2026 STR Bonus Depreciation: How 100% First-Year Deductions Work Now

You just closed on a beachfront STR in early 2026. Your CPA mentioned "bonus depreciation," but the last thing you read online said it was phasing down to some fraction of the original amount. Here is the thing: that old schedule is gone. The law changed, and the change is permanent.

TL;DR: Under the One Big Beautiful Bill Act (signed July 2025), 100% first-year bonus depreciation under IRC §168(k) is now permanent for qualified property acquired and placed in service after January 19, 2025. For STR owners who also qualify under the STR loophole (average guest stay of 7 days or less, material participation met), the resulting paper loss is non-passive and offsets W-2 or other ordinary income in year one. There is no phase-out to race against.

Jennifer Beadles is a real estate investor and short-term rental owner who uses the STR loophole on her own properties. She writes from hands-on operating experience plus current IRS guidance (IRC §469 and Treas. Reg. §1.469-1T(e)(3)(ii)(A)).

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What 100% Bonus Depreciation Actually Means for STR Owners in 2026

Bonus depreciation is the IRS mechanism that lets you deduct a percentage of a qualifying asset's cost in the year you place it in service, rather than spreading that deduction over 27.5 or 39 years on a straight-line schedule.

Before the One Big Beautiful Bill Act (OBBBA), bonus depreciation was on a legislated phase-down under the Tax Cuts and Jobs Act: 80% in 2023, 60% in 2024, 40% in early 2025, and so on. That schedule is now repealed for property acquired after January 19, 2025. The rate is 100%. It is written into permanent law, not a temporary provision with an expiration date.

For an STR owner, this matters because a cost segregation study can reclassify 25 to 35 percent of your depreciable basis into 5-year, 7-year, and 15-year MACRS property. Those shorter-life components are exactly what bonus depreciation applies to: assets with a recovery period of 20 years or fewer. The structural shell of the building (39-year commercial or 27.5-year residential) stays on its normal schedule. But the personal property, fixtures, land improvements, and qualifying components get front-loaded into year one.

The full mechanics of running a cost segregation study are covered in our post on cost segregation and the STR loophole. The short version: hire a qualified engineer, get the study done before you file, and make sure your CPA applies the bonus depreciation election to the reclassified components.

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Why the STR Loophole Is the Other Half of This Strategy

A large first-year depreciation deduction only helps you if the loss it creates can actually offset your income. This is where most rental property owners hit a wall.

Under IRC §469, rental activities are presumed passive. Passive losses can only offset passive income. If you have a $90,000 paper loss from your STR and no other passive income, that loss just sits there, suspended, until you sell the property or generate enough passive income to absorb it.

The STR loophole changes that entirely. Under Treas. Reg. §1.469-1T(e)(3)(ii)(A), a rental whose average guest stay is 7 days or fewer is not classified as a rental activity under §469. It is treated like a trade or business. That means the passive activity rules do not apply in the same way. If you materially participate, your losses are non-passive and can offset W-2 income, business income, or other ordinary income directly.

You do not need to be a real estate professional. You do not need 750 hours or the other requirements of real estate professional status. The STR loophole requires only two things: an average stay at or under 7 days, and material participation in that specific activity.

Material participation is commonly met through Test 3 under Treas. Reg. §1.469-5T: you must log more than 100 hours and more hours than any other individual, including cleaners, co-hosts, and property managers. If you are more involved than anyone else and cross the 100-hour mark, you qualify. Test 1 (500 or more hours total) also works. For a deeper look at how those tests compare, see our post on 100 hours vs. 500 hours for the STR loophole.

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The Math: A Full Worked Example

Say you purchase an STR cabin in March 2026 for $600,000. The land is appraised at $100,000, so your depreciable basis is $500,000.

You commission a cost segregation study. The engineer identifies:

• $150,000 in 5-year personal property (appliances, furniture, flooring)
• $50,000 in 15-year land improvements (driveway, landscaping, outdoor deck)
• $300,000 remaining as 39-year nonresidential real property (structural)

Step 1: Apply 100% bonus depreciation to the 5-year and 15-year components.

$150,000 + $50,000 = $200,000 eligible for bonus depreciation

At 100%, that is a $200,000 deduction in year one.

Step 2: Add first-year straight-line depreciation on the 39-year structural portion.

