How the Strategy Works

• Short-Term Rental Exception:  When your rental’s average guest stay is seven days or less, or sometimes up to 30 days if you provide substantial services (like cleaning or meals), the IRS can treat the activity as a business rather than a typical rental.

• Material Participation:  You must actively participate in the STR. This means meeting one of the IRS’s material participation tests:

o 100+ Hour Test: You (and your spouse, if applicable) spend at least 100 hours on the property, and no one else (like a cleaner or manager) spends more time on it than you.
o 500-Hour Test:  You put in at least 500 hours.
o Substantially All Work:  You do almost all the work yourself.

• Achieve “Non-Passive” Status:  If you satisfy these requirements, your STR activity is classified as non-passive. That means losses—especially those amplified via cost segregation and bonus depreciation—can offset your active income without being capped by the usual $25,000 passive activity loss       limits or the real estate professional status hurdle.

Maximizing Tax Savings

• Cost Segregation & Bonus Depreciation: Use a cost segregation study to accelerate depreciation deductions. Thanks to OBBA, 100% bonus depreciation remains available in 2025, making it possible to create large “paper losses” in the first year and use them to offset your W-2 or business income.

• Careful Documentation: Keep detailed time logs proving your material participation—track your hours and those of any contractors or service providers.

• Audit-Ready Bookkeeping: Maintain strong documentation and stay updated on both IRS rules and local STR regulations.

Why It’s Powerful

Classifying your STR as non-passive lets you bypass the passive loss limits—an enormous advantage for high-income earners who want to use substantial real estate losses (from cost seg and bonus depreciation) to reduce their regular income tax bill in 2025 and beyond.

In summary: To sidestep passive loss caps, convert your short-term rental into a non-passive business via active material participation, maximize cost seg/bonus depreciation, and document everything. This gives you a rare opportunity to offset W-2 or business income with real estate losses and potentially save five or six figures in taxes each year. Always work with a qualified CPA familiar with STRs and the latest 2025 rules for compliance and audit defense.

1. 100% Bonus Depreciation — Permanently Restored

OBBA reinstates and makes permanent 100% bonus depreciation for qualified property, including Qualified Improvement Property (QIP) on commercial real estate. Owners and investors can fully expense eligible improvements in the year those improvements are placed in service, rather than spreading deductions over decades. This applies for property acquired and placed in service after January 19, 2025. It drastically increases first-year tax deductions, notably improving after-tax cash flow. For example, instead of depreciating a $1M renovation over 39 years (about $25,641/year), you can now deduct the full $1M immediately—potentially saving $370,000 in taxes in the first year for a high-bracket taxpayer.

2. Permanent 20% Pass-Through/Rental Income Deduction (Section 199A)

The 20% qualified business income (QBI) deduction for pass-through entities and rental properties is now permanent. Real estate investors can repeatedly deduct 20% of their net rental income, reducing overall tax exposure and boosting yield for investors using LLCs, S-Corps, and partnerships.

3. Enhanced Interest Deduction: Return to EBITDA-Based Limits

For leveraged owners, the limit on deductible business interest now uses the more favorable EBITDA (earnings before interest, taxes, depreciation, and amortization) formula, rather than EBIT. This increases the eligible interest deduction for those utilizing significant depreciation and amortization, particularly benefitting heavily financed real estate deals.

4. Section 179 Expensing Cap Raised to $2.5 Million

For smaller assets and capital improvements, the Section 179 deduction cap has been raised to $2.5M and expanded to some commercial property, allowing more immediate expensing for a wider range of investments.

5. 1031 Like-Kind Exchanges Protected

OBBA preserves 1031 exchanges, so investors can continue deferring capital gains tax on the sale of investment property when replacing it with similar property.

6. Capital Gains and Low-Income Housing/Opportunity Zone Incentives

Lower long-term capital gains rates remain intact, and OBBA expands Low-Income Housing Tax Credits and improves Opportunity Zone incentives, creating new opportunities and increased credits for those developing or investing in affordable housing.

