The 2025 tax legislation restored a permanent 100 percent additional first-year depreciation deduction under IRC §168(k) for qualified property acquired after January 19, 2025, according to the IRS summary of the law's business provisions. For a short-term rental owner, that means a cost segregation study can again front-load a large share of the building's cost into the first year. But the deduction and the ability to use it against W-2 income are two different things. The first comes from §168(k). The second comes from §469, and it is proven with hours, not with a study.
What changed
Under the prior phase-down, bonus depreciation had fallen to 40 percent for most property placed in service in 2025 and was heading toward zero. The July 2025 legislation reversed that and made 100 percent bonus depreciation permanent for qualified property acquired after January 19, 2025. The IRS also notes a one-time election to take 40 percent instead of 100 percent for the first tax year ending after that date, and has issued interim guidance in Notice 2026-11. The source is the IRS page on the business provisions; read it, and check the current IRS guidance for the acquisition-date rules that apply to your closing, because "acquired" generally follows the written binding contract date rather than the day you got the keys. A contract signed before the cutoff and closed after it is a question for your CPA, not for this post.
For the 2026 tax year, then, a property bought and placed in service this year is squarely inside the new rule. Whether that is good news for your return depends on everything that follows.
The deduction is easy; using it is the hard part
Nobody audits whether you were allowed to claim bonus depreciation on a five-year asset. Cost segregation firms know the rules and produce clean reports. What gets examined is whether the loss that the deduction creates can offset your salary.
By default, a rental activity is passive under §469(c)(2), and passive losses only offset passive income. The short-term rental strategy works because a property whose average period of customer use is seven days or less is not treated as a rental activity under Treas. Reg. §1.469-1T(e)(3)(ii)(A). That removes the automatic passive label, but it does not make the loss nonpassive. To get there, you must materially participate under one of the tests in Treas. Reg. §1.469-5T(a). The STR loophole guide walks through the whole chain.
So the sequence is: the study reclassifies components, §168(k) allows the first-year deduction, the deduction produces a loss, and §469 decides whether that loss touches your W-2. Owners who order the study first and think about hours later have the order backwards.
Cost seg produces the loss; §469 decides if it is usable
A study typically moves 20 to 35 percent of a residential building's cost into 5-, 7- and 15-year property, and those shorter-lived assets are what bonus depreciation applies to. Land is never depreciable, and the remaining structure stays on its ordinary 27.5-year schedule. The cost segregation guide explains what a study contains and what it costs.
The resulting first-year loss can be large relative to the rent the property earns. That is exactly why the material participation record matters more in the placed-in-service year than in any other: the number on the return is bigger, the year is usually partial, and the owner is often new to the work.
The three gates
Before the loss reaches your W-2, three questions have to be answered for the tax year, and each has its own record.
| Gate | Rule | What proves it |
|---|---|---|
| Average stay of seven days or less | Treas. Reg. §1.469-1T(e)(3)(ii)(A) | Booking count and total nights per property |
| Material participation | Treas. Reg. §1.469-5T(a), most often the 100-hour test in (a)(3) | A log of your hours, and the hours of everyone else who worked on the property |
| Personal use limits | IRC §280A | A calendar showing days of personal use versus rental days |
The seven-day gate is arithmetic on your bookings. The personal-use gate is arithmetic on your calendar. The material participation gate is the only one that depends on a record you build day by day, and it is the one the Tax Court has repeatedly decided on the quality of the log rather than the size of the deduction.
The timing trap: placed in service versus closing
Depreciation begins when property is placed in service, which IRS Publication 946 describes as when it is ready and available for its intended use. For a rental, that generally means ready and available to rent, not the closing date. A December closing followed by two months of furnishing and repairs is usually a next-year placed-in-service date, which moves the bonus deduction into the next tax year.
This interacts with the hours. The material participation tests are applied per tax year. If the property is placed in service late in the year, the loss lands in that year and the 100-hour test has to be met in that same year, with whatever months remain. Hours spent getting the property ready after you own it are participation in the activity and belong in the log from day one. STR Tracker shows a running per-property total against the 100-hour test, so an owner who closes in September can see in October whether the placed-in-service year is on pace. Many practitioners treat a short first year as the highest-risk year in the strategy for precisely this reason.
State non-conformity
Federal bonus depreciation does not automatically flow to your state return. Several states, California among them, do not conform to §168(k) and require a separate depreciation calculation, and some decouple from the passive-loss rules in other ways. The federal loss you are planning around may look very different on the state form. Ask your CPA how your state treats both bonus depreciation and the short-term rental exception before you count on either.
Other limits worth asking about
Even a nonpassive loss can run into ceilings. The excess business loss limitation under §461(l) caps the amount of aggregate business losses an individual can use against nonbusiness income in a year, with the remainder carried forward. At-risk rules under §465 also apply. None of these are record-keeping problems, but they are reasons the number a calculator shows is not the number on the return.
Checklist before ordering a cost seg study
- Confirm the acquisition date against the current IRS guidance on the January 19, 2025 cutoff, including the binding-contract rule.
- Confirm the placed-in-service date with your CPA, and which tax year the deduction will land in.
- Confirm the booking model will keep the average stay at seven days or less for the whole year, including any off-season long stays.
- Count personal-use days honestly, including family and friends at below-market rent.
- Identify everyone else who will work on the property (cleaner, co-host, handyman) and decide how you will collect their hours, because the 100-hour test compares your hours to each of theirs.
- Start the hours log on the day you own the property, not the day the study arrives.
- Ask the study provider whether they will supply the asset schedule in a form your CPA can use for the state return.
What to write down, starting now
If you closed on a property this year and the cost seg is on order, the log is the part of the plan that cannot be bought later. Each entry needs the date, the property, what you did in plain words, the actual minutes, and something that corroborates it. Keep the cleaner's and co-host's hours next to yours. Track stays and nights so the seven-day average is visible before year end, not after.
You can start a free trial and log from the first walkthrough. The study will tell your CPA how big the deduction is. Only the log tells them whether you can use it.