Why hotels benefit so much
Hotels are packed with personal property and specialized fixtures relative to a plain office building or apartment complex. Carpeting throughout guest rooms, custom millwork and cabinetry, decorative lighting, in-room entertainment systems, restaurant kitchen equipment, laundry facilities, and branded fixtures are all candidates for reclassification as 5-year or 7-year property. In a well-executed cost segregation study, hotels often see 20–35% of the depreciable building cost moved to shorter recovery periods — a significantly higher rate than typical residential or commercial properties.
A $10 million hotel purchase (building and personal property) with 25% reclassified to 5-year property at 40% bonus depreciation rate generates an additional first-year deduction of $10M × 25% × 40% = $1,000,000 — compared to the standard year-one deduction of roughly $254,000 (1/39 year).
5-year, 7-year, and 15-year components in hotels
5-year property: guest room carpet and vinyl flooring (removable), specialized decorative light fixtures, casework (non-structural cabinets and closets), audio/visual systems, in-room appliances, security systems, and certain plumbing fixtures specifically serving equipment. 7-year property: freestanding furniture, office equipment, and some food service equipment. 15-year property: parking lots, driveways, canopies, landscaping, exterior lighting, swimming pools, loading docks, and freestanding signage.
What stays at 39 years: the structural frame, exterior walls, roof, load-bearing interior walls, central HVAC, fire suppression, and plumbing that serves the building generally rather than specific equipment.
Timing and recapture considerations
Because hotel assets depreciate faster than standard commercial property, the eventual Section 1245 recapture on sale of 5-year and 7-year property is taxed as ordinary income — not at the more favorable 25% rate for real property. A thorough cost segregation study should model the long-term tax picture, not just first-year deductions. That said, for operators who reinvest or plan a 1031 exchange, the upfront cash-flow benefit of accelerated depreciation is often substantial.
Frequently asked questions
Are hotels good candidates for cost segregation?
Yes — hotels typically have among the highest reclassification percentages (20–35%) of any property type, due to the high concentration of furniture, fixtures, and specialized equipment.
What types of hotel assets get reclassified to 5-year property?
Guest room carpeting, decorative lighting, casework, in-room appliances, audio/video systems, and security systems are common 5-year components.
Does the Section 1245 recapture rate apply to hotel assets?
Yes. Personal property components (5-year and 7-year) are Section 1245 property, so recapture on those assets is taxed at ordinary income rates, not the 25% cap that applies to Section 1250 real property.
Sources
- IRS Publication 946 — How to Depreciate Property
- IRS — Cost Segregation Audit Techniques Guide
- IRS Publication 527 — Residential Rental Property
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.