Your Short-Term Rental Is Depreciating Over 39 Years. It Doesn't Have To.

She bought the two-bedroom condo in Pacific Beach four years ago. Rents for $350 a night on the short-term market, books solid most of the summer, clears about $85,000 in revenue this year. She also owns a cabin near Idyllwild she picked up during the pandemic. Both are short-term rentals, both perform well, and every year her CPA depreciates them over 39 years, same as a strip mall or an office tower.

That's how the tax code defaults. But here's what she's never been told: an engineering-based cost segregation study can reclassify large portions of those properties from a 39-year asset into 5-year, 7-year, and 15-year categories. The timeline collapses from four decades to a handful of years. And with bonus depreciation now permanently back at 100%, those shorter-lived assets can be written off in the first year.

The 39-Year Default (and What It Costs You)

When you buy a rental property, the IRS says you can deduct a portion of the building's value each year as depreciation. For residential rental property, that's 27.5 years. For commercial, it's 39 years. Short-term rentals typically default to 39-year straight-line depreciation, which means you recover about 2.56% of the building's value each year.

For that $1.2 million Pacific Beach condo where the structure is worth roughly $900,000, that's about $23,000 a year in depreciation. Not nothing. But it's slow, and it's linear.

What most owners don't realize is that a significant portion of what you paid for isn't the building at all. It's personal property, land improvements, and interior finishes that wear out much faster than the structure itself.

What a Cost Segregation Study Actually Finds

A cost segregation study is an engineering-based analysis of your property. An engineer walks the building, identifies every component, and assigns each one to the correct depreciation life under IRS guidelines.

Here's what they typically find:

• 5-year property: Carpeting, window treatments, appliances, furniture, specialty lighting
• 7-year property: Office furniture, some fixtures and equipment
• 15-year property: Land improvements such as landscaping, fencing, driveways, parking lots, decks and patios

For a short-term rental, the 5-year category is especially important. STRs are furnished, often heavily. That furniture, those appliances, the decor, the patio set, the hot tub, the outdoor kitchen — all of it is 5-year property. In a standard long-term rental, those items don't exist (the tenant brings their own furniture). In a short-term rental, they can represent 20% to 30% of the total property cost.

A well-done study typically reclassifies 20% to 35% of a property's value from 39-year to 5-, 7-, or 15-year categories, depending on how it's built and furnished.

How Bonus Depreciation Accelerates the Timeline in 2026

This is where the timing matters. Bonus depreciation lets you deduct the reclassified 5-, 7-, and 15-year property immediately, in the first year. It was 100% from 2018 through 2022, then began phasing down. The July 2025 tax law reversed that: bonus depreciation is now permanently 100% for eligible property acquired after January 19, 2025. Property acquired before January 20, 2025 still follows the old phase-down schedule, so the date you bought the property matters.

So if you bought your short-term rental after January 19, 2025, you can deduct 100% of the reclassified property in the first year instead of spreading it over decades.

The Short-Term Rental Advantage

Short-term rentals benefit from cost segregation more than long-term rentals for two reasons.

First, the furniture and fixtures. A long-term rental is a shell — the tenant supplies their own couch, bed, and kitchen table. A short-term rental is a fully furnished, turnkey product. Every piece of furniture, every appliance, every set of blinds and every outdoor furnishing is depreciable over 5 years. That 20% to 30% reclassification figure is often higher for STRs because there's more 5-year property to capture.

Second, the short-term rental safe harbor. Under IRS Revenue Procedure 2024-26, properties rented for an average of 7 days or fewer qualify for the short-term rental exception to the passive activity loss rules. This means an STR owner who actively participates can use the accelerated depreciation to offset ordinary income, not just passive income. That distinction matters enormously when you're a physician or executive with W-2 income and an STR on the side, especially here in San Diego where short-term rental property values and nightly rates tend to run higher than national averages.

We go deeper into short term rental tax strategy in How a Short-Term Rental Can Shelter $150K of Your W-2 Income.

When Does a Study Pay for Itself?

A cost segregation study typically costs between $3,000 and $8,000, depending on the property's size and complexity. In most cases, it pays for itself in the first year.

Consider a representative short-term rental purchased for $800,000. After land value, the depreciable basis is roughly $700,000. A cost segregation study reclassifies 25% of that, or $175,000, into shorter-lived assets. Under standard 39-year depreciation, that $175,000 would yield roughly $4,500 per year. With cost segregation and 100% bonus depreciation, you can deduct the full $175,000 in year one. The remaining $525,000 is still depreciated over 39 years, about $13,500 a year.

That's a material difference in year one, and the study pays for itself before you file your first return after completing it.

If you already own the property and have been depreciating it on the standard schedule, a look-back study (sometimes called a retroactive cost segregation study) can capture missed depreciation through a change in accounting method, no amended returns needed.

No number here is a promise or a guarantee — every property is different and every owner's situation is different. The point is that the potential is large enough that a conversation makes sense.

FAQ

What is a cost segregation study?

A cost segregation study is an engineering-based analysis that identifies components of a building that can be depreciated over shorter time periods than the standard 39-year or 27.5-year schedule. It reclassifies items like flooring, cabinetry, appliances, and land improvements into 5-, 7-, and 15-year asset categories.

How much does a cost segregation study cost for a short-term rental?

A professional engineering study typically costs between $3,000 and $8,000 depending on the property's size, complexity, and location. Most owners find the study pays for itself in the first year through the additional depreciation.

Can I do a cost segregation study on a property I already own?

Yes. You can commission a look-back or retroactive study on a property you've owned for years. The missed depreciation is captured through a change in accounting method (Form 3115), which lets you take the catch-up amount in the current year without filing amended returns.

What is bonus depreciation in 2026?

Bonus depreciation lets you deduct reclassified short-life property in the first year. For eligible property acquired after January 19, 2025, it is permanently 100% under the July 2025 tax law. Property acquired before that date still follows the old phase-down schedule.

Do short-term rentals qualify for bonus depreciation differently than long-term rentals?

The bonus depreciation rules apply the same way to both. But short-term rentals typically have more 5-year property (furniture, appliances, furnishings) to reclassify, and the short-term rental safe harbor may allow the accelerated deductions to offset active income rather than being limited to passive income.

Who should order a cost segregation study?

Any property owner who holds a commercial, rental, or short-term rental property and has not had an engineering-based study performed should consider one. The best candidates are recently purchased properties, properties with significant personal property or improvements, and owners who want to accelerate their depreciation timeline before bonus depreciation phases down further.

If you own a short-term rental in San Diego, Frisco, or Panama City Beach and have never had a cost segregation study done, the first step is a 15-minute conversation to see whether your property is a candidate. (619) 280-2700 or info@RoadmapTax.com.

We go deeper into cost segregation study in Cost Segregation in San Diego: The Look-Back Study Walkthrough.