Real Estate Tax Calc
Rental use is depreciable
If the property is rented out and held for income, the building portion is depreciable like any rental. Land is still excluded.
Personal-use days reduce it
If you also use the property personally, you generally allocate depreciation between rental and personal use. Heavy personal use can limit deductions under the vacation-home rules.
Short-term rentals can be different
Average stays of 7 days or less can make a rental a non-passive "business," which interacts with material participation and cost segregation — a powerful but nuanced area often called the STR loophole.
How to actually calculate the depreciation
Start by splitting your total cost basis between land (never depreciable) and the building (depreciable). A common approach is to use the ratio from your county property-tax assessment — if the assessor values land at 20% and improvements at 80%, apply that 80% to your purchase price plus capitalized closing costs. Say you bought a beach condo for $500,000 with $6,000 of capitalized closing costs, and the land share is 20%. Your depreciable building basis is ($506,000 × 80%) = $404,800.
Residential rental real property is depreciated straight-line over 27.5 years using the mid-month convention. That yields roughly $404,800 ÷ 27.5 = $14,720 per full year once the property is fully in service. In the first year you only get a partial deduction based on the month it was placed in service. You report all of this on Form 4562 in year one and carry the schedule onto Schedule E each following year.
Personal use and the vacation-home rules in detail
Under IRC Section 280A, if your personal use exceeds the greater of 14 days or 10% of the days rented at fair value, the property is treated as a residence. That does not stop you from depreciating the rental portion — but it caps your total rental deductions (including depreciation) at your rental income, so you cannot generate a deductible loss. Any depreciation disallowed by that cap carries forward to future years.
When both personal and rental use occur, you prorate. If you rented the condo 200 days and used it personally 20 days, the rental fraction for depreciation and operating costs is 200 ÷ 220 = 90.9%. So your $14,720 of annual building depreciation becomes about $13,380 deductible against rental income. Note the courts and the IRS disagree on how to allocate mortgage interest and property tax specifically, but depreciation, insurance, and utilities are allocated on the rental-days-over-total-use-days basis.
Short-term rentals: 27.5-year vs 39-year life
A subtle trap: property rented on a truly transient basis — an average guest stay of 30 days or less — is generally not "residential rental property." It is treated as nonresidential real property and depreciated over 39 years, not 27.5. That is a slower building write-off. Do not confuse this 30-day depreciation-life test with the separate 7-day average-stay test used for passive-activity classification — they answer different questions. A typical nightly-rental Airbnb often lands in the 39-year building class while still qualifying as non-passive for loss purposes.
Cost segregation and bonus depreciation
Because so much of a furnished short-term rental is really personal property and land improvements, a cost segregation study can reclassify 20–35% of the basis into 5-, 7-, and 15-year MACRS classes that qualify for bonus depreciation. Furniture, appliances, and decor you buy for the rental are 5- or 7-year property you can often expense quickly under bonus depreciation or the Section 179 rules. On a $400,000 building basis, reclassifying 30% into short-life property could accelerate roughly $120,000 of deductions into the early years. This pairs with the STR loophole: if you materially participate and stays average 7 days or less, those accelerated losses may offset your ordinary W-2 income.
Common mistakes and planning tips
The biggest errors are: forgetting to exclude land (you cannot depreciate dirt), miscounting personal-use days (a day you spend mostly on repairs generally is not a personal day), and skipping depreciation entirely. Skipping is costly because the IRS calculates recapture on depreciation "allowed or allowable" — you owe recapture at sale whether or not you actually claimed it, so failing to deduct just wastes the benefit. Keep a written log of every night of use (yours, family, and guests) and the rent charged, and keep receipts for furnishings so you can depreciate them separately from the building.
A full 14-day / 10% example
Say you rent the condo at fair value for 150 days and use it personally for 20 days. The threshold is the greater of 14 days or 10% of rental days (15 days), so the line is 15 days. Your 20 personal days exceed it, so the property is a residence under Section 280A. You can still depreciate — the rental fraction is 150 ÷ 170 = 88.2% — but your total rental deductions, including depreciation, cannot exceed your rental income for the year. Any disallowed amount carries forward to the next year. If instead you'd used it only 12 days, personal use would fall under the line, the property would be a true rental, and losses could be allowed (subject to the passive-activity rules).
