Last updated: December 2024
As lawmakers revisit the tax provisions introduced under the 2017 Tax Cuts and Jobs Act (TCJA), discussions around reinstating or extending 100% bonus depreciation have taken center stage. This comes at a time when the phase-out of bonus depreciation is impacting investors who have relied on these provisions to optimize their tax strategies. If Congress moves forward with restoring these benefits, after Trump’s presidential election, the implications for short-term rental investors and real estate owners could be transformative.
Cost segregation, a key tool for maximizing bonus depreciation, would once again take the spotlight as a must-use strategy for tax-savvy property owners.
The Current Legislative Landscape
The TCJA originally introduced 100% bonus depreciation, allowing property owners to immediately expense qualifying costs, such as furnishings, renovations, and structural improvements. However, this provision has been phasing out since 2022, with bonus depreciation reducing by 20% annually and scheduled to expire entirely after 2026:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027 and beyond: 0%
According to MarketWatch, Republican lawmakers are pushing for an extension of these provisions, which could give real estate investors an immediate boost in tax-saving opportunities. Similarly, AP News reports that this aligns with the GOP’s broader economic agenda, aiming to stimulate growth through real estate investment incentives.
Top 200 Airbnb Rental Markets
Instantly compare top 200 short-term (Airbnb) rental markets in the US
Cost Segregation and Bonus Depreciation: The Perfect Partnership
Cost segregation is a powerful tax strategy that allows property owners to reclassify parts of their real estate into shorter depreciation schedules. This enables accelerated tax deductions, providing immediate financial benefits. When combined with bonus depreciation, the savings are amplified, making it a game-changing tool for short-term rental investors.
For example, in a this case study, the owners of Chalet conducted a cost segregation study on their short-term rental property. By breaking down their property into its individual components, they identified significant portions eligible for shorter depreciation schedules. Paired with bonus depreciation, they saved $36,000 in taxes in a single year, freeing up capital for reinvestment and operational improvements.
Another case study, as shared in this article, explores another investor’s journey with cost segregation. After acquiring a short-term rental property, the investor used a cost segregation study to unlock $50,000 in first-year tax deductions. By reclassifying elements like furnishings, appliances, and certain outdoor amenities, they were able to enhance their cash flow and significantly reduce their taxable income.
The Impact of Potential Legislative Changes
If Congress extends the phase out or even reinstates 100% bonus depreciation, the benefits for short-term rental investors could include:
- Immediate Cash Flow Gains: Accelerated depreciation schedules combined with bonus depreciation would allow property owners to expense qualifying costs upfront, maximizing liquidity.
- Enhanced Return on Investment (ROI): Tax savings from cost segregation studies would directly increase profitability, particularly for investors managing multiple properties.
- Flexibility for New and Existing Properties: The combined benefits of cost segregation and bonus depreciation apply not only to new acquisitions but also to renovations and retroactive studies, as outlined in our look-back cost segregation guide.
The Unique Benefits for Short-Term Rentals
Short-term rental properties often involve frequent upgrades and asset turnover, making them particularly well-suited for cost segregation and bonus depreciation strategies. Items such as kitchen appliances, furniture, and landscaping improvements can often qualify for shorter depreciation schedules, allowing for greater immediate tax savings.
In addition, short-term rental investors can capitalize on retroactive cost segregation studies to claim missed benefits from previous years. This strategy, as detailed in our look-back guide, can provide a substantial financial boost, unlocking past savings that many investors overlook.
Prepare for the Future
With the election of President Donald Trump and a Republican-controlled Congress, there is potential for legislative changes affecting bonus depreciation. The administration has expressed interest in extending or reinstating 100% bonus depreciation to stimulate business investment. However, specific details regarding whether the phase-out will be extended or completely abandoned have not been finalized. The outcome will depend on legislative negotiations and the administration’s policy priorities.
These potential changes represent a pivotal moment for short-term rental investors. By combining this incentive with a cost segregation study, property owners can maximize tax savings, improve cash flow, and achieve their investment goals more quickly.
If you’re considering cost segregation or want to ensure you’re prepared to leverage potential legislative changes, connect with Chalet today. Our team of experts can guide you through the process, offering tailored strategies that unlock the full potential of your investments.
The time to act is now. With changes on the horizon, short-term rental investors have an unprecedented opportunity to harness the benefits of cost segregation and bonus depreciation. Take charge of your financial future and make the most of your investments. For investors or businesses that have already conducted cost segregation studies and utilized bonus depreciation, the benefits realized under previous laws remain intact.
