STR Bonus Depreciation Was Just Restored to 100%. Here Is What the One Big Beautiful Bill Changed.

H.R. 1 carries a name that would not survive a single pass through the average law school editing workshop: the One Big Beautiful Bill. But whatever you think of the legislative branding (and I have reviewed enough congressional titles over the years to have developed opinions), the substance matters for short-term rental investors. The bill permanently restored 100% bonus depreciation for qualifying property acquired after January 19, 2025, eliminating the TCJA phase-down schedule that had the rate heading to 20% in 2026 and zero in 2027.

If you were planning 2026 STR acquisitions around that 20% figure, the actual number is five times higher. That changes the after-tax math on a lot of deals.

What the TCJA Phase-Down Schedule Said

The Tax Cuts and Jobs Act of 2017 created 100% first-year bonus depreciation, but Congress built in a sunset. The rate dropped 20 percentage points per year starting in 2023: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and zero from 2027 onward.

By early 2025, most tax professionals and STR investors were working with these numbers as settled law. The consensus was that 2026 would be the last year with any meaningful bonus depreciation benefit before the full phase-out. Some investors structured deals specifically to close in 2025 to capture the 40% rate rather than waiting for what they expected to be 20% in 2026.

That planning was rational given what the law said at the time. The law then changed.

What H.R. 1, the One Big Beautiful Bill, Actually Did

H.R. 1 passed the 119th Congress and was signed into law on July 4, 2025. The bill permanently restored 100% additional first-year depreciation under IRC Section 168(k) (bonus depreciation’s home in the Internal Revenue Code, for those who prefer their tax benefits with a specific statutory address) for qualifying property acquired after January 19, 2025. No new sunset date. No phase-down. The rate is permanently 100%.

The law ties eligibility to the acquisition date, not just the placed-in-service date. Property acquired on or after January 20, 2025 qualifies for the full 100% rate. Property acquired before that date stays on the old TCJA schedule regardless of when it was placed in service.

One exception matters for anyone who had a deal in progress during early 2025: property acquired under a written binding contract signed before January 20, 2025 is treated as acquired under the old rules even if the actual closing happened after that date. If your purchase agreement was executed in November 2024 and you closed in February 2025, the old phase-down applies to that property.

Self-constructed property follows a parallel rule. Construction must have commenced after January 19, 2025 for the new 100% rate to apply. If you broke ground in December 2024, you are on the old schedule.

IRS Notice 2026-11: What the Interim Guidance Covers

Congress writes the legislation. The IRS writes the rules for how it actually works. Notice 2026-11, issued January 14, 2026, provides the interim guidance while Treasury drafts formal final regulations.

The practical takeaway: taxpayers may rely on the existing TCJA-era bonus depreciation regulations with the dates updated to reflect the OBBBA’s new acquisition cutoff. You do not need to wait for final regulations before claiming the deduction. The existing regulatory framework still applies, with the relevant date substituted in.

The notice also addresses the election options available to taxpayers. You may elect to claim a 40% rate instead of the full 100% (or 60% for certain long-production-period property and aircraft). You may also elect out of bonus depreciation entirely for a given tax year. These elections can make sense in lower-income years when preserving deductions for future higher-rate years is the better tax move, or when state conformity issues make the federal rate misleading as a planning assumption.

This article provides general information and should not be construed as legal or tax advice. Consult a qualified tax professional or attorney for advice specific to your situation.

What 100% Bonus Depreciation Actually Means in Practice

Picture this: you acquire a short-term rental property in July 2026 for $650,000. The land component is $100,000, leaving $550,000 in depreciable property. Without additional analysis, the residential building goes on a 27.5-year straight-line schedule, generating roughly $18,000 per year in depreciation.

Now a cost segregation study identifies $175,000 in personal property and land improvements with 5-year and 15-year recovery periods. Under the old 20% rule, bonus depreciation on those items would have been $35,000 in year one. Under the restored 100% rule, the full $175,000 is deductible in year one.

The gap between $35,000 and $175,000 is the difference between a moderate tax benefit and a first-year deduction that can meaningfully offset other income, provided you meet the material participation requirements. At a 37% marginal rate, that difference represents roughly $51,800 in additional first-year tax savings on a single acquisition.

For a full breakdown of how depreciation interacts with operating deductions, the 14-day rule, and Schedule E versus Schedule C treatment, our complete guide to STR tax deductions in 2026 covers those mechanics in detail.

The 750-Hour Test Has Not Changed

Restoring bonus depreciation did not make the material participation rules more forgiving. The IRS has increased scrutiny on STR investors claiming passive losses against ordinary income, and that trend has continued through 2025 and 2026.

To deduct STR losses against other income rather than carrying them forward as suspended passive losses, investors need to satisfy one of two standards.

