Under current U.S. tax law, certain property components, such as furniture, appliances, as well as improvements to the structure or land can be depreciated much faster than the traditional 27.5-year schedule used for residential real estate. Bonus depreciation may allow an investor to deduct a significant portion of these expenses in the first year the property is placed in service.
By Matthew Marini, CFP®
Owning a rental property isn’t just about generating income, we believe it’s also about potentially maximizing the tax advantages that may come with real estate. In our opinion, one powerful, yet often overlooked strategy is bonus depreciation, particularly for short-term rental property investments managed through AIRBNB or VRBO.
At Coastal Bridge, our Advisors regularly help educate clients on strategies that can support tax-efficient planning. One example that comes to mind is from a family we advise, who in 2021 built a multi-family rental property for just this purpose. It was a 23-acre property in Ludlow, Vermont, that they now rent for more than 150 nights per year.
What Is Bonus Depreciation?
Under current U.S. tax law, certain property components, such as furniture, appliances, as well as improvements to the structure or land can be depreciated much faster than the traditional 27.5-year schedule used for residential real estate. Bonus depreciation may allow an investor to deduct a significant portion of these expenses in the first year the property is placed in service.
Short-term rentals that qualify as an 'active trade or business' rather than passive rental activity may offer potentially greater tax advantages. In certain situations, accelerated deductions may be used to offset not just rental income, but possibly other types of income earned, depending on your involvement and overall tax profile.
Why We Believe This Matters for Short-Term Rentals
Short-term rentals often involve significant upfront investment in furniture, fixtures, landscaping, and guest-ready amenities. Enhancing these features may improve visibility on rental platforms as prospective renters tend to search for features like hot-tubs and pet-friendly accommodations. Some of these costs may qualify for accelerated depreciation write-offs. Rather than spreading depreciation over many years, bonus depreciation can allow investors to claim certain benefits earlier, potentially enhancing cash flow and overall investment outcomes. In some cases, this strategy may generate paper losses that offset taxable income, potentially lowering the effective cost of the investment and improving after-tax outcomes subject to individual circumstances and applicable tax rules. While bonus depreciation may improve short-term cash flow by accelerating deductions, it is important to consider that eligibility depends on specific IRS requirements. Improper classification or aggressive interpretations could trigger IRS scrutiny or future tax adjustments.
Key Considerations:
New Buyers: If you’re purchasing a short-term rental property, a cost-segregation study combined with bonus depreciation may result in tax benefits depending on your individual circumstances.
Current Owners: If you already own a property, you may be able to explore bonus depreciation through retroactive studies and amended returns.
High-Income Earners: For those in higher tax brackets, these deductions could reduce taxable income and potentially improve after-tax returns depending on your overall tax profile and individual circumstances.
Final Thoughts
Owning a property that you both enjoy and rent out can be rewarding on many levels. But without a thoughtful tax strategy, you may be leaving money on the table. Bonus depreciation may offer meaningful tax benefits when applied in the right circumstances, though its effectiveness depends on several factors including property type, usage, and the your overall tax profile. Bonus depreciation is a tool that, when applied correctly, we believe may transform the economics of a rental property investment.
At Coastal Bridge Advisors, we work with clients to evaluate how their real estate strategies may align with their broader financial planning and tax considerations. If you’re considering purchasing a short-term rental or already own one, we believe it’s worth exploring whether these tax advantages may apply to your situation.
Coastal Bridge Advisors, LLC is an SEC registered investment advisor. SEC registration does not constitute an endorsement of Coastal Bridge Advisors by the SEC nor does it indicate that the firm has attained a particular level of skill or ability. The information contained herein is provided for educational purposes only and should not be construed as tax, legal, or investment advice. You should consult your own qualified tax advisor, CPA, or attorney before making any decisions regarding bonus depreciation or other tax strategies. Past examples are for illustrative purposes only and may not be representative of the results you will achieve. For information regarding the firm, please visit www.coastalbridgeadvisors.com or email info@coastalbridgeadvisors.com.