Frequently Asked Questions

In the context of taxation, depreciation is the process in which a taxpayer deducts a capital expenditure over multiple years instead of in the year of purchase or year the purchased capital was placed in service. This is generally required with large expenses like a building, remodel, or vehicle. It's important to know that each situation is unique and there may be beneficial workarounds that allow the taxpayer to take a greater deduction, or even deduct the entire expense, in the first year. Examples include bonus depreciation, the de minimis safe harbor rule, and more. To make sure to get the most benefit out of allowable strategies, taxpayers should consult an expert.

It depends, but usually no! For most people, this is a good thing that can save you from an additional 15.3% tax. Business income from real estate is generally reported in one of two places on your personal tax return, Schedule C or Schedule E. Income reported on Schedule C is subject to self-employment tax which can seriously eat into profits. Thankfully, due to the way the tax code and treasury regulations are written, income from most short term rentals (STRs) qualifies as “rental income” and is therefore reported on Schedule E just like any other rental.

This “Loophole” is essentially a quirk in the regulations regarding most STRs. Normally, if you report a loss on a rental property that loss has very limited use against your other income. With many STRs, however, the IRS actually does not consider them to be “rental activity” at all. This is actually different than the “rental income” distinction that qualifies many STRs for Schedule E reporting, which is why many consider this a true loophole. In short, if you meet certain criteria, you are able to use the full amount of any losses to offset your other income. Are you eligible and taking advantage?

A Partial Asset Disposition is something that can be done when a taxpayer disposes of a depreciable asset before it is finished being depreciated. It allows the taxpayer to deduct the remaining basis of the disposed asset in the current year, instead of continuing to depreciate it over multiple years.

The depreciation special allowance, also referred to as bonus depreciation or §168(k) depreciation, is a tax incentive applying to certain business property subject to depreciation that allows a percentage (sometimes 100%) of the cost to be deducted in the first year. It can create major tax breaks for business owners and real estate investors. 100% bonus depreciation was recently reinstated permanently, with a retroactive effect going back to 1/20/2025.

Do you think you may have missed this bonus or are interested in tax planning strategies that can help you save money? Contact us!

When a taxpayer makes a capital expenditure it generally needs to be depreciated. If the depreciable cost is small enough (usually less than $2,500), the taxpayer can attach a statement to their tax return to be able to deduct the entire cost in one year invoking Treasury Regulation §1.263(a)-1(f). On top of the tax savings, this can reduce the amount of paperwork needed for many businesses by a substantial amount.

Put simply, cost segregation is when individual components of a building are broken out and their values estimated. This allows a portion of the overall purchase price to be depreciated over shorter recovery periods, often utilizing bonus depreciation. This can create major tax deductions in the first year of service and is particularly useful for those who qualify for the STR “Loophole” or Real Estate Professional Status, but can still make a major difference in many other situations.

There can be some downside in certain situations, like if you plan to sell soon, but the benefits often outweigh any negatives. Continue reading to find out if cost segregation is right for you!

Unfortunately, yes. The IRS looks at real estate, or “real property,” as consisting of two categories: Residential Rental Property (27.5 years of depreciation) and Nonresidential Real Property (39 years). The tax code states that any establishment in which more than half of the units are used on a transient basis (average tenancy <30 days) is classified as Nonresidential Real Property by default (IRC §168(e)(2)). Therefore any STR must be depreciated over the longer 39 year period.

As a silver lining, this actually might open up properties to 1) extra §179 deductions for things like roofs and HVAC units, and 2) bonus depreciation and shorter recovery periods for interior renovations and remodels. Residential properties are usually not eligible for either of those. If you think this may apply to you, contact us.

Depreciation recapture is what happens when you sell an asset for more than its adjusted cost basis, usually purchase price minus depreciation allowed or allowable. The difference, up to the total amount of depreciation, will be taxed at your ordinary income tax rates (with a cap at 25% for real property) instead of the more favorable capital gains rates.

Example: You purchase a rental property for $100k and over the years depreciate $30k, leaving an adjusted cost basis of $70k. You then sell the property for $125k. Instead of simply having a $25k capital gain, you will have that plus $30k of depreciation recapture, taxed at ordinary rates up to 25%. For simplicity, this example excludes land value, capital improvements, and other factors that may affect adjusted cost basis.

Because depreciation recapture will be owed regardless of whether you took depreciation deductions or not! The IRS figures recapture based on allowable, not taken, depreciation. Also, because of a principle known as the “time value of money,” it will almost always be beneficial to take deductions as soon as they are available, even if those deductions eventually have to be “paid back.”

Do you have a property or asset that you haven’t been depreciating? We can help!

Generally, if a taxpayer has a loss resulting from a passive activity, those losses can only be applied to other passive income. This excludes all W-2, active business, and even capital gains income. One important exception for real estate investors is the “special $25,000 allowance” which allows investors to use up to $25k (with an income phaseout) in rental losses against non-passive income as long as they “actively participate” in the rental activity, which is a much lower bar than material participation. Most investors would meet the criteria without even trying. For more information on this and related topics see IRS Publication 925.

Whether a taxpayer materially participates in an income-producing activity can affect a lot of things, from self-employment tax to deductibility of losses. The IRS has seven tests to determine whether there is material participation, and a taxpayer must pass at least one test to be considered materially participating. The most commonly met tests are, 1) spending more than 500 hours in the year on the activity, and 2) spending more than 100 hours and also more than any other individual, including employees and contractors. For more information on this and related topics see IRS Publication 925.

Real estate professional status is a designation that can allow a taxpayer and their spouse to use an unlimited amount of rental real estate losses to counteract their other income, circumventing passive activity loss limitations. In order to qualify, a taxpayer must spend more than 750 hours in a year in a real estate trade or business and longer than any other job or business. This can include landlords, developers, real estate agents, and more! This is a highly sought after benefit for real estate investors, especially for real estate agents and married couples where one spouse has a high earning full time job. For more information on this and related topics see IRS Publication 925.

The short answer is yes, you can use your short term rental personally. The better question might be should you?

It’s important to remember that personal use will limit most of your tax deductions by a proportional amount. If you have 5 days of personal use and 95 days of rental use, this means most of your deductions are decreased by 5% (5 personal days divided by 100 total days). Further, if your personal use exceeds the greater of 14 days or 10% of total rental days the property will be classified as a residence. This results in disallowing any losses you may have had in the year, so say goodbye to the $25k passive activity loss exclusion, the STR Loophole, and even the benefits of Real Estate Professional status.

The “election to expense certain depreciable business assets,” commonly referred to as the §179 Deduction, is essentially what its name states. One could think of it as similar to 100% bonus depreciation but it’s treated a little differently. The two major differences to note are, 1) a limit to the total deduction allowable (including this deductions inability to create a tax loss for the taxpayer) and a phaseout based on total cost of eligible assets, and 2) section-specific exclusions and inclusions of eligible assets that do not apply when discussing bonus depreciation.

For most real estate investors, this is something that won’t be needed often but can make a big difference when it is. One notable example for nonresidential real property is the cost of new roofs or HVAC units which are not eligible for bonus depreciation.