Miami Airbnb host maximizes depreciation with a cost segregation study and bonus depreciation.

The strategy

Depreciation lets a property owner deduct the cost of a building over time, even while its market value is rising. Residential rental property is normally depreciated over 27.5 years, which spreads the deduction thin.

A cost segregation study changes the timing. An engineering-based analysis separates the property into its components and assigns each the useful life the tax code actually allows: flooring, cabinetry, appliances, specialty electrical and plumbing, and land improvements such as fencing and paving often qualify for 5-, 7-, or 15-year lives instead of 27.5. Those shorter-lived assets are also eligible for bonus depreciation, so a large share of the purchase price can be deducted in the first year rather than over decades.

That first-year deduction is frequently larger than the property's rental income, which produces a loss on paper.

Why short-term rentals are different

For most rental property, that loss is "passive" and can only offset other passive income, not wages. Short-term rentals can be the exception. When the average guest stay is seven days or less and the owner materially participates in running the property, the activity is not treated as a rental for passive-loss purposes, and the loss can offset ordinary income such as a salary.

What we did

• Confirmed the property qualified: average stays under seven days and documented material participation by the owner.
• Ran a feasibility estimate to confirm the study would pay for itself many times over before engaging the engineering firm.
• Coordinated the cost segregation study and applied bonus depreciation to the reclassified components.
• Prepared the return so the resulting loss properly offset the client's W-2 wages.

The result

• The depreciation loss offset the client's wages, leaving no federal income tax liability for the year.
• He received a refund of all federal income tax withheld from his paychecks.
• The property continued to produce positive cash flow.

The same approach applies to many short-term rental owners in Miami, and to commercial, multifamily, and medical office property through the real estate professional rules. The feasibility estimate is the place to start, because it tells you whether it's worth it before you spend anything. See Cost Segregation Services.

Results depend on individual facts and current law. The material participation and short-term rental rules have specific requirements, and depreciation taken now is generally recaptured on sale. Consult a qualified tax advisor and an experienced cost segregation specialist before acting.