Depreciation is one of the biggest tax advantages available to owners of vacation rentals in the US. Explained at its simplest level, depreciation lets you deduct the cost of your property, split over time, from your tax bill. This works even if your property is increasing in market value, which can compound benefits. This is most useful for medium scale operators of multiple short term rentals – but vacation rental tax benefits are available to individual owners.
That’s the surface level, but when you get into it things are more complex. This article will look at an overview of the basics. Starting with the standard calculation for depreciation, then moving on to the benefits of getting professional help and segregation studies. As well as changes made to the process in 2026 and some practical tips for those in the rental property business.
What is Rental Property Depreciation?
Depreciation is a tax deduction designed to help real estate owners account for the cost of maintenance and wear and tear on residential rental properties.
The majority of rental owners use straight-line depreciation. That is where the deduction is equal each year. However (more on this later) anything in the property – from new kitchen blinds to appliances – may be deductible on shorter time scales.
Although this is variable, at the base level the IRS splits the cost of the property over a 27.5 year life cycle. Rental owners can then deduct that yearly amount from their tax bill.
Note this applied to the value of the building only. The land is not considered to depreciate in value under the law.
How to Calculate It Depreciation (Basic Steps)
Before you get into this section it might be useful to know you can use a depreciation calculator to do the work for you. Simply plug in the numbers for your specific property, and in seconds you’ll know your possible tax savings. Service providers can take you further, identifying how you can accelerate deprecation to maximize savings.
It is still useful to understand the basic calculation however. So here it is, as a step by step process.
- Take your cost purchase – for example $500,000 – and then minus that from the land value. In this case, $100,000. So your total depreciable value is $400,000.
- Next work out how much, if anything, you spent on upgrading or renovating the property, as well as legal fees involved with the purchase. Add that to your depreciable value. In this case, $50,000, so your total is now $450,000.
- Divide the depreciable value by 27.5 years. In this case: $450,000/27.5 = $16,363.
- Deductions start from the day it was “placed in service” – not when it was purchased. This means a partial deductible in the first and last year, depending on the date your property hit the rental market.
That last part is not always easy to calculate, and there are other factors. Which is why getting professional help is advised. But, that is the basic math behind rental property depreciation.
Cost Segregation Studies and Why You Might Want One
A cost segregation study is the next step to maximizing your upfront returns from depreciation. A professional survey helps rental owners classify different parts of the property (appliances, furniture, cabinets, driveways and yard upgrades like decking) as short-life assets.
These, the IRS has agreed, depreciate faster. So, the cost of them can be returned to you in tax deductions over a shorter time scale. Not the 27.5 years of the full property. These are usually split into:
- Five-year property
- Seven-year property
- 15-year property
Another major bonus to getting this done, is that you can get your depreciation on short-life assets as a bonus. In year one of the rental. In some cases that can be a massive upfront cost saver.
The 2025 US Law Change and What it Means
In recent years, bonus depreciation levels were being lowered by regulators. President Trump’s 2025 One Big Beautiful Bill Act restored 100% bonus depreciation, for any qualifying property purchased after Jan 19, 2025.
For example, imagine a cost segregation study done on that $400,000 property from the basic calculation. If the total cost of the short-term assets inside (not the building or the land) was calculated at $50,000, you would normally see that back over five to seven years of tax deductions.
However, with 100% bonus depreciation, you can get the entire $50,000 off of your tax in year one. While this is a non-cash deductible, that can still be very significant. It does mean you will get around $7000 to $10,000 less per year on your total depreciation tax deduction. But you do get it all of your first year.
Offsetting Income with Rental Losses – How to Qualify
Depreciation is not a cash deductible. Should you take your owed tax below zero through this process – a paper loss – the excess is normally deferred for money off future tax payments.
However, there are two ways in which this paper loss can transfer over to tax deductibles in W-2 or other business income.
That is by qualifying for Real Estate Professional Status (REPS), or the Short Term Rental Loophole. The first needs 750+ hours of real estate working per year, and half your professional working hours in the sector. STR needs an average stay of less than seven days at the property, and 100+ hours of personal work on the property.
If you find all of this interesting, qualifying as a real estate professional is one sure-fire way to get the tax benefits from real estate professional status while developing a better understanding of the process. Experts in the field can guide you through the process of qualification, from documenting your working hours to dealing with IRS questions after your application.