Bonus Depreciation for Short-Term Rentals in 2024

Bonus depreciation lets a taxpayer deduct a percentage of the cost of qualifying shorter-life property in the year it is placed in service, rather than spreading it across the asset's recovery period. For a short-term rental, the qualifying property is what a cost segregation study reclassifies out of the building: carpet, appliances, decorative lighting, specialty electrical, furnishings, and land improvements such as driveways, landscaping and pools. This is where it stood in 2024, which was the year the market stabilised and the tax benefit shrank.

What 2024 changed

2024 was the stabilisation. The panic of 2023 faded, supply growth slowed in most markets, and occupancy found a floor. What changed most was the tax side: bonus depreciation at 60% meant the same property produced a materially smaller first-year deduction than it would have three years earlier.

Buyers who had waited for prices to collapse were still waiting. What actually happened was a market that stopped falling and started rewarding operators who had systems rather than luck.

Bonus depreciation fell to 60% for property placed in service in 2024, continuing the TCJA phase-down.

How it works

Bonus depreciation lets a taxpayer deduct a percentage of the cost of qualifying shorter-life property in the year it is placed in service, rather than spreading it across the asset's recovery period. For a short-term rental, the qualifying property is what a cost segregation study reclassifies out of the building: carpet, appliances, decorative lighting, specialty electrical, furnishings, and land improvements such as driveways, landscaping and pools.

1. A cost segregation study separates the purchase into components and assigns each to its correct recovery period, commonly 5, 7 and 15 years for the pieces that come out of the building shell.
2. Bonus depreciation then applies to those shorter-life components at whatever percentage the law allows for the year the property is placed in service.
3. The remaining structure continues over its long recovery period, 39 years for a short-term rental with an average stay of seven days or less, or 27.5 for residential rental property.
4. None of this is usable against wage income unless the activity clears the seven-day average period of customer use and the owner materially participates.

What that meant in 2024 specifically

At 60% bonus depreciation, the strategy still worked and the margin was thinner. Buyers doing the arithmetic properly found that purchase basis and marginal rate mattered more than they had when the deduction was 100%.

The live risk in 2024 was regulatory rather than economic. Several resort markets tightened permits, and the direction of travel in high-pressure housing markets was consistently toward restriction.

2024 was a year to buy on fundamentals rather than on the tax benefit, because the tax benefit alone no longer carried a marginal deal.

Where it goes wrong

The failure modes are consistent across years, which is itself useful information: they are not caused by the market cycle, so a different year does not protect you from them.

• Treating the deduction as free money. It is a timing shift, and on sale the depreciation taken is recaptured, with Section 1245 recapture on personal property components taxed as ordinary income.
• Commissioning a study before confirming the participation position, which produces a large loss that is passive and generally suspended.
• Assuming the placed-in-service date is the closing date. It is when the property is ready and available for its intended use, which for a rental generally means available for booking.

What a buyer should have done in 2024

2024 was a year to buy on fundamentals rather than on the tax benefit, because the tax benefit alone no longer carried a marginal deal.

The underwriting discipline does not change with the year. Twelve individual monthly revenue figures from a comparable set you assembled, a complete expense stack including reserves, and a stress test at 75% of projection that still covers debt service.

We screen roughly a thousand deals a week and eliminate about 98% of them. That ratio has held across every year on this site, through the boom, the correction and the stabilisation, because it is a function of how listings are selected rather than of the market.

What generalises, and what does not

Reading a year in isolation is the most common analytical error in this business. 2024 had its own conditions, and someone who learned the wrong lesson from it carried that lesson into a market that no longer rewarded it.

What generalises is the mechanics above. The definitions, the tests, the sequence and the failure modes are the same in every year on this site, which is why they are worth learning properly once rather than relearning each cycle.

What does not generalise is the environment: the cost of capital, the depth of supply, the bonus depreciation percentage, and the regulatory posture of a given jurisdiction. Those change, sometimes abruptly, and a model that treats them as fixed is a model that was only ever right about one year.

The practical consequence is to build the analysis so the environment is an input rather than an assumption. A property that only works at one interest rate, one occupancy level and one tax treatment is not an investment thesis, it is a bet that nothing moves.

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