When Congress made 100% bonus depreciation permanent in 2025, tax planning around rental property looked a lot more attractive on paper. Whether a deduction survives a review, though, depends less on its size than on the records behind it. That gap is where advisory firms such as AE Tax Advisors, a Billings, Montana, practice serving business owners and real estate investors, focus much of their planning.
What Changed in the Law
The One Big Beautiful Bill Act restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. According to BDO’s analysis, the rate is now permanent and no longer phases down. The IRS followed with interim guidance in Notice 2026-11, which tells taxpayers to apply the existing bonus depreciation regulations with the new dates and percentages.
Property acquired before January 20, 2025, stays under the earlier rules, so contract dates matter. For rental owners, the change gave new weight to cost segregation, an engineering-based study that reclassifies parts of a building into shorter-lived categories such as five, seven and 15 years. Those shorter-lived components are what bonus depreciation can accelerate.
Where the Short-Term Rental Rule Gets Tested
Rental losses are passive by default, which means they can generally offset only passive income. A rental whose average guest stay is seven days or less is not automatically treated as a rental activity under the passive loss regulations. The owner then has to show material participation for the loss to count against other income, such as wages or business profit.
The IRS lays out seven tests for material participation in Publication 925. Two draw the most attention: more than 500 hours in the year, or more than 100 hours with no one else participating more. A spouse’s hours count toward the total, and the test is applied year by year, so a change in booking patterns can change the answer.
Why Records Come First
The regulations allow participation to be shown by any reasonable means, which can include calendars, appointment books and narrative summaries. They do not reward a rough estimate assembled after a notice arrives. Tax Court decisions in this area have turned on exactly that point.
Other people’s hours also count against the owner. When a property manager, cleaner or co-host does most of the work, the 100-hour test becomes hard to meet. Time spent on investor activities, such as reviewing financial statements, generally does not count unless the owner is directly involved in day-to-day operations.
Planning Before the Purchase
A firm built around year-round planning would put these questions ahead of the closing date. AE Tax Advisors describes its work as proactive planning that reviews business and household income together and ends in a written plan with a defined scope. The logic of that approach is simple: confirm that the property can qualify, set up a system for logging hours, and only then decide whether a cost segregation study is worth the expense.
The order matters because a study sizes a deduction but does not qualify the property for it. A large first-year loss that cannot be used against other income is suspended and carried forward, which can leave the owner with a study fee and a deduction that sits unused.
What the Deduction Does and Does Not Do
Accelerated depreciation shifts deductions into earlier years. It also lowers the property’s tax basis, so some of the benefit can return as depreciation recapture when the property is sold. The result is closer to a deferral than a permanent reduction, and the numbers depend on how long the owner holds the asset.
The broader lesson matches what Grit Daily has reported about tax strategy more generally: positions tend to hold up when they rest on real economic substance and documented transactions. For short-term rental owners, that means the hours log and the planning memo carry as much weight as the depreciation schedule.
Tax outcomes vary with each owner’s facts, and the material here is general information rather than tax advice. Owners weighing a purchase or a cost segregation study can ask a licensed professional to review their own situation before they act.