7. Improved SALT Deductibility

The State and Local Tax (SALT) deduction cap is raised to $40,000 for those earning below $500,000 (2025–2029), allowing high-net-worth property owners more federal deductions.

8. Faster Federal Approvals for Developments

OBBA introduces measures to accelerate federal permitting for development projects, especially those needing environmental review, streamlining the process for investors and builders.

In summary: OBBA fundamentally rewrites the after-tax ROI calculus for real estate investors and owners, especially those using cost segregation, frequent renovations, or leveraged acquisition models. The permanent changes allow for accelerated deductions, continued pass-through and rental income advantages, favorable expensing and interest rules, and sustained benefits for tax-advantaged development.

These changes present a major opportunity to maximize after-tax cash flow and should be integrated into acquisition, renovation, and long-term investment strategies for commercial and investment property owners.

BONUS DEPRECIATION CRITERIA UNDER THE NEW TAX LAW
Permanent Bonus Depreciation for Capital Investments
 
Key Provision
Full Expensing allows businesses to immediately deduct 100% of the cost of qualifying 
capital investments—such as machinery, equipment, and certain other property—from their 
taxable income in the year the investment is made.
 
This provision, known as bonus depreciation, was initially enacted in the 2017 Tax Cuts and 
Jobs Act  TCJA) but was scheduled to phase out after 2026. The new legislation makes this 
full expensing provision permanent.
 
Details from H.R. 1  119th Congress)
Section 70301 of the bill amends the Internal Revenue Code to provide for the permanent 
extension of full expensing for certain business property. Businesses can continue to claim a 100% deduction for the cost of eligible property placed 
in service after December 31, 2026, with no scheduled reduction or phase-out.
 
Eligible property generally includes:
Tangible personal property with a recovery period of 20 years or less (e.g., machinery, 
equipment, computers, appliances).
Certain qualified improvement property.
Some specified types of software and other assets.
 
Personal property and land improvements are now fully expensed even for buildings that had already been previously occupied when the taxpayer acquired them.
 
Bonus depreciation was developed after the September 11, 2001, terrorist attack.  The federal government decided to encourage building using the bonus depreciation write-off of part of new building construction immediately in year one of the building's useful life.  
 
QUALIFIED IMPROVEMENT PROPERTY
The law states that qualified improvement property in 2018 and onward is a 39 year useful life with no bonus depreciation allowed.  Everything is subject to change with additional guidance or technical corrections, but this discussion is built on how the law reads now. 
 
WRITTEN BINDING CONTRACT RULE
Under bonus depreciation eligibility through the new tax law's written and building contract rules, the rules apply to acquisitions after September 27, 2017.  Proposed regulations provide that property acquired under a written binding contract is treated as acquired at the time the contract is entered into.  The written and binding contract rules apply to bonus depreciation if a building went into contract prior to September 28, 2017.
 
INTERPLAY OF BONUS DEPRECIATION AND CODE SEC. 179 EXPENSING
Taxpayers can elect to expense certain property by completing Form 4562, Depreciation and Amortization, and attaching it to their tax returns.  Code Sec. 179 allows businesses to deduct the purchase of qualified equipment and software.  Qualified property for the Section 179 deduction is tangible section 1245 property (new or used) depreciable under MACRS acquired by the purchaser for use in an active trade or business.  The deduction limit is $1 million, and there's a capital investment limitation of $2.5 million and then a dollar-for-dollar reduction after that.  In 2018, Code Sec. 179 was expanded to include a new category of assets called "qualified real property"  which includes additional items such as roof; heating, ventilation, and air conditioning (HVAC); as well as improvements to the interiors; fire protection; alarm systems; and security systems of nonresidential properties.
 
Code Sec. 179 expensing now includes personal property used for furnishing lodgings, such as furniture and appliances, hotel rooms and student housing, and apartment buildings.  There's no benefit in taking Code Sec. 179 expensing on tangible personal property when clients have 100 percent bonus depreciation applied. Clients are trying to avoid the $2.5 million cap with this play.  If clients acquire more than $2.5 million of capital expenditures, then Section 179 deductions start being reduced.  
 NOTE: There's no benefit in taking Code Sec. 179 expense on tangible personal property when bonus depreciation is 100 percent.  Bonus depreciation is preferable to use by very large businesses that spend more than the $2.5 million spending cap for the year.  
 