The material participation test under the passive activity loss rules (Section 469, the Internal Revenue Code provision that governs when rental losses can be used versus when they get shelved) requires at least 500 or 750 hours of participation in the STR activity during the tax year, or satisfying one of the other seven regulatory tests. For short-term rentals, the IRS typically applies the participation test property-by-property by default, which matters if you own multiple properties. Grouping elections are available but must be made by the return filing deadline.

Real Estate Professional Status (REPS) is the other path. REPS requires that more than half of your total personal service hours during the year are spent in real property trades or businesses, and that you perform more than 750 hours in those activities. Qualifying for REPS allows you to group all rental activities together and treat any resulting losses as non-passive, making them available to offset W-2 income, business income, or other ordinary income directly.

Both paths require contemporaneous documentation. Not a mental estimate assembled in April. Logs showing dates, specific tasks, time spent, and which property each entry relates to. The IRS is particularly skeptical of 750-hour claims from taxpayers who hold full-time employment outside real estate and own multiple rental properties. Auditors know what reconstructed logs look like.

STR-Specific Considerations

Short-term rentals occupy a distinct position in the tax code. Properties rented with an average stay of seven days or fewer qualify as a trade or business under Section 162 (the active trade or business provision) rather than as a passive rental activity under Section 469 (the passive loss rules). That classification matters before you even reach the material participation analysis: STR losses can be non-passive if you meet the relevant activity thresholds, without necessarily achieving the more demanding Real Estate Professional Status.

For bonus depreciation specifically, STRs carry a structural advantage over standard long-term residential rentals: they come loaded with qualifying personal property. Furniture, linens, kitchen equipment, appliances, television and entertainment systems, outdoor fixtures, and decor all qualify as 5-year or 15-year personal property under the tax code. A cost segregation study on a well-furnished vacation rental typically identifies somewhere between 20% and 35% of total property value in short-life assets eligible for bonus depreciation.

The combination of cost segregation and 100% bonus depreciation is the core strategy for first-year STR tax planning. Cost segregation identifies the qualifying short-life components. Bonus depreciation allows full first-year deduction of those components. Material participation (or REPS) makes those losses available against ordinary income rather than only against passive income. Each tool has standalone value. Together, they generate the large first-year paper losses that make STR investing particularly attractive from a tax planning perspective.

Two important caveats worth flagging:

State tax conformity is not guaranteed. Many states do not follow federal bonus depreciation rules and require addback adjustments that effectively spread the deduction over multiple years. The federal deduction and the state tax result can differ significantly depending on where your property is located. Verify your state’s position before projecting total savings.

Depreciation recapture applies when you sell. Sections 1250 and 1245 of the Internal Revenue Code (the recapture provisions that require you to recognize previously deducted depreciation as taxable income upon disposition) will apply when you eventually sell the property. Bonus depreciation is a timing benefit, not a permanent tax elimination. It accelerates deductions into the acquisition year, generating time value of money benefits. Structure your exit planning with recapture in mind.

What This Means for 2025 and 2026 Purchase Decisions

The restoration of 100% bonus depreciation substantially improves the after-tax picture on STR acquisitions that qualify under the new rules. For investors who were modeling 2026 purchases against a 20% rate, the revised calculation looks considerably better.

That said, bonus depreciation does not rescue a deal that does not work on its own fundamentals. Revenue projections, operating costs, local regulatory environment, market demand, and financing structure still determine whether an STR generates acceptable returns. The depreciation benefit improves the tax position for deals that already make sense. It does not transform a marginal deal into a good one.

For investors using DSCR financing, note that lenders calculate DSCR on the property’s rental income and debt service, not on the investor’s personal tax situation. The depreciation benefit does not appear in the DSCR analysis. Keep the investment case and the tax case in separate columns when modeling a deal.

If you want to understand the income side of the equation before running tax scenarios, the StaySTRA Analyzer provides market-level data on occupancy, average daily rate, and RevPAR across hundreds of U.S. short-term rental markets.

Get the Documentation Right Before You Close

The deduction is clear on paper. The implementation is where things go sideways.

Cost segregation studies should come from qualified engineering firms with real estate experience. The IRS has challenged poorly documented studies in audit, and a study that cannot hold up is more expensive than not doing one at all. Material participation logs need to be maintained throughout the year, not reconstructed after December 31. Form 4562, where bonus depreciation is reported, needs to be completed correctly.

If you are planning a 2025 or 2026 acquisition with the intent to claim 100% bonus depreciation and use the resulting losses against other income, get a CPA or tax attorney who works regularly with real estate investors involved before you close. The window to structure the position correctly does not stay open past year-end.

We do our best to keep our tax and regulatory guides current and accurate, but tax law changes frequently and individual situations vary. Always verify current requirements with a qualified tax professional before making financial or purchase decisions.

If you are evaluating STR markets for a 2025 or 2026 acquisition, start with the income data. The StaySTRA Analyzer gives you occupancy, average daily rate, and RevPAR data across hundreds of U.S. short-term rental markets so you can model realistic revenue before running tax scenarios.