Aurelian tax blog
Cost segregation on a vacation rental: what it is and when it pays
A cost segregation study splits a property into parts you can write off fast and a building you write off over decades. On a short term rental you run, that can mean a large year one deduction.
The short answer
On many vacation rentals, 20 to 30% of the depreciable cost is reclassified into short life parts. With 100% bonus depreciation, those parts come off in year one. It pays most when you can use the loss now and plan to hold.
What the study does
An engineering based report reviews the purchase, the closing statement and usually the property itself. It assigns each part to a tax class:
- 5 and 7 year property: furniture, appliances, carpet, decor and some fixtures.
- 15 year property: land improvements like driveways, fencing, patios, landscaping and pools.
- The building: 27.5 or 39 years, depending on how the property is classified.
- Land: never depreciated.
Why bonus depreciation matters
Bonus depreciation lets you deduct the full cost of qualifying short life parts in the year the property is placed in service. Under the 2025 tax law, it is 100% and permanent for property acquired after January 19, 2025. Without it, those parts still come off faster than the building, just over several years.
The math on an example home
A $1,000,000 home with 20% land.
Depreciable basis: $800,000. At 25% reclassified, $200,000 is short life parts. Add about $40,000 of furniture and setup, and the year one write off is about $240,000.
Without a study, the whole basis over 27.5 years is about $29,091 a year.
Examples, not promises. The same defaults run in the Aurelian calculator.
When it pays
- You can use the loss this year. On a short term rental that means an average stay of 7 days or less and material participation. The two rules
- You are in a high bracket. A deduction saves roughly your top rate times the deduction.
- The property is big enough. A study has a cost, so it pays better on a larger basis.
- You plan to hold. The deduction is worth the most when you keep the property for years.
When it pays less
- You can’t meet the hour test. The loss is held back until you have rental income to offset or you sell.
- You sell soon. Short life parts are recaptured at ordinary rates, and the building part at up to 25%. A 1031 exchange can defer it.
- You are past the yearly cap. The rest carries forward. How the cap works
- Your state adds it back. Some states skip bonus depreciation. State by state rules
Timing
Order the study after closing. It can be finished after the year ends, before the return is filed. Bought a property in an earlier year without one? A look back study with Form 3115 can catch up the missed depreciation in the current year without amending old returns.
Want to see your own numbers? Put in your income and home price. The Aurelian calculator applies the yearly cap.
Sources
- IRS Cost Segregation Audit Techniques Guide, Publication 5653: irs.gov
- Depreciation classes and recovery periods, Publication 946: irs.gov
- 100% bonus for property acquired after January 19, 2025: irs.gov
- Changing an accounting method, Form 3115 instructions: irs.gov
- Recapture of short life parts, IRC 1245: law.cornell.edu
- IRC 461(l), excess business loss: law.cornell.edu. 2026 amounts, Rev. Proc. 2025-32: irs.gov
Last checked November 1, 2026.
Educational, not tax advice. Tax rules change and depend on your income, filing status, hours, how the property is used and your state. Nothing here is a promise of any deduction or tax result. BNB Portfolio is not a CPA firm, law firm, real estate broker or lender. We work with licensed agent partners and CPAs.