreciation and Cost Segregation
Standard straight-line depreciation is conservative. Two tools let STR owners take far larger first-year deductions:
Bonus Depreciation
Bonus depreciation allows an immediate deduction on a fixed percentage of eligible 5-, 7-, or 15-year property in the year it is placed in service. The rate phases down under current law: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, then 0% from 2027 onward unless Congress extends it. Furnishings, appliances, and most cost-segregated components qualify.
On $30,000 in furnishings in 2026, a 40% bonus depreciation rate means a $12,000 first-year deduction — instead of $4,286–$6,000 spread across 5-7 years.
Cost Segregation
Depreciation — and especially accelerated depreciation — is the mechanism that lets a profitable short-term rental produce a paper tax loss even in years when it generates strong cash flow. That combination of taxable loss and real income is the core of STR as a wealth-building vehicle.
Material Participation: Unlocking STR Depreciation Against Active Income
By default, rental income is passive, and passive losses (including depreciation) can only offset other passive income. Two pathways override that rule for STR investors:
Real estate professional status: Spend more than 750 hours per year in real-estate-related activities and more time in real estate than in any other profession. Losses become active, fully offsetting W-2 income without limit.
STR material participation: Short-term rentals with an average guest stay of 7 days or fewer are not automatically classified as passive activity under IRC §469. An STR host who materially participates in the rental (100+ hours, more than anyone else, or one of five other tests) can deduct depreciation losses against ordinary income regardless of professional status.
Depreciation Recapture: The Exit Cost
Every depreciation dollar claimed (or that should have been claimed) is subject to recapture at sale. The IRS taxes recaptured depreciation at a maximum 25% rate — higher than the standard 15-20% long-term capital-gains rate.
Example: $80,000 in cumulative depreciation → up to $20,000 in recapture tax at sale.
Why Depreciation Matters for Airbnb Hosts
- Tax-free income shelter: In markets where STR revenue is strong — AirROI data shows Nashville median revenue at $44,039 and Scottsdale at $49,153 per year — depreciation can shelter 30–50% of gross income from tax, dramatically improving after-tax returns
- Phantom deduction: Unlike operating expenses such as cleaning and supplies, depreciation costs nothing out of pocket while still reducing taxable income
- Portfolio compounding: Tax savings from depreciation can fund down payments on additional properties, accelerating portfolio growth without external capital
- Competitive advantage: Full-time STR investors who understand depreciation mechanics — especially cost segregation and bonus depreciation — routinely outperform investors who treat rentals as passive income plays
Frequently Asked Questions
Calculate depreciation by subtracting the land value from the purchase price to get the depreciable basis, then divide by 27.5 years for the annual deduction. For example, a $400,000 property with $80,000 land value has a $320,000 basis, yielding $11,636 in annual depreciation. Furnishings and appliances are depreciated separately over 5-7 years, potentially adding thousands more in annual deductions.
Yes, furniture, appliances, and other personal property in your STR are depreciated separately from the building over 5-7 years. This includes beds, sofas, TVs, kitchen appliances, linens, and decor. These items can also qualify for Section 179 expensing or bonus depreciation, potentially allowing full deduction in the purchase year. Keep receipts and maintain a detailed asset list for each property.
When you sell a rental property, you must pay depreciation recapture tax at a rate of up to 25% on all depreciation deductions you claimed (or should have claimed) during ownership. For example, if you claimed $80,000 in total depreciation, you could owe up to $20,000 in recapture taxes. You can defer this recapture by using a 1031 exchange to reinvest in another qualifying property.
Bonus depreciation lets you deduct a large percentage of eligible property costs in the first year rather than spreading them across 5-7 years. For 2026, the bonus depreciation rate is 40% under current law (down from 100% in 2022). Short-term rental furnishings, appliances, and cost-segregated building components classified as 5- or 7-year property all qualify, making first-year depreciation deductions significantly larger than standard schedules alone.
Yes, but only if you qualify as a real estate professional or meet the STR material participation test. STR hosts who spend more than 750 hours per year in their rental activity and more time in STR than in any other profession can treat STR losses — including depreciation — as active losses that offset W-2 and other ordinary income without the $25,000 passive-loss cap that applies to standard landlords.