Tax Strategy
Depreciation on short-term rentals: 27.5 or 39 years?
Most STR owners are depreciating their property over the wrong timeline. Here's how to get it right — and why the answer unlocks bigger deductions than you might expect.
The 30-day rule that determines your depreciation schedule
The distinction isn't about what the building looks like. It's about how long guests typically stay.
Under the tax code, a property qualifies as "residential rental property" — and its more favorable 27.5-year depreciation schedule — only if 80% or more of its rental income comes from "dwelling units." But a unit used on a transient basis doesn't count as a dwelling unit for this purpose. And the IRS defines transient as an average occupancy period of 30 days or less.
In practice, this means the vast majority of short-term rentals — Airbnbs, VRBOs, and similar nightly or weekly rentals — fall into the nonresidential category, with a 39-year depreciation schedule.
Common mistake
Many STR owners — and even some tax preparers unfamiliar with short-term rentals — assume the residential 27.5-year schedule applies because the property is a house or condo. Using the wrong schedule can trigger an audit or result in missed deductions.
Why 39-year classification is actually good news
At first glance, a longer depreciation schedule sounds worse. But for short-term rental owners who plan carefully, the 39-year nonresidential classification often unlocks more aggressive tax strategies than the 27.5-year residential track.
The reason comes down to cost segregation and bonus depreciation.
Cost segregation and bonus depreciation are available on any real estate — including long-term rentals. The reason short-term rentals attract so much attention around these strategies isn't the strategies themselves. It's what you can do with the losses they generate.
On a long-term rental, even a large depreciation deduction from a cost seg study produces passive losses — which can only offset other passive income, not W-2 wages or business earnings. On a qualifying short-term rental, those same losses can be non-passive, meaning they offset any income. That's the actual loophole. Cost segregation and bonus depreciation just determine how large the deduction is.
With that context in mind, here's why short-term rentals tend to produce especially large cost segregation deductions.
20–30%
Year 1
$200k+
Cost segregation + bonus depreciation
The §481(a) catch-up adjustment
Key takeaway
The 39-year classification isn't a penalty — it's the classification that makes short-term rentals eligible for the most aggressive depreciation strategies available in real estate. The structure is what matters, not the headline number.
Frequently asked questions
Is a short-term rental depreciated over 27.5 or 39 years?
Most short-term rentals — those with an average guest stay of 30 days or fewer — are classified as nonresidential real property and depreciated over 39 years. Only rentals with average stays exceeding 30 days qualify as residential rental property at the 27.5-year rate.
Does it matter if my rental is a house or a condo?
No. The physical structure doesn't determine the classification — the average length of guest stays does. A single-family home used as a nightly rental is nonresidential property under the tax code if the average stay is 30 days or fewer.
What is a §481(a) catch-up adjustment?
If you've been depreciating your STR over 27.5 or 39 years without a cost segregation study, you can claim all the depreciation you missed in a single deduction in the current year — without filing amended returns. This is done by filing IRS Form 3115 (Change in Accounting Method), which generates a §481(a) adjustment representing the difference between depreciation you actually took and what you could have taken.
Can I use short-term rental losses to offset my W-2 income?
Yes, in some cases. If your property has an average stay of 7 days or fewer and you materially participate in its operations, the losses are treated as non-passive under IRS rules — meaning they can offset salary or business income. See our related guide on the short-term rental tax loophole for more detail.
Official IRS resources
For those who want to go deeper into the underlying rules, these are the primary sources.
IRS Publication 946: How to Depreciate Property
Detailed guidance on MACRS depreciation and bonus depreciation rules
IRS Form 3115 Instructions
How to change accounting methods and calculate §481(a) adjustments
IRS Cost Segregation Audit Techniques Guide
How the IRS views the breakdown of property components
Have questions about your
property?
Fairly's team can help you understand how these rules apply to your situation and what to discuss with your tax advisor.
This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are complex and subject to change. Results vary significantly based on individual circumstances. Always consult a qualified tax advisor before implementing any tax strategy.
Alana Moore, CPA
Alana is an accounting manager at Fairly, where she works with homeowners on the tax and financial dimensions of short-term rental ownership.