Be aware that both Code Sec. 179 and bonus depreciation are subject to recapture as well.  If clients are creating massive deductions with bonus depreciation that could come back and catch up with them if they're going to sell it within, perhaps, three to five years, another route is preferrable.  Taxpayers should consider Code Sec. 179 expensing on items ineligible for bonus depreciation, such as roofs, to avoid hitting the Code Sec. 179 cap.

Here’s a fully updated and clarified summary on “Bonus Depreciation” and its interplay with Section 179 for 2025 and beyond:

BONUS DEPRECIATION: 2025 AND BEYOND

What is Bonus Depreciation?
Bonus depreciation allows businesses to take an immediate first-year deduction on the purchase of qualified business property, accelerating tax deductions that would otherwise be spread over years. This applies to property with a recovery period of 20 years or less under the modified accelerated cost recovery system (MACRS)—commonly called “short-life property.” Typical examples include machinery, equipment, computers, furniture, and eligible improvements to commercial real estate.

Permanent 100% Bonus Depreciation
The “One Big Beautiful Bill Act” (OBBBA), signed on July 4, 2025, permanently reinstates 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. This means businesses can immediately expense the full cost of eligible assets, providing a major cash flow and tax planning advantage. The definition of qualifying property remains unchanged.

Eligibility Details

• Acquisition and placed-in-service dates are critical: Only property acquired and placed in service after January 19, 2025 qualifies for 100% bonus depreciation.
• Property acquired or under contract before January 20, 2025, but placed in service after, may be limited to 40% bonus depreciation.
• Eligible property includes tangible business assets with a recovery period of 20 years or less, qualified improvement property (QIP), computer software, water utility property, and more.

Qualified Improvement Property (QIP)
QIP (improvements to the interior of non-residential buildings) is eligible for 100% bonus depreciation under the new law, provided it does not:

• Enlarge the building,
• Affect elevators/escalators,
• Alter the internal structural framework.

WRITTEN BINDING CONTRACT RULE
If a binding contract for the acquisition of property existed prior to January 20, 2025, the property generally does not qualify for the new 100% bonus depreciation rate—even if placed in service later in 2025.

SECTION 179 EXPENSING: 2025 UPDATE

Key Fact:
Section 179 expensing lets small and mid-sized businesses immediately deduct up to $2,500,000 of qualifying property placed in service in 2025, with a phase-out cap at $3,130,000. These limits have increased from previous years.

• Section 179 typically covers tangible personal property (such as machinery, equipment, and certain off-the-shelf software) acquired for business use.
• It was expanded to include “qualified real property” (roofs, HVAC, fire/security systems, etc.) for nonresidential buildings.
• Section 179 deductions are phased out dollar-for-dollar above the cap, so large capital expenditures may limit its benefit.

INTERPLAY: SECTION 179 VS. BONUS DEPRECIATION

• If both options apply, 100% bonus depreciation is usually more advantageous—there is no cap and can be used by larger businesses.
• Section 179 is ideal for mid-sized businesses not exceeding the threshold or those seeking to target specific real property items not eligible for bonus depreciation.
• Both deductions are subject to recapture for property sold or otherwise disposed of within a short time. Careful planning is essential for properties that may be sold soon after acquisition.

Summary Table: Key 2025 Provisions

Practical Notes

• Cost segregation studies remain a powerful tool for identifying and accelerating deductions for assets qualifying for bonus depreciation.
• Large real estate investors and businesses making significant capital investments should take note of the placed-in-service and acquisition date rules for maximizing tax savings.
• Always consult a CPA or tax advisor for property placed in service near key legislative dates or when considering a sale within 3–5 years due to potential recapture.

This update reflects the current permanent law as of August 2025.