Is your STR depreciated over 27.5 years or 39? Check your CPA!

[Nate Meeker]

I see this mistake on so many new client's previous returns...

Are Short Term Rentals depreciated over 27.5 years or 39 years?

Residential homes are depreciated over 27.5 years.

Short-term rentals are considered nonresidential property. Former Reg. Sec. 1.1679(k)-3C1 was removed in 1993 but referenced in a 2011 CCA.

If more than 50% of dwelling units in a building are used on a transient basis, it's a nonresidential property. Transient basis means occupied by a series of tenants who each stay less than 30 days.

A vacation rental is 1 dwelling unit, so 100% of units are rented on a transient basis and therefore be depreciated over 39 years. 

What if my bank considers it commercial?

Sec. 168(e)(2) defines residential rental property as any building or structure from which 80% or more of the gross rental income for the tax year is from dwelling units entitling it to 27.5 years of depreciation.

For hotels, motels, and other establishments, the 80%-gross-receipts test is disregarded if more than 50% of the dwelling units are used on a “transient basis.” It is then considered commercial and depreciated over 39 years.