Cost segregation for short-term rentals
How furnished resort homes in the theme park corridor can move a large share of their depreciation into year one, what the short-term rental rules require, and what to ask your CPA.
Not tax advice. I'm a licensed Florida real estate broker and appraiser, not a CPA, enrolled agent, tax attorney, or financial advisor. This page is general education. Talk to a qualified tax professional before acting on anything here.
What cost segregation is
An engineering-based study that splits a rental's purchase price into shorter-lived pieces, so much of it is depreciated in 5 or 15 years instead of 27.5 or 39.
The total depreciation over the life of the property stays the same; the study moves it earlier. Without one, the IRS default treats everything except land as a single building depreciated evenly over decades. Add bonus depreciation, and the 5- and 15-year pieces can be deducted in the first year.
Class | Recovery period | Resort-home examples |
|---|---|---|
PERSONAL PROPERTY | 5 years | Furniture, appliances, TVs, game room equipment, themed bedroom décor, carpet, blinds |
LAND IMPROVEMENTS | 15 years | Pool and spa, pool deck, screened lanai, pavers, landscaping, exterior lighting |
BUILDING | 27.5 or 39 years | Structure, roof, framing, HVAC, plumbing, wiring |
LAND | Never | The lot itself |
Why theme park area homes are a strong fit
Purpose-built vacation homes in Reunion, ChampionsGate, Windsor Island, Solterra, Storey Lake, Encore, and similar short-term rental communities in Osceola and Polk counties carry more short-lived property than a typical long-term rental.
- Sold turnkey. Furniture, linens, kitchenware, and electronics are part of the price.
- Themed bedrooms and game rooms. Arcade machines, bunk systems, and theater seating are often personal property.
- Private pool and spa. Plus screened enclosures, heated decks, and pavers, typically 15-year property.
- Short stays. Most guests book a few nights to a week, the pattern the rules below depend on.
Florida has no personal state income tax, so for most individual owners the benefit lands on the federal return. Out-of-state owners should ask how their home state treats bonus depreciation.
The two short-term rental tests
A big depreciation loss only offsets W-2 or business income if the rental is non-passive, and for most owners that comes down to two tests met every year.
Average stay of 7 days or less
Under Treasury Regulation 1.469-1T(e)(3)(ii)(A), a property with an average customer stay of 7 days or less is not a "rental activity" for passive loss purposes. Divide rented nights by the number of stays. Long winter bookings can push the average up.
Material participation
Most owners rely on either more than 100 hours and more than anyone else (cleaners, pool tech, and manager included), or more than 500 hours in the year. Rates, guest messages, turnovers, and repairs typically count.
Where Orlando owners get caught: an out-of-state owner with a full-service management company rarely out-works the manager's staff, which defeats the 100-hour test. Owners who want non-passive treatment usually self-manage or use limited-service management, and keep a contemporaneous time log. If the tests aren't met, the losses are passive and carry forward.
$13,000 or $212,000 in year one
A hypothetical $850,000 furnished 8-bedroom pool home, contract signed and placed in service in April 2026. Land at 15%, building treated as 39-year property, and a study that reclassifies 28% of the $722,500 depreciable basis.
Invented figures to show the mechanics, not a projection for any property. At a 35% federal bracket, if non-passive, that is roughly $74,100 of tax deferred in year one versus $4,600. Much of it can be recaptured when you sell.
Cost segregation FAQ
Is bonus depreciation still 100% in 2026?
For property acquired after January 19, 2025 with no earlier binding contract, the 2025 tax law restored 100% bonus depreciation with no scheduled phase-out. Homes under contract before January 20, 2025 follow the old phase-down, which is 20% for property placed in service in 2026.
Is a short-term rental depreciated over 27.5 or 39 years?
Residential rental property uses 27.5 years, but units used on a transient basis are excluded from that definition. Many practitioners depreciate the building portion of a short-term rental with an average stay of 30 days or less over 39 years. Ask your CPA which they will use.
I bought my vacation home a few years ago. Is it too late?
No. A look-back study can catch up missed depreciation. Your CPA files Form 3115 and takes the difference in the current year, generally without amending prior returns. The bonus rate is the one in effect when the home was placed in service: 80% for 2023, 60% for 2024.
What happens when I sell?
Depreciation lowers your basis, so part of the gain is taxed as recapture. Personal property is generally recaptured at ordinary rates, the building at up to 25%. A 1031 exchange can defer the tax, and heirs generally receive a stepped-up basis.
Does a study make sense for every property?
No. It usually pays off for furnished homes priced around $400,000 and up, held five years or longer, by owners who can use the deduction now. It is a weaker fit for low-price condos, quick flips, and owners with no way to use a passive loss.
Get the full 14-page guide
Everything on this page in more depth, formatted to print or send to your CPA.
- Component-by-component reclassification table for resort pool homes
- Bonus depreciation rates by acquisition date
- How to document material participation
- Depreciation recapture and exit planning
- Ten questions to bring to your CPA
Matt Dixon, Real Estate Advisor | REALTOR®, Compass Florida · 851 W Morse Blvd, Winter Park, FL 32789 · +1 407-965-8906 · FL Real Estate License #3083421 · FL Appraisal License #261095680
Matt Dixon is not a CPA, enrolled agent, tax attorney, or financial advisor. This page is general education and is not tax, legal, or financial advice. Tax law changes; consult a qualified tax professional before acting. Figures are illustrative. Sources: Warren Averett, WCG CPAs & Advisors, IRS Cost Segregation Audit Techniques Guide. Photography via Unsplash.