Introduction
Cost segregation is one of the most powerful tax strategies for short-term rental (STR) investors, yet many still have questions about how it works, its benefits, and how they can apply it to their properties. Below, we address the most common questions to help STR owners navigate this lucrative tax-saving opportunity.
1. What is cost segregation?
Cost segregation is a tax strategy that accelerates depreciation by reclassifying certain components of a property from a standard 27.5-year depreciation schedule to a much shorter timeline (typically 5, 7, or 15 years). This allows STR investors to take larger deductions upfront and significantly reduce taxable income.
Want to know more about cost segregation? You can read more about it here or talk to our experts: Connect With a Cost Segregation Specialist
2. How does cost segregation benefit short-term rental investors?
For STR owners, cost segregation can:
- Enable a look-back study to apply retroactive depreciation benefits
- Increase cash flow by lowering taxable income
- Provide immediate tax savings, especially when paired with bonus depreciation
- Offset active income if structured properly
3. What is bonus depreciation, and why is 2024 crucial?
Bonus depreciation allows investors to deduct a large percentage of qualifying property components in the first year. However, the percentage has been decreasing:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
Since bonus depreciation is phasing out, 2024 is a critical year to maximize this benefit before it further declines.
4. Can I apply cost segregation to properties I already own?
Yes! A look-back cost segregation study allows you to retroactively apply cost segregation to properties purchased in previous years. This means you can still capture lost depreciation and claim it in the current tax year without needing to amend prior returns.
5. Does cost segregation apply to all STR properties?
Cost segregation works best for properties with high renovation costs, luxury features, or expensive appliances. However, most STRs with significant depreciable assets (flooring, furniture, landscaping, etc.) can benefit.
6. Can I use cost segregation if I rent my STR for less than 7 days on average?
Yes! STR properties often qualify as business assets rather than rental properties, allowing owners to offset active income with depreciation deductions. This can be a game-changer for investors who manage their own rentals.
7. How much does a cost segregation study cost?
The cost of a cost segregation study varies depending on the complexity of the property, the chosen methodology and the firm conducting the analysis. The cost can start even as low as $1,500. Is Cost Segregation Worth It? This upfront investment can yield returns that far exceed the initial cost through increased tax savings and improved cash flow, as we will show in our case study in this article.
8. How do I know if cost segregation is right for my property?
Every STR investor should consider a free consultation with a Cost Segregation Specialist to assess potential tax savings. Factors like property value, renovation costs, and rental income impact the overall benefit.
9. Can cost segregation help if I plan to sell my STR?
Yes! If done strategically, cost segregation can increase short-term cash flow while deferring taxes. However, investors should plan for depreciation recapture taxes upon sale, which can be managed with 1031 exchanges and other strategies.
10. How do I get started?
The easiest way is to connect with a Chalet Cost Segregation Specialist for a free assessment. With tax deadlines approaching and bonus depreciation decreasing, now is the time to act!
Case Study: Kelley K. and Her Airbnb in Florida
Kelly K., a forward-thinking real estate investor, purchased an Airbnb property in Florida in 2023 for $1,175,000. Initially, like many investors, she planned to follow traditional depreciation methods, which would have limited her first-year depreciation deduction to $14,209. While this provided some tax benefits, it left substantial savings untapped.
Recognizing an opportunity to significantly enhance her tax strategy, Kelly decided to conduct a cost segregation study—a move that would prove to be incredibly beneficial. By breaking down her property’s components into shorter depreciation schedules, Kelly was able to increase her first-year depreciation to a staggering $152,471, more than 10 times the initial amount.
Increased Tax Depreciation (Year 1): $138,262
The impact of this increased depreciation was immediate and substantial. With an additional $138,262 in depreciation, Kelly effectively reduced her taxable income by this same amount. This reduction resulted in significant tax savings, keeping more of her earnings in her pocket.
For investors like Kelly, leveraging cost segregation means moving beyond conventional tax strategies and unlocking tens of thousands of dollars in tax benefits that would otherwise take decades to realize.
Increased Cash Flow (Year 1): $51,157
One of the most tangible benefits of Kelly’s cost segregation study was the immediate boost to her cash flow. With an additional $51,157 in cash flow in the first year alone, Kelly gained valuable financial flexibility.
This extra capital allowed her to reinvest in her property—making enhancements to improve guest experience and increase nightly rates. Alternatively, she could allocate the additional funds toward debt reduction, improving her equity position, or even acquiring additional STR properties to expand her investment portfolio.
How Cost Segregation Transformed Kelly’s Investment Strategy
By implementing a cost segregation study, Kelly was able to accelerate depreciation, reduce her taxable income, and significantly improve her property’s financial performance—all within the first year of ownership. Instead of waiting years to realize these benefits, she unlocked them immediately, optimizing her cash flow and tax position.
Kelly’s experience highlights how cost segregation can dramatically enhance the profitability of an Airbnb investment. Whether for new purchases or existing properties, this strategy can yield substantial financial benefits for investors willing to take advantage of it.
Conclusion
For any investor looking to maximize the returns on their Airbnb or other short-term rental properties, cost segregation offers a strategic advantage that can make a significant difference in both the short and long term. With the phase-out of 100% bonus depreciation on the horizon (60% in 2024), now is the time to act and secure these benefits before they diminish.
If you’re interested in learning how much you could save with a cost segregation study, connect with our expert team today for a free estimate. Don’t leave money on the table—take control of your investment’s potential and maximize your tax savings and cash flow just like Kelly did.
Contact us now for your free cost segregation estimate and take the first step towards significant tax savings. Our team of top cost segregation specialists is ready to help you navigate this tax-saving strategy.
