I still remember a conversation I had with a client who had just purchased a three-bedroom waterfront property in Destin, Florida, intending to turn it into a premium VRBO rental. She had already committed nearly $45,000 to upgrades: solid wood bedroom sets, stainless steel appliances, new patio furniture, and a full landscaping refresh. What she didn’t realize was that a large portion of those costs could be written off in the first year through bonus depreciation.

Once we ran the numbers, her first-year deduction came to just over $38,000. If she could use the loss against her other income, that would cut her federal tax bill by nearly $13,000.

How Bonus Depreciation Works for VRBO Rentals

Standard depreciation spreads deductions over decades: 39 years for most short-term rentals, because average stays under 30 days make them nonresidential property, and 27.5 years for long-term residential rentals. Bonus depreciation accelerates that timeline by allowing a full deduction of certain asset costs in the first year they’re placed in service. For VRBO owners, that means you can write off the cost of short-lived assets like appliances, furniture, and fixtures right away, which lowers that year's tax bill if you can use the loss.

Recent Tax Law Changes and Their Impact on VRBO Rentals

Under recent federal tax legislation, 100% bonus depreciation is now available for qualified assets that are both acquired and placed in service after January 19, 2025, with no scheduled phase-down. This change is permanent unless modified by future law. 

Assets acquired before January 20, 2025, including those subject to a binding written contract before that date, remain subject to the previous phase-down rates, even if placed in service after January 19, 2025. For VRBO investors, both the acquisition date and the placed-in-service date decide which rate applies. 

The practical impacts include:

• Full first-year write-offs restored. Qualifying assets acquired and placed in service after January 19, 2025 can be fully expensed in year one rather than depreciated over multiple years.
  
  
• Applies to both new and used property. As long as the asset is new to you, it qualifies; it doesn’t have to be brand-new from the manufacturer.
  
  
• Timing matters. Property acquired on or before January 19, 2025 stays on the prior phase-down schedule: 40% if placed in service in 2025, 20% in 2026.
  
  
• Permanent change (for now). Unlike the 2017 rules, which were set to phase out, the current law has no automatic sunset.
  
  
• State conformity varies. Some states will not follow federal bonus depreciation rules, so your state tax deduction may differ.
  
  
• Cost segregation identifies the components. A study separates the 5-, 7-, and 15-year components that qualify for the 100% deduction.

Which Components of VRBO Rentals Qualify for Bonus Depreciation

The building itself doesn’t qualify for bonus depreciation because of its 39-year recovery period (27.5 years for a long-term rental). However, many components do, provided they have a recovery period of 20 years or less. Examples include:

• Furniture and beds
• Appliances such as refrigerators, ovens, and washers/dryers
• Carpeting and some types of flooring
• Decorative light fixtures
• Land improvements such as landscaping, fencing, and paving (15-year property)

A cost segregation study can help identify and categorize these assets so they can be depreciated faster. Without such a study, many qualifying components end up lumped into the building’s longer depreciation schedule, pushing those deductions into later years.

STR Tax Classification: Passive vs. Active and Why It Matters

Whether your VRBO is classified as a passive or non-passive activity can determine if bonus depreciation benefits you in the current year. If the property qualifies as a short-term rental (typically with an average guest stay of seven days or less), and you materially participate, your rental activity can be considered non-passive. 

That means depreciation losses can offset other active income, like wages or business earnings, subject to the excess business loss limit. If it’s passive, the losses may be limited to offsetting passive income only, though they can still be carried forward.

Acquisition and Placed-in-Service Dates

The 100% rate applies only to assets acquired and placed in service after January 19, 2025. “Placed in service” means ready and available for its intended use. Both dates matter: furniture bought on January 10, 2025 stays on the phase-down (40% if placed in service in 2025) even if the property didn't open to guests until February. Furniture bought on January 25, 2025 and placed in service in February qualifies for 100%. For more detail, see our guide to the placed-in-service date.

Potential Costs, Risks, and Planning Pitfalls

A fully engineered cost segregation study starts at $2,320 for residential property, with a Rapid Report option from $950. Larger properties and portfolios price above those starting points, and for properties with significant qualifying assets the tax benefit can outweigh the fee many times over. 

However, accurate documentation is critical. Overstating qualifying assets or misclassifying property components can lead to IRS scrutiny. Owners should also watch for state-level differences. Some states don’t conform to federal bonus depreciation rules, which can affect your state tax bill. 

Finally, remember that depreciation deductions can trigger depreciation recapture tax when you sell, so plan your exit strategy accordingly.

How It Works in Practice

Imagine acquiring a VRBO property for $500,000, with $400,000 of depreciable basis after land. Through a cost segregation study, you identify $130,000 (about 33% of basis) in assets eligible for 100% bonus depreciation. Because those assets are acquired and placed in service after January 19, 2025, you can deduct the entire $130,000 in year one. 

For an investor in the 35% federal tax bracket who materially participates and can use the loss, that’s a $45,500 reduction in federal taxes.

Strategic Planning Tips for VRBO Investors

• Place upgrades in service in the tax year you want the deduction.
• Use a cost segregation study for higher-value properties.
• Actively manage the property to meet material participation standards.
• Keep records of asset costs, in-service dates, and supporting invoices.
• Consult a tax professional familiar with short-term rental rules.

Addressing FAQs and Myths

• Is bonus depreciation mandatory? No. You can opt out on a class-by-class basis if it better fits your long-term tax strategy.
  
  
• Do used assets qualify? Yes, as long as they’re new to you and placed in service during the eligible period.
  
  
• Can Section 179 be used instead? Section 179 expensing is another tool, but it has different limits and qualifications. In some cases, it can complement bonus depreciation.

Next Steps

Bonus depreciation lets VRBO investors deduct the cost of short-life components in the first year instead of over 39 years. Whether that lowers your tax bill this year depends on your acquisition and placed-in-service dates, whether you materially participate, and the excess business loss limit. Your tax advisor can confirm how the rules apply to you.

To see what a study would show on your property, talk to R.E. Cost Seg, or use our free short-term rental depreciation calculator to estimate your first-year deduction.

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For help choosing a provider, see our guide to cost segregation for Airbnb and short-term rentals.