Short-Term Rental 39-Year Depreciation Rule Explained

The IRS distinguishes between residential rental property, which is depreciated over 27.5 years, and nonresidential real property, which is depreciated over 39 years. The classification depends on how the property is used, not just what type of building it is.

Residential rental property is defined as a building or structure where 80% or more of the gross rental income is from dwelling units. A dwelling unit is a house or apartment used to provide living accommodations, but it does not include units in hotels, motels, inns, or other establishments where more than half the units are used on a transient basis.

Nonresidential real property includes commercial buildings, retail space, and any property that does not meet the residential rental property definition. For short-term rentals, the key question is whether the property is used on a transient basis, which would disqualify it from residential treatment.

The IRS considers use to be transient if the average guest stay is short and the property provides hotel-like services. This creates a tension for STR investors: the same characteristics that help meet the 7-day passive activity rule (short stays) may also push the property into 39-year nonresidential depreciation.

Short term rental 39 year depreciation arises when the IRS determines that the property is more like a hotel or inn than a traditional apartment rental. This classification is fact-specific and depends on how you operate the rental business.

Properties that provide significant services to guests, such as daily housekeeping, meals, concierge services, or frequent linen changes, are more likely to be classified as nonresidential. These services are characteristic of hotels, motels, and bed-and-breakfast establishments, which are nonresidential properties subject to 39-year depreciation.

Properties with very short average stays, such as one to three nights, may also be viewed as transient lodging rather than residential rentals. The more your operation resembles a hotel business, the stronger the argument for 39-year treatment.

The IRS has not issued definitive guidance on when short-term rentals cross the line from residential to nonresidential. Some tax professionals take the position that any STR meeting the 7-day rule should be classified as nonresidential, while others argue that traditional single-family homes or condos rented on Airbnb remain residential. The lack of clear guidance creates uncertainty and requires careful analysis.

Several factors influence whether your short-term rental should be classified as residential (27.5 years) or nonresidential (39 years). Understanding these factors helps you determine the proper depreciation period and plan accordingly.

First, consider the average length of guest stay. Properties with very short stays (one to three nights) are more likely to be viewed as transient lodging. Properties with longer average stays (four to seven days or more) may still qualify as residential rentals.

Second, evaluate the services provided. Minimal services like providing linens and basic amenities do not necessarily make the property nonresidential. However, extensive services like daily cleaning, meals, concierge, or frequent turnover support nonresidential classification.

Third, examine the property type and layout. A single-family home or traditional apartment is more likely to qualify as residential. A studio unit in a building with hotel-like amenities, front desk, or shared facilities may be nonresidential.

Finally, review how the property is marketed and operated. If you hold yourself out as operating a bed-and-breakfast, inn, or boutique hotel, the IRS may classify the property as nonresidential regardless of the structure type.

The 7-day average rental period rule and the depreciation life determination are separate tax concepts, but they often interact in short-term rental planning.

The 7-day rule determines whether your rental activity is subject to passive activity loss limitations. If the average guest stay is seven days or less, the activity is not treated as a rental for passive loss purposes, allowing you to claim losses against active income if you also materially participate.

The depreciation life determination (27.5 years vs 39 years) is based on whether the property qualifies as residential rental property. This depends on transient use and services provided, not the passive activity rules.

However, the two rules are related because the same facts that help you meet the 7-day rule (short stays, high turnover) may also indicate transient use that supports 39-year depreciation. This creates a potential tension: you want short stays for passive activity purposes, but very short stays may push you into slower 39-year depreciation.

In practice, many STR investors accept 39-year depreciation if necessary and compensate by using cost segregation to maximize accelerated deductions. The benefit of offsetting W-2 income through non-passive treatment often outweighs the slightly slower building depreciation.

Cost segregation becomes even more critical when dealing with short term rental 39 year depreciation. Because the building structure depreciates more slowly under 39-year treatment, accelerating deductions through cost segregation provides greater relative benefit.

A cost segregation study identifies personal property and land improvements that can be depreciated over 5, 7, or 15 years regardless of whether the building is classified as residential or nonresidential. The same appliances, furniture, fixtures, and site improvements qualify for reclassification.

For 39-year property, cost segregation can shift a larger percentage of total basis into shorter lives compared to 27.5-year property. This is because the relative benefit of moving an asset from 39 years to 5 years is greater than moving it from 27.5 years to 5 years.