$300,000 ÷ 39 years × (10 months placed in service ÷ 12) ≈ $6,410

Step 3: Add operating expenses. Say the property generates $80,000 in gross rental income and has $55,000 in operating costs (mortgage interest, insurance, utilities, platform fees, repairs).

Paper income from operations: $80,000 − $55,000 = $25,000 net before depreciation

Step 4: Subtract total depreciation.

$25,000 − $200,000 − $6,410 = −$181,410 paper loss

Step 5: Apply the loss against W-2 income, assuming you qualify under the STR loophole.

If your W-2 income is $250,000 and your federal marginal rate is 35%, a $181,410 non-passive deduction saves approximately:

$181,410 × 0.35 = $63,494 in federal tax

That is real cash, not deferred savings. You are not avoiding the tax permanently, because depreciation recapture applies when you sell. But you are shifting a significant tax liability years into the future, and the time value of that money is real. Our post on how the STR loophole affects a high-income W-2 example walks through more scenarios like this one.

To run the numbers on your own property, use our cost segregation calculator.

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Key Requirements Checklist Before You Claim It

Getting this wrong is expensive. Here is a structured checklist of what has to be true before you claim bonus depreciation in combination with the STR loophole.

1. Average guest stay is 7 days or fewer. Calculate this as total rental days divided by the number of separate stays for the calendar year. One long stay can push this average above 7 days and knock you out of the loophole entirely. See how the IRS calculates average period of customer use for the details.

2. Material participation is documented. Contemporaneous logs with dates, specific tasks, and start and end times. Tax Court has ruled against owners who submitted rounded estimates (Penley), after-the-fact reconstructions (Almquist), and "on call" time with no active work (Moss). Your logs need to show actual activity. The STR Loophole app logs hours in real time, and if you sync with Hospitable, it automatically adds a default of 5 minutes per guest message to capture communication time. That said, you should set the time to reflect how long you actually spent on each exchange. The auto-log creates useful evidence, but exact timing should reflect reality.

3. Cost segregation study is complete and accurate. The study must be done by a qualified engineer before you file. Do not try to estimate component values yourself.

4. Property acquired on or after January 20, 2025. For property acquired before that date, a different bonus depreciation percentage applies (40% for January 1–19, 2025; 60% for 2024; 80% for 2023). Do not apply 100% retroactively to older acquisitions.

5. No disqualifying personal use. Under IRC §280A(d)(1), if you or a family member uses the property for more than 14 days or more than 10% of rental days (whichever is greater), the property may be treated as a personal residence, which limits your deductions.

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What This Strategy Does NOT Do

Honesty matters here. A few things worth saying plainly.

Bonus depreciation is not a permanent free deduction. When you sell, IRC §1250 depreciation recapture taxes the prior deductions, typically at 25% on unrecaptured §1250 gain. The accelerated deductions are real, and the time value of money makes them genuinely valuable, but you will pay some of it back at the exit.

The strategy also does not eliminate the need for a good CPA. The cost segregation study, the bonus depreciation election, the material participation documentation, and the non-passive classification all have to line up correctly. One missed step and your losses stay trapped as passive.

And it is not always worth the cost of a cost segregation study for a small property. If your depreciable basis is under $250,000 or so, the engineering fee may eat most of the incremental benefit compared with standard depreciation. Is it always worth it? No. Talk to your CPA and run the actual numbers for your property using the STR tax deduction checklist for 2026 before committing.

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How Bonus Depreciation Interacts With the STR Loophole: Side-by-Side Comparison

The bonus depreciation rate is the same either way. The loophole is what makes it usable.

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A Note on §179 Expensing

The OBBBA also raised the §179 deduction limit to $2.5 million (with a phaseout beginning at $4 million). For most STR owners, bonus depreciation under §168(k) is the primary tool because §179 has restrictions around passive activities and rental property that make it less straightforward to apply. Your CPA should evaluate both, but bonus depreciation will typically be the cleaner path for STR property components.

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Sources

• IRC §168(k), Bonus Depreciation
• IRC §469, Passive Activity Loss Rules
• IRC §280A, Personal Use of Dwelling
• Treas. Reg. §1.469-1T(e)(3)(ii)(A), 7-Day Rule Exception
• Treas. Reg. §1.469-5T, Material Participation
• IRS Publication 527, Residential Rental Property
• IRS Publication 946, How to Depreciate Property

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This article is for educational purposes only and is not tax or legal advice. Talk to a CPA who knows short-term rentals before you act on it.