Renting a Room - Should I do a Cost Segregation Study

[Kevin Maurer]

About 18 months ago I finished a renovation with a Homestyle loan ($160k pp, $90k renovations, $320k ARV). Its a 2 bed 1 bath SFH and I rent the other room through AirBnb. Guests have access to the entire house except for my bedroom. The plan is to purchase a new property in the next year or so then rent the full house as a STR. I have a W2 job to deduct losses against and I'm hoping my AGI should fall right around $100k including the losses from my Schedule C (side business).

I still have to file my 2024 taxes and have been struggling with whether I should do a cost seg study this year or not? Getting more back this year would really help me pay off a couple things and finance my next property but if its more beneficial to wait until I rent the entire house I can do that. Would love to get some thoughts and if anyone has a good CPA that I can engage to do the study. Thanks!

[Lauren Robins]

You're in a great position to make strategic tax decisions with your property, but whether to do a cost segregation (cost seg) study now or wait depends on a few key factors—especially how you're using the property and your overall tax strategy. A cost segregation study can significantly accelerate depreciation by breaking down your property into shorter-life components (like appliances, cabinetry, flooring, etc.), allowing you to claim larger deductions up front—potentially through 100% bonus depreciation if applicable for your tax year. However, timing is crucial when the property is only partially used as a short-term rental.

Right now, since you're living in the property and only renting part of it on Airbnb, you’re in what's called a “mixed-use” situation. This limits the depreciation you can take. Only the portion of the property used for rental (i.e., the guest room and any shared common areas used by guests) can be depreciated, and you would only be able to cost segregate and depreciate that specific percentage—not the entire structure. That reduces the value of doing a full cost segregation study at this stage because the tax benefits will be proportionally limited.

However, once you move out and convert the whole property to a short-term rental (STR), your depreciation deductions—including those from a cost seg study—would apply to the entire property. This would dramatically increase the allowable deduction and could generate a much larger paper loss, especially if you or your CPA can qualify the property as non-passive (e.g., by materially participating or if it meets certain STR exemptions from passive activity rules). This could offset W2 income, especially if your AGI is around $100K and you're actively involved in the property.

That said, there are still scenarios where doing the cost seg study now could make sense—especially if your current AGI and losses allow you to benefit from the deduction and you really need the cash flow this year. Just remember that once the bonus depreciation rules phase out further (as they're doing post-2023), you may not get as much of a punch from waiting. But if you're only depreciating a portion of the home now and expect to fully depreciate the house as a business asset later, waiting could be the better financial play.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.