A seismic shift in federal tax policy now offers a generational opportunity for sophisticated real estate investors. The government recently enacted the “One Big Beautiful Bill Act” (OBBBA), which does more than just prevent the expiration of prior tax cuts.¹ In fact, it fundamentally rewrites the playbook for capital-intensive ventures. As a result, Short-Term Rental (STR) investors are positioned as primary beneficiaries.
At the heart of this legislative overhaul is a key provision. It transforms a temporary tax incentive into a permanent structural advantage. Specifically, the law restores 100% first-year bonus depreciation. For the discerning investor, this change means you can convert a significant portion of an STR acquisition or renovation cost into an immediate and substantial tax deduction. Consequently, this creates an unparalleled strategic advantage.
The New Certainty: Permanent 100% Bonus Depreciation
To appreciate the significance of this act, you must recall the landscape investors previously faced. The Tax Cuts and Jobs Act of 2017 (TCJA) first introduced the powerful tool of 100% bonus depreciation. This allowed investors to write off the full cost of certain assets in year one. However, this benefit had a built-in expiration date. For instance, the deduction percentage dropped to 80% in 2023 and fell again to 60% in 2024. It was scheduled to plummet to a mere 40% in 2025.²
This declining schedule created enormous uncertainty for investors. It also diminished the after-tax return on capital projects with each passing year. Fortunately, the OBBBA has not just paused this countdown; it has dismantled the clock entirely. Effective for property placed in service after January 19, 2025, the law permanently sets the rate for first-year bonus depreciation at 100%.³ This grants investors a stable, predictable foundation for long-term financial modeling. Ultimately, this certainty is a crucial element for building a scalable real estate portfolio.
Your Blueprint for Unlocking Massive Tax Savings
The restoration of 100% bonus depreciation is a powerful development. However, you cannot unlock its full potential automatically. Instead, it requires a deliberate, multi-step strategy that navigates specific sections of the Internal Revenue Code. For an STR investor, this means you must transform a typically “passive” real estate investment into a non-passive business in the eyes of the IRS. This approach allows the resulting tax losses to offset your active income, such as W-2 wages.
From my experience analyzing tax statutes, the most successful investors treat tax compliance with the same rigor as property acquisition. This strategy, while highly effective, demands meticulous execution.
Step 1: Mandate a Cost Segregation Study
First, you must understand that bonus depreciation applies only to specific components of a property. It does not apply to the entire structure. The residential building itself requires a lengthy 27.5-year depreciation schedule. Therefore, a Cost Segregation Study is the essential, engineering-based analysis to identify and reclassify property components into shorter-lived asset classes.⁴ These valuable classes include:
- 5-Year Property: Covers furniture, appliances, carpeting, and decorative items.
- 15-Year Property: Includes land improvements like driveways, fencing, and landscaping.
A professional study can often reclassify 20-30% of a property’s purchase price (excluding land) into these categories. This, in turn, creates a large pool of assets now eligible for immediate, 100% expensing under the new law. Without this study, an investor has no defensible basis for maximizing this important deduction.
Step 2: Leverage the “Short-Term Rental Loophole”
By default, the IRS classifies all rental activities as “passive.” This classification means any tax losses they generate are trapped. For example, they can only offset passive income, not your primary salary.⁵ This is where the “STR Loophole” comes into play. A specific exception in the tax code (IRS Publication 925) states that an activity is not a rental if the average period of customer use is seven days or less.⁶
By ensuring your property’s average guest stay meets this 7-day threshold, you move the activity out of the automatic passive category. The IRS now considers it a trade or business. As a result, this opens the door for you to treat its losses as fully deductible.
Step 3: Document Your Material Participation
Once your STR qualifies as a business, you must clear one final hurdle. You must prove you “materially participated” in that business. This is an IRS standard defined as involvement that is regular, continuous, and substantial. An investor only needs to meet one of seven tests. The three most common tests for STR owners are:
- The 500-Hour Test: You (and your spouse) participate for more than 500 hours during the year.
- The 100-Hour Test: You participate for more than 100 hours, and no other single individual (like a cleaner) participates more than you.
- The Substantially All Test: Your participation constitutes nearly all of the work done for the rental.⁷
Meticulous, contemporaneous documentation of your time is non-negotiable. Should an audit occur, these detailed records are your primary defense.
The Bottom Line: A Quantifiable Windfall for Your Portfolio
The combination of these elements creates a profound impact on an investor’s cash flow. To illustrate, consider this simplified case study:
- The Investment: An investor buys an STR property for $600,000, with a $500,000 basis for the building and its improvements.
- Cost Segregation: A study identifies $150,000 (30%) of that basis as 5- and 15-year property.
- The Investor: A high-income earner in a 32% tax bracket who materially participates in the STR.
Under the Old Law (40% Bonus Depreciation): The year-one depreciation deduction would have been about $90,121. This would generate a tax savings of roughly $28,839.
Under the New OBBBA (100% Bonus Depreciation): Now, the investor can deduct the full $150,000 of qualifying assets in year one, plus standard depreciation on the building. This action brings the total year-one deduction to a staggering $162,121. Consequently, it generates a tax savings of $51,879.
This single legislative change puts an additional $23,040 of cash back into the investor’s pocket in the first year alone. This capital, which taxes would have otherwise consumed, can now work for you. For instance, you can use it to pay down the mortgage, fund further renovations, or acquire your next property. It dramatically improves key metrics like cash-on-cash return and accelerates capital velocity for portfolio growth.
Furthermore, for investors planning renovations, the math is even more compelling. You can immediately write off the entire cost of qualifying improvements, like new kitchens and furnishings. This effectively provides a government-subsidized “rebate” on the project equal to your marginal tax rate. This creates a powerful incentive to acquire “value-add” properties where you can create new, depreciable assets.
In conclusion, this new tax framework is a game-changer. It rewards not only savvy acquisition but also diligent operation. For the STR investor willing to master the details, the OBBBA provides a clear, permanent, and exceptionally powerful path to wealth creation.
Footnotes:
- ¹ H.R. 1, the “One Big Beautiful Bill Act” (OBBBA), enacted July 4, 2025.
- ² Internal Revenue Code § 168(k). The pre-OBBBA phase-out schedule reduced the bonus depreciation percentage to 40% in 2025, 20% in 2026, and 0% thereafter.
- ³ Per the final version of the OBBBA, the 100% rate is effective for qualified property acquired and placed in service after January 19, 2025.
- ⁴ A Cost Segregation Study is a detailed, engineering-based analysis that taxpayers use to identify and reclassify assets, thereby accelerating depreciation deductions.
- ⁵ Internal Revenue Code § 469 establishes the Passive Activity Loss (PAL) rules.
- ⁶ IRS Publication 925, Passive Activity and At-Risk Rules. The “7-day rule” is a key exception to the definition of a rental activity.
- ⁷ The seven tests for material participation are outlined in Treas. Reg. § 1.469-5T. Meticulous record-keeping is crucial for substantiating any claim of material participation.
