If you’re a short-term rental property owner, understanding how depreciation applies to your investment is crucial for maximizing tax savings. One of the most common questions investors ask is: Should I depreciate my property over 27.5 or 39 years? The answer depends on how the property is used.
The 27.5-Year Depreciation Rule
Most residential rental properties are depreciated over 27.5 years. This includes single-family homes, condos, and multi-family properties used primarily as long-term rentals. According to IRS guidelines, if the average tenant stay exceeds 30 days, the property is generally considered residential real estate, qualifying it for 27.5-year depreciation.
This shorter recovery period allows you to deduct a larger portion of your property’s cost each year, providing more aggressive tax savings early on.
The 39-Year Depreciation Rule
However, if your short-term rental operates more like a hotel or motel—where average guest stays are fewer than 30 days—it may be classified as nonresidential or commercial property. In this case, the IRS requires you to depreciate the property over 39 years, reducing your annual depreciation deductions.
This classification hinges on the “average stay” metric. Even if your property looks residential, it’s the usage that determines the depreciation schedule.
Cost Segregation Can Help
Fortunately, cost segregation can offer a strategic workaround. This method involves breaking out certain components of the property—like appliances, flooring, and landscaping—and depreciating them over shorter periods (5, 7, or 15 years). Even if your property is subject to 39-year depreciation, a cost segregation study can significantly accelerate your deductions.
Cost segregation is especially beneficial for high-income investors looking to shelter rental income or offset other taxable gains.
Bottom Line
The depreciation schedule for your short-term rental depends on the average length of guest stays. Over 30 days? You’re likely eligible for 27.5-year depreciation. Under 30 days? You may face a 39-year schedule—unless you use cost segregation to maximize your tax benefits. Consulting a tax professional with experience in short-term rentals can help you choose the best strategy for your situation.