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.

When you buy a short-term rental, you get to deduct the cost of the building over time through depreciation. But the IRS uses two very different timelines — 27.5 years and 39 years — and which one applies to your property has a significant impact on how much you can deduct, and when.

The Rule

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.

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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.

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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.

Average guest stay

IRS classification

Recovery period

More than 30 days

Residential rental property

27.5 years

30 days or fewer

Nonresidential real property

39 years

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.

The Opportunity

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.

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The reason comes down to cost segregation and bonus depreciation.

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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.

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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.

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With that context in mind, here's why short-term rentals tend to produce especially large cost segregation deductions.

20–30%

of purchase price typically reclassifiable via cost segregation

Year 1

when reclassified components can often be fully deducted

$200k+

potential first-year deduction on a $1M property

Strategy 1

Cost segregation + bonus depreciation

A cost segregation study identifies components eligible for 5, 7, and 15-year depreciation schedules. Under IRC § 168(k), assets with a recovery period of 20 years or less qualify for bonus depreciation — meaning they can be fully deducted in year one rather than over decades.

Strategy 2

The §481(a) catch-up adjustment

If you've been depreciating your STR without a cost segregation study for several years, you haven't lost those deductions. By filing IRS Form 3115 (Change in Accounting Method), you can claim all the depreciation you missed in a single catch-up deduction in the current year — no amended returns required.

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.

Questions

Frequently asked

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

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IRS Form 3115 Instructions

How to change accounting methods and calculate §481(a) adjustments

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IRS Cost Segregation Audit Techniques Guide

How the IRS views the breakdown of property components

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Have questions about your specific 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 CPA or tax strategist 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.

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