The cost segregation study process is the same for 39-year and 27.5-year property. The engineering firm inspects the property, identifies and classifies components, allocates costs, and prepares a detailed report. The main difference is that the benefit is amplified when the baseline is 39 years instead of 27.5 years.

For broader context on cost segregation for short-term rentals, see Cost Segregation for Short-Term Rentals.

Bonus depreciation does not apply to the 39-year building structure itself, but it does apply to personal property identified in a cost segregation study. This makes cost segregation particularly valuable for STR nonresidential depreciation.

When a cost segregation study reclassifies components into 5, 7, or 15-year property, those components may qualify for bonus depreciation. Under current law, bonus rates are phasing down (80% in 2023, 60% in 2024, 40% in 2025, etc.), but significant first-year deductions are still available.

For example, if a cost segregation study identifies $200,000 of 5-year personal property from a $1,000,000 purchase and the applicable bonus rate is 60%, you can deduct $120,000 in the first year. This accelerated deduction offsets the slower 39-year depreciation on the remaining building structure.

When combined with non-passive treatment (meeting the 7-day rule and material participation), bonus depreciation on reclassified assets can create substantial losses that offset W-2 income in the first few years of ownership.

Coordinate bonus depreciation elections with your CPA. You can elect out of bonus on a class-by-class basis if spreading deductions over more years would be more advantageous for your tax situation.

If you have been depreciating your short-term rental over the wrong period, you can correct the classification by filing IRS Form 3115, Application for Change in Accounting Method.

Form 3115 allows you to change from 27.5-year to 39-year depreciation (or vice versa) if the facts support the change. The form calculates a catch-up adjustment (called a Section 481(a) adjustment) that accounts for the difference between depreciation claimed and depreciation that should have been claimed.

If you have been using 27.5-year depreciation but should have been using 39-year, the adjustment will generally be negative (you claimed too much depreciation), and you will recapture the excess over a specified period. If you have been using 39-year but should have been using 27.5-year, the adjustment will be positive, and you can claim the additional depreciation.

Changing depreciation methods requires careful analysis of the facts and proper completion of Form 3115. Consult with a CPA experienced in short-term rental taxation to determine whether a change is necessary and how to implement it correctly.

Some investors discover the classification issue when they perform a cost segregation study. The engineering firm may identify that the property should be classified as 39-year rather than 27.5-year (or vice versa), prompting the need for a correction.

The term "STR commercial depreciation" often refers to the 39-year nonresidential treatment that applies when short-term rentals are classified as transient lodging. Understanding the difference between commercial and residential depreciation helps you plan for the tax impact.

Residential depreciation (27.5 years) results in faster annual deductions compared to nonresidential (39 years). For example, a $1,000,000 building depreciates at $36,364 per year under 27.5-year treatment versus $25,641 per year under 39-year treatment. Over time, this difference compounds.

However, the depreciation life alone does not determine total tax benefit. Cost segregation and bonus depreciation can shift substantial basis into much shorter lives (5, 7, or 15 years), creating large first-year deductions that dwarf the difference between 27.5 and 39-year building depreciation.

For STR investors pursuing non-passive treatment, the ability to offset W-2 income with accelerated depreciation is often more valuable than the specific building depreciation life. A 39-year building with aggressive cost segregation and non-passive treatment can generate greater tax savings than a 27.5-year building with passive treatment.

The key takeaway is that depreciation period is one factor among many. Focus on the total tax strategy, including cost segregation, material participation, and passive activity rules, rather than fixating solely on 27.5 vs 39 years.

Several common mistakes can result in incorrect depreciation treatment and potential IRS scrutiny. Understanding these pitfalls helps you structure your short-term rental depreciation correctly.

One frequent error is automatically assuming all short-term rentals qualify for 27.5-year residential treatment without evaluating the property's use and services. If the IRS determines your property is transient lodging, you may be required to reclassify to 39-year depreciation and amend prior returns.

Another mistake is confusing the 7-day passive activity rule with the depreciation life determination. Meeting the 7-day rule does not automatically mean you should use 39-year depreciation, and failing the 7-day rule does not automatically mean you should use 27.5 years. The two rules are separate and based on different factors.

Some investors also fail to perform cost segregation when using 39-year depreciation, thinking the slower building depreciation makes cost segregation unnecessary. In fact, cost segregation is more valuable for 39-year property because the relative benefit of reclassifying assets into shorter lives is greater.

Finally, inadequate documentation of property use, services provided, and average stay can make it difficult to support your depreciation classification if audited. Maintain detailed records of booking data, services offered, and operational characteristics.