Bonus Depreciation Is Back at 100%: What Every Short-Term Rental Owner Should Know in 2026

If you own a short-term rental — or you're thinking about buying one — there's a tax change worth understanding right now. It's the first question almost every new owner we work with at Hotel Home Stays is asking, and for good reason: as of 2025, one of the most powerful deductions in real estate is back at full strength.

Here's a plain-English look at what changed, why short-term rentals are treated so favorably, and the details that trip people up. (One important note up front: this is educational, not tax advice — see the disclaimer at the end, and loop in a qualified CPA before you act.)

What bonus depreciation actually is

Normally, when you buy a rental property, you can't deduct its cost all at once. You spread it out — residential property is depreciated over 27.5 years. Bonus depreciation lets you accelerate a big chunk of that, deducting a large percentage of qualifying assets in the year the property is placed in service instead of waiting decades.

The result can be a sizable paper loss in year one — and that loss is where the strategy gets interesting.

What changed in 2025 (and why people are excited)

Under the original 2017 Tax Cuts and Jobs Act, bonus depreciation was scheduled to phase out — dropping to 20% in 2026 and disappearing entirely in 2027.

That changed. The One Big Beautiful Bill Act, signed July 4, 2025, permanently restored 100% bonus depreciation for qualifying property acquired after January 19, 2025. In other words, for eligible owners, the deduction is back to full strength — and it's no longer on a countdown clock.

The "short-term rental loophole"

Here's the part that makes short-term rentals special. Most rental losses are "passive" under IRC §469, which means they can only offset other passive income — not your salary or business income.

Short-term rentals can escape that limitation. If the average guest stay is 7 days or less, the IRS generally doesn't treat the activity as a passive rental. That opens the door for losses (including a big first-year bonus-depreciation loss) to offset W-2 wages and active business income — something long-term landlords usually can't do unless they qualify as a real estate professional (750+ hours a year).

For a high earner who also owns a short-term rental, that distinction can be substantial. It's exactly why so many investors are paying attention.

The catch most owners miss: material participation

The 7-day rule is necessary, but it's not sufficient on its own. To use those losses against ordinary income, you also have to materially participate in the rental. The IRS offers several tests; the common ones are:

• 500-hour test — you participate more than 500 hours during the year.
• 100-hour test — you participate more than 100 hours, and no one else (including paid managers) participates more than you.
• Substantially-all test — your participation makes up substantially all of the participation in the activity.

This is the part to think through carefully if you use a full-service manager, because professional management hours can affect tests like the 100-hour rule. It's worth a conversation with both your CPA and your management partner about how to structure your involvement so the operations run smoothly without undercutting your tax position. And whatever you do, keep a contemporaneous log of your hours — no documentation is an audit risk.

Cost segregation: how you unlock the deduction

To take full advantage, most owners commission a cost segregation study. It reclassifies parts of your property out of the slow 27.5-year bucket and into faster depreciation schedules:

• 5-year property — appliances, carpet, fixtures, furniture
• 7-year property — specialty equipment not captured above
• 15-year property — land improvements like landscaping, paving, and fencing

Those reclassified components are what bonus depreciation can write off immediately. A professional study for a single short-term rental typically runs $3,000–$10,000; DIY alternatives exist for $500–$2,000 but carry more audit risk. Skip the study entirely and your whole basis defaults to the 27.5-year treatment — leaving the benefit on the table.

Quick eligibility checklist

You'll generally need:

• An average guest stay of 7 days or less
• The property placed in service (ready and available to rent) during the tax year
• Material participation (the 7-day rule alone isn't enough)
• An acquisition date after January 19, 2025 to claim the 100% rate
• Personal use kept to 14 days or less (or 10% of rented days)

Good news: used property can still qualify, as long as it's "new to you."

Where to be careful

A few caveats worth knowing before you count on the savings:

• Not all states conform to federal bonus depreciation — California and New York are notable exceptions, so your state return may look different.
• Depreciation recapture can apply when you sell, taxed at up to 25% — this is a timing advantage, not free money.
• The 7-day rule, material participation, and cost segregation all have to line up; missing one can unwind the strategy.

Where Hotel Home Stays fits in

The tax strategy is only half the equation — the property still has to perform. That's our role. Hotel Home Stays manages 29 short-term rentals across South Florida — including West Palm Beach short-term rentals — plus Arizona and North Carolina, with a Superhost track record and a 4.93 guest rating. Owners get a turnkey, high-occupancy operation without the day-to-day grind. We handle the guest experience, pricing, and upkeep that keep a property booked — so you can focus on the bigger-picture decisions (like the tax planning above) with your advisors.

If you're a current owner wondering whether your property is positioned to take advantage of this — or you're weighing a new short-term rental purchase before year-end — we're happy to talk through the operational side and connect the dots with your CPA.

Ready to make your short-term rental work harder for you? Get in touch with the Hotel Home Stays team to start the conversation.

This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax laws are complex and change frequently, and individual situations vary. Consult a qualified tax professional before making any decisions about bonus depreciation, cost segregation, or your short-term rental.