The ordering rules for capped deductions
When the vacation-home cap applies, deductions come off rental income in a set order, which protects your depreciation. First you deduct the rental share of otherwise-allowable expenses (mortgage interest and property taxes). Next, operating expenses like insurance, utilities, repairs, and management fees. Depreciation comes last. Because depreciation is deducted only after everything else, it's the item most likely to be limited and carried forward — but that carryforward isn't lost; it's available in a future year when rental income is higher or personal use drops. Understanding this order helps you predict how much depreciation you'll actually get to claim in a given year.
Depreciation recapture when you sell — with numbers
Depreciation isn't a permanent tax cut; it's a deferral that's settled at sale. Suppose over the years you claim $60,000 of depreciation on the building and cost-segregated items. When you sell, that $60,000 is subject to recapture: the Section 1250 building portion is "unrecaptured 1250 gain," taxed at a maximum 25% federal rate, and any Section 1245 personal-property portion (furniture, appliances, cost-seg components) is taxed at ordinary rates. On top of that, high earners may owe the 3.8% net investment income tax, and your state will tax the gain too. Model this before selling — the recapture bill can be a meaningful share of your proceeds, and strategies like a 1031 exchange or holding until death can defer or eliminate it.
The state tax angle
Federal rules are only half the story. Most states tax rental income and depreciation recapture as ordinary income, often without the federal 25% cap on 1250 gain — so a high-tax state can add materially to your recapture bill at sale. A handful of states also decouple from federal bonus depreciation, meaning you must keep a separate state depreciation schedule and add back the federal bonus in the year taken (recovering it over the normal life on the state return). If your vacation rental is in a different state from where you live, you'll generally file a nonresident return in the property's state and claim a credit at home to avoid double taxation. Factor state rules in before assuming a big first-year deduction.
How to report it on your return
Rental income and expenses for a vacation rental without substantial services go on Schedule E, with first-year depreciation and any Section 179 election on Form 4562. If you provide hotel-like substantial services, the activity moves to Schedule C and may owe self-employment tax. Track the property's basis, accumulated depreciation, and personal-vs-rental day counts every year — you'll need all three to compute the cap, the annual deduction, and the eventual recapture. Good records turn a confusing set of rules into a mechanical calculation, and they're your best defense if the IRS ever questions how you split personal and rental use.
Converting a second home to a rental
Many vacation rentals start as personal second homes. When you convert one to a rental (or to primarily rental use), depreciation begins on the date of conversion, and your depreciable basis is the lesser of the property's adjusted cost basis or its fair market value on that date. This lesser-of rule prevents you from depreciating a paper loss if the home declined in value while you owned it personally. From the conversion date forward you follow the vacation-home day-counting rules described above. Keep an appraisal or solid documentation of the conversion-date value and your original cost — that figure anchors every future depreciation deduction and the recapture calculation when you eventually sell.
Does a vacation rental qualify for the QBI deduction?
Depreciation lowers taxable rental income, but a separate deduction can lower it further: the qualified business income (QBI) deduction under § 199A, worth up to 20% of net rental income. It applies only if the rental rises to a trade or business. A short-term rental with substantial owner involvement usually clears that bar, and the IRS also offers a rental real estate safe harbor (Rev. Proc. 2019-38) that treats a rental enterprise as a business if you keep separate books and log at least 250 hours of rental services a year.
Two wrinkles matter for vacation rentals. First, a property with significant personal use may fail the safe harbor, which excludes any residence you use personally under § 280A — so heavy personal use can cost you both depreciation and the QBI deduction. Second, QBI is computed after depreciation, so a big cost-segregation loss year produces no positive QBI (you cannot take 20% of a loss); the QBI benefit shows up in the profitable years instead.
