Hi everyone, Jed Collins here, your guide to the rules and policies around short-term rentals. Today, we’re going to talk about something called depreciation. It’s a way for people who own buildings to lower their taxes over time. Think of it like saying a building slowly loses value as it gets older, and the tax rules let you count that loss.
Right now, in early 2025, there are rules about how much of a building’s cost you can deduct each year. But things might change later this year! Let’s break it down in a simple way.
How Depreciation Works Today
Usually, when you buy a building, you can’t just say it all went away in one year for tax purposes. Instead, you have to spread out the cost over many years. This is called depreciation.
There are different ways to do this. One common way is called MACRS (it’s a long name, so don’t worry about remembering it!). MACRS says how many years you have to take to lower the value of your building for taxes. For a place where people live, like an house, it’s usually 27 and a half years. For other buildings, like stores or offices, it’s often 39 years.
Another rule is called bonus depreciation. This lets you take a bigger chunk of the cost off your taxes in the first few years. For things bought in 2025, you can deduct 40% of the cost right away! This is less than before. For example, if you bought something for $100,000 in 2022, you could deduct the whole $100,000 right away. In 2023, it was 80%, and in 2024, it was 60%. Now it’s going down to 40%.
There’s also something called Section 179. This lets some businesses take the full cost of certain things off their taxes right away, up to a certain amount each year. For 2025, that limit is $1,250,000. But there are rules about what kind of property this works for, and your business has to have enough income.
What Could Change in 2025?
Now, here’s where it gets interesting. The people in charge of making laws about money (like taxes) have been talking. They made a plan in April 2025 that could lead to some big changes later this year.
One of the big ideas is to bring back 100% bonus depreciation! That means if you buy something that qualifies, you could deduct the entire cost in the first year, just like it was in the past. Some people are even saying this could go back to January 20, 2025.
This is a big deal for people who invest in buildings. If they can deduct more money sooner, it can help them save on taxes and have more money to use for other things.
What This Means for You
If you own or are thinking about buying a short-term rental, these possible changes could be important.
- If 100% bonus comes back: You might want to think about buying things or making improvements sooner rather than later to get the bigger tax break.
- Even with 40% bonus: It’s still a good idea to understand how depreciation works. There are even ways to study your building to find parts that can be depreciated faster, called cost segregation.
But remember, these are just possibilities right now. The laws could stay the same. So, it’s important to keep an eye on what happens and talk to a tax expert to see what’s best for you.
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