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Airbnb and furnished rental owners
In a cost segregation study the parts of an Airbnb that are depreciated over 5 and 15 years are separated from the structure, and under 100% bonus depreciation those parts are deducted in the first year. Whether that is worth the fee depends on the basis, on what you already deduct as furniture, and on whether you can use the loss this year.
We size all three from the closing statement before you commission anything.
The short life share estimated from the closing statement and the property type, before any engineer is engaged
Furniture you already deduct separated out, so the study is sized on what is inside the purchase price
Whether you can use the deduction this year checked against your guest stays and hours
On a mid sized property a study can move the first year deduction from five figures to six.
The deduction is worth nothing unless you can use it this year, and whether you can depends on your average guest stay and your hours.
Furniture bought after closing is five year property without a study, so part of what a study firm shows you may already be on your return.
Purchase price, land allocation and the date it went into service are enough to size the deduction before you commission anything.
In a cost segregation study the price you paid is split into the parts of the building that wear out quickly and the structure that does not. Appliances, carpet, cabinetry and removable fixtures go to a five year life; driveways, decking, fencing and landscaping to fifteen; the rest stays on the building life it started on.
Bonus depreciation applies to assets with a recovery period of twenty years or less, so both short classes are deducted at 100% in the first year and the structure is not.
A $600,000 purchase with $120,000 allocated to land, $480,000 depreciable basis, and a study that allocates $72,000 to five year assets and $34,000 to land improvements:
| Line | No study | With a study |
|---|---|---|
| Building, full year at 27.5 years | $17,455 on $480,000 | $13,600 on $374,000 |
| 5 and 15 year assets at 100% bonus | none | $106,000 |
| Deduction, full year basis | $17,455 | $119,600 |
The difference is $102,145. At a 32% marginal rate that is about $32,700 of tax deferred.
The tax is deferred: the same amount is recaptured on sale. The split is an illustration only, and the building figures are full year amounts: in the year you buy, the building side is prorated from the middle of the month the property was placed in service.
Furniture bought after closing is on your return without a study.
Beds, sofas, televisions, kitchenware and outdoor furniture bought after closing are five year personal property. They go on the return directly, at their own cost, and 100% bonus depreciation applies to them without an engineer setting foot on the property.
A study is limited to the short life components that came with the building and are inside the purchase price: the appliances already in the kitchen, the flooring, the fitted cabinetry, the driveway.
On a furnished conversion where you spent heavily after closing, the incremental value of a study is smaller than its headline figure, because part of what you were shown is already on your schedule.
Both are claimed on Form 4562. We reconcile what a firm says it found against what your return already includes.
Neither is created by the study, and either can make it worthless.
If the activity is passive, the loss is suspended until there is passive income, and a bigger suspended loss saves nothing until then. Whether the activity is passive depends on your average guest stay and your hours.
Depreciation reduces basis, and reduced basis means more gain on sale. Accelerating deductions on a property you intend to sell in two years means paying a fee to move the deduction and the recapture closer together.
The first condition is covered in full on the short term rental tax loophole page, and the second on the short term rental depreciation page. We check both before you commission anything; a study on a property that meets neither condition is a report you paid for and cannot use.
The basis is small. On a modest condo the short life share can be thin enough that the fee is close to the benefit.
The activity is passive and there is no passive income to absorb the loss.
A sale or an exchange is close enough that the deduction is recaptured before it has reduced any tax.
The property is nearly all structure, with little land and few fitted components. A city apartment with no grounds has no land improvements to allocate.
We can tell you roughly what is there, and whether you can use it, from the closing statement and a short conversation about how the property is run.
Estimated from the closing statement and property type before any study is quoted.
Post-closing purchases separated from what is inside the purchase price.
Average guest stay and hours checked, so the loss is not suspended.
Recapture on the extra deduction set against your plan for the property.
A property held for years caught up on one return, with the missed depreciation taken now.
Where the numbers are large enough, the study is quoted by our own team.
Purchase price, land allocation, property type and post-closing spend.
The short life share estimated for the property type, without an engineer.
Average guest stay and hours checked against the passive activity tests.
A study quoted where the numbers work, and the reason given where they do not.
The quote checked against what your return already includes.
Post-closing furniture separated out before the study is sized.
The short life share estimated before any fee is paid.
The read is quoted separately from any study. What it depends on:
These are the factors, not a quote.
We prepare studies and the returns they go on, which is why we tell you when not to buy one.
Licensed CPAs and Enrolled Agents on every return
Fixed quote agreed before work starts
"People that own real estate and have rental properties, absolutely take a look at cost segregations. This can save tens of thousands of dollars, in some cases even hundreds of thousands of dollars."
"Responsive and well organized accountancy at a competitive price point with transparent pricing. I will be moving my Quickbooks based two small business returns prep to them."
Our team includes CPAs and Enrolled Agents who work on individual returns, business taxes and tax planning. Tell us what you need help with when you get in touch.
The useful question is what the deduction is on your property, whether you can use it this year, and what is recaptured on sale. Send the closing statement and we will work through all three.
General information rather than advice for your circumstances. Outcomes depend on facts specific to you, so speak to a CPA before acting on it.
