Cost Segregation and STR Tax Setup

A cost segregation study identifies components of your property that can be depreciated faster than the building itself, accelerating potential tax deductions. Land is not depreciable. Start the process after closing and let the provider know about planned renovations so they can recommend when to finalize the study. IRS cost segregation guide

Cost segregation identifies eligible assets with shorter depreciation periods. Bonus depreciation can then allow you to deduct their qualifying cost in the year they are placed in service. Under current federal rules, eligible property acquired and placed in service after January 19, 2025, generally qualifies for 100% bonus depreciation. Acquisition and contract dates can affect eligibility. IRS bonus depreciation guidance

These deductions may create a tax loss that offsets W-2 or other nonpassive income if your STR qualifies for nonpassive treatment. A common route is an average guest stay of seven days or less combined with meeting a material participation test. This is not automatic: personal use, at-risk rules and other loss limitations can affect the deduction. Your CPA should confirm your eligibility and documentation. IRS passive activity rules

You cannot simply divide a bonus depreciation deduction between whichever years you choose. However, your CPA can evaluate electing out of bonus depreciation for particular asset classes, allowing those costs to be depreciated over their normal schedules. Assets placed in service in different years also have separate deduction timelines. IRS depreciation rules

If a loss is limited, it may carry forward under the applicable rules. That is different from choosing to spread the deduction. IRS loss limitations

The provider will give you a checklist, but commonly requested documents include:

• Purchase agreement and closing statement.
• Appraisal, inspection report and property photos.
• Floor plans or construction drawings, if available.
• Renovation contracts, itemized invoices and payment records.
• Furniture, appliance and equipment purchase records.
• Dates the property and later additions became ready and available for rental use.
• Existing depreciation schedules if the property was reported on a prior tax return.

Keep records showing the property’s condition at purchase and what you subsequently changed or removed. IRS cost segregation guide

The transaction coordinator (TC) team will help you gather available documents after closing. Title may provide closing documents electronically or by mail. If anything is missing, request the closing statement from title, the appraisal from your lender and the inspection report from your inspector.

Yes, give the provider and your CPA the renovation and furnishing records so they can account for them properly. Furnishings may be listed separately on your depreciation schedule rather than requiring a study. Your CPA will distinguish deductible repairs from improvements that must be capitalized. IRS rental property guidance

Later improvements are generally recorded as new assets, with depreciation beginning when they are ready and available for rental use. Their classification determines the depreciation period and potential bonus eligibility. Your CPA and study provider can assess whether a supplemental study would be useful. Keep itemized invoices and completion dates. IRS rental property guidance

Tell your CPA what was replaced, when it was removed and whether it was sold, donated or discarded. The replacement is accounted for separately. The old asset may have remaining tax basis that can be recognized on disposal, depending on the circumstances. If it was already fully depreciated, there generally is no remaining basis to deduct. A sale can also trigger depreciation recapture. IRS asset disposition guidance

PAD can allow you to recognize the remaining tax basis of a component you remove from a larger depreciable asset, for example, an old roof replaced during renovations. This helps avoid continuing to depreciate the removed component alongside its replacement.

It requires support for the removed component’s basis and generally a timely election on the tax return for the year of disposal. Separately recorded furniture or appliances usually involve disposal of the whole asset rather than PAD. Notify your CPA before filing that year’s return. IRS partial disposition guidance

Start coordinating the study after closing, before major demolition or replacements, so the provider can document the original property. If you are renovating before opening, it may be practical to finalize the study once the work and costs are complete. Ask the provider to coordinate with your CPA.

The study date does not determine when depreciation begins; the property or asset must be ready and available for its intended rental use. IRS cost segregation guide, IRS depreciation rules

We work with several tax advisors and CPAs and can provide referrals. If you already have a CPA, make sure they have experience with short-term rentals, material participation, cost segregation and bonus depreciation. They should evaluate your personal situation, including state tax treatment and potential depreciation recapture when you sell.