At-risk and passive-loss limits can cap even correct depreciation
Computing depreciation correctly does not guarantee you can deduct it this year. Two other limits sit downstream. The at-risk rules under § 465 cap your deductible loss at the amount you actually have on the line — cash invested plus recourse debt you are personally liable for; nonrecourse financing generally does not add to your at-risk amount (qualified nonrecourse real-estate debt is a narrow exception). The passive activity loss rules under § 469 then limit rental losses to passive income unless you qualify for an exception, such as the $25,000 active-participation allowance (phased out between $100,000 and $150,000 of MAGI) or the short-term-rental material-participation route.
The order is: figure depreciation, apply the § 280A personal-use cap if the vacation-home rules bite, then the at-risk cap, then the passive-loss cap. Losses stopped at any gate are not lost — they suspend and carry forward — but they may not shelter this year's wages the way you hoped. Model all three before assuming a paper loss will offset other income.
'Allowed or allowable': claim depreciation every year or you pay twice
Depreciation is not optional. When you sell, recapture is computed on the depreciation allowed or allowable — meaning the IRS reduces your basis by the depreciation you could have taken even if you never claimed it. Skip depreciation to keep reported income up, and you get the worst of both worlds: no deduction along the way and full recapture at sale as if you had deducted it.
If you discover you failed to depreciate a vacation rental (a common oversight when a second home is converted), you generally fix it with Form 3115, Application for Change in Accounting Method, taking a catch-up § 481(a) adjustment that lets you deduct the missed depreciation in the current year — rather than amending several prior returns. This is one of the most valuable and overlooked corrections available to rental owners, so do not simply start depreciating going forward and leave the earlier years on the table.
Substantiating rental days versus personal days
Because the deductible share of depreciation turns on the ratio of rental days to total use days, your day count is audit-sensitive. Keep a reservation and occupancy log tying every rental day to a booking, payment, and guest, and record every day you, family members, or anyone paying less than fair rent used the home. Remember the counting quirks: a day spent primarily on repairs and maintenance does not count as a personal day even if your family is present, and a day rented below fair market value counts as personal use.
Corroborate the numbers with platform payout statements, cleaning invoices between guests, and a calendar. The 14-day-or-10% test that separates a tax-favored rental from a personal residence can hinge on a single disputed day, so treat the log as you would a mileage log — contemporaneous, specific, and backed by third-party records.
Frequently asked questions
Can I depreciate an Airbnb?
Yes, the building portion used for rental is depreciable; personal-use days reduce the deductible share.
What is the short-term rental loophole?
When average stays are 7 days or less and you materially participate, losses may be non-passive — often paired with cost segregation.
How long do I depreciate a vacation rental?
A standard residential rental is 27.5 years straight-line. But a transient short-term rental with an average stay of 30 days or less is usually nonresidential property depreciated over 39 years.
Do I depreciate the furniture separately?
Yes. Furniture, appliances, and decor are 5- or 7-year personal property depreciated on their own schedule — and they often qualify for bonus depreciation or Section 179 expensing.
What happens to the depreciation when I sell?
You owe depreciation recapture on the amount allowed or allowable — unrecaptured Section 1250 gain on the building (taxed up to 25%) plus Section 1245 recapture on any cost-segregated components, taxed at ordinary rates.
Do I get the 20% QBI deduction on a vacation rental?
Only if the rental is a trade or business — likely for a hands-on short-term rental, and provable through the Rev. Proc. 2019-38 safe harbor (separate books plus 250 hours of rental services). Heavy personal use can disqualify it, and QBI applies to profits, not to a loss year.
What if I forgot to depreciate my rental for several years?
You generally file Form 3115 to change your accounting method and claim the missed depreciation as a catch-up § 481(a) adjustment in the current year, instead of amending old returns. Skipping depreciation does not help you — recapture at sale is figured on the amount 'allowed or allowable' whether or not you claimed it.
Why can't I deduct my rental loss even though depreciation created one?
Correct depreciation can still be trapped by the at-risk rules (§ 465) or the passive activity loss rules (§ 469). Unless you have passive income, qualify for the $25,000 active-participation allowance, or meet the short-term-rental material-participation test, the loss suspends and carries forward rather than offsetting your other income this year.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.