Depreciation
Depreciation is a tax deduction that allows short-term rental owners to recover the cost of their property and its improvements over a set useful life, reducing taxable income each year without any cash outlay. For residential rental properties, the IRS allows the building's cost to be depreciated over 27.5 years, making depreciation one of the most valuable tax benefits available to Airbnb hosts and real estate investors.
Key Takeaways
- Residential rental buildings are depreciated over 27.5 years; furnishings and appliances over 5-7 years
- Depreciation reduces taxable income without requiring any actual cash expenditure
- STR hosts with material participation status can use depreciation losses to offset W-2 and other active income
- Cost segregation studies can accelerate depreciation by reclassifying building components into shorter schedules
- Depreciation is recaptured at up to 25% when you sell, but a 1031 exchange defers this tax
How Depreciation Works for Rental Properties
Standard Depreciation Schedule
| 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 | 15 years | 6.67% per year |
| Land | Not depreciable | N/A |
Calculating Annual Depreciation
Step 1: Determine the depreciable basis (purchase price minus land value)
Step 2: Divide the basis by the useful life
Example:
| Item | Amount |
|---|---|
| Purchase price | $450,000 |
| Land value (20%) | -$90,000 |
| Building depreciable basis | $360,000 |
| Annual building depreciation (27.5 years) | $13,091 |
| Furnishing and setup costs | $30,000 |
| Annual furnishing depreciation (5-7 years) | $4,286 - $6,000 |
| Total annual depreciation | $17,377 - $19,091 |
At a 32% marginal tax rate, this saves $5,561 to $6,109 per year in taxes.
Why Depreciation Matters for Airbnb Hosts
- Tax-free income shelter: Depreciation can offset a significant portion of your rental income, reducing or eliminating your tax bill on STR earnings
- Phantom deduction: Unlike operating expenses, depreciation costs you nothing out of pocket while still reducing taxable income
- Material participation advantage: STR hosts who actively manage their properties can use depreciation losses against all income types, not just rental income
- Compounding wealth: Tax savings from depreciation can be reinvested into additional properties, accelerating portfolio growth
Depreciation Tax Savings by Tax Bracket
| Tax Bracket | Annual Depreciation | Annual Tax Savings | 10-Year Savings |
|---|---|---|---|
| 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 |
Tips for Maximizing Depreciation Benefits
- Separate land from building value: Have a professional appraisal done to minimize the land allocation and maximize your depreciable basis.
- Track all furnishings separately: Every piece of furniture, appliance, and fixture should be tracked individually for 5-7 year depreciation, not lumped into the building.
- Consider cost segregation: A cost seg study can identify 20-40% of your building's value for accelerated 5 or 15-year depreciation.
- Establish material participation: Spend 100+ hours managing your STR annually (more than anyone else) to classify as a real estate professional for tax purposes.
- Depreciate improvements immediately: Renovations and upgrades start new depreciation schedules, adding to your annual deductions.
- Plan for recapture: When selling, use a 1031 exchange to defer depreciation recapture taxes and continue building wealth tax-deferred.
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.