Depreciation Period for Leasehold Property Operated as STR
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Honolulu, HI · Member since 2008 · 3k+ posts · 2k+ votes
7moI can't help with your tax question, but be certain the property is properly zoned AND that the Condo Association allows STR. Maui just changed the allowable use of some 7000 STR's, forcing them into LTR in most areas. Oahu is also cracking down on STR's outside of "Hotel" zones.
Aside from all that, you need to be crystal clear on the finances and reserve funding plan for the Association. In spite of a short remaining life for the entire project, repairs will continue needing to be made, some very costly, some will be ignored, but all to be paid for by the existing condo owners.
Retired as a Residential PM and Managing Agent for multiple Associations here, if you obtain the docs, I can help you understand them.
11 Replies
- Honolulu, HI · Member since 2008 · 3k+ posts · 2k+ votes7mo
I can't help with your tax question, but be certain the property is properly zoned AND that the Condo Association allows STR. Maui just changed the allowable use of some 7000 STR's, forcing them into LTR in most areas. Oahu is also cracking down on STR's outside of "Hotel" zones.
Aside from all that, you need to be crystal clear on the finances and reserve funding plan for the Association. In spite of a short remaining life for the entire project, repairs will continue needing to be made, some very costly, some will be ignored, but all to be paid for by the existing condo owners.
Retired as a Residential PM and Managing Agent for multiple Associations here, if you obtain the docs, I can help you understand them.
- Los Angeles, CA · Member since 2026 · 21 posts · 15 votes7mo
@Robert S. the remaining lease term controls here. You would depreciate over 16 years, not 27.5 or 39. The recovery period can't exceed the lease term, including any renewal options. So check if your lease has renewals that extend past 27.5 years before assuming the shorter period.
One thing worth knowing if you're considering a cost seg study on this: the shorter base period actually changes the math. Reclassifying to 15 year doesn't help much when you're already at 16, but the 5 and 7 year components still accelerate.
Quote from @Jonathan Hersh:
@Robert S. the remaining lease term controls here. You would depreciate over 16 years, not 27.5 or 39. The recovery period can't exceed the lease term, including any renewal options. So check if your lease has renewals that extend past 27.5 years before assuming the shorter period.
One thing worth knowing if you're considering a cost seg study on this: the shorter base period actually changes the math. Reclassifying to 15 year doesn't help much when you're already at 16, but the 5 and 7 year components still accelerate.
@Jonathan Hersh thank you for your reply. What guidance do you reference for this? If I look at 1.167(a)-4 it states
"(ii) Depreciate any leasehold improvement to which section 168 applies under the provisions of section 168 and depreciate or amortize any leasehold improvement to which section 168 does not apply under the provisions of the Code that are applicable to the cost recovery of that leasehold improvement, without regard to the period of the lease."
Do you think this is not applicable in this scenario?
Also, do you allocate a portion of the basis to the leasehold interest and to the condo property?
- Accountant · Chicago, IL · Member since 2026 · 11 posts · 21 votes7mo
CPA here. The reg you cited, 1.167(a)-4, applies to leasehold improvements, meaning improvements a tenant makes to a leased property. Buying the condo itself isn't a leasehold improvement, it's an acquisition of a leasehold interest in real property. Different animal for depreciation purposes.
For the condo building component you'd normally use 27.5 years for residential rental or 39 years if it qualifies as nonresidential. STRs can land in the nonresidential bucket depending on average stay length and material participation. But the recovery period gets capped at the remaining lease term when the lease is shorter than the applicable MACRS period. So Jonathan is right that 16 years controls here, assuming no renewal options push it past 27.5.
On your second question about basis allocation, yes you'd need to split the purchase price. Part of what you're buying is the leasehold interest in the building, which is depreciable. Part is essentially a prepaid land lease or the right to use the land for the remaining term, and that piece isn't depreciable, same as any other real estate purchase. Your purchase agreement or an appraisal should give you a defensible allocation. I'd get that nailed down before you start depreciating anything, because the IRS has opinions about how those splits should look. Talk to a CPA who works with leasehold properties before filing, this one has enough moving parts to get wrong.
@Elaine Park thank you for your reply on this. Makes sense. Do you know what guidance supports this position? I am having a really hard time finding the irs guidance on this.
- Los Angeles, CA · Member since 2026 · 21 posts · 15 votes7mo
@Robert S. The primary authority is IRC 168(i)(8) — it provides that when you acquire a leasehold interest in real property, the recovery period is capped at the remaining lease term (including reasonably certain renewal options). For basis allocation, §1.167(a)-5 covers the general principles, but with a Hawaii leasehold condo I'd second Elaine's advice to work with a CPA who's handled these before.
@Jonathan Hersh I think if you are referring to the below wouldn't it be the opposite? I believe it is saying for leasehold improvements (which @Elaine Park is saying the condo wouldn't be considered as it was acquired and not improved by the lessee) that leasehold improvements would be depreciated over their individual useful lives as would be applicable under 168. If we considered the purchased condo to be a leasehold improvement then wouldn't 27.5 or 39 years be the correct depreciation period for the portion of the purchase price allocated to the leasehold improvements, barring a cost seg study being done?
IRC 168(i)(8)(A):
"In the case of any building erected (or improvements made) on leased property, if such building or improvement is property to which this section applies, the depreciation deduction shall be determined under the provisions of this section."- Accountant · Chicago, IL · Member since 2026 · 11 posts · 21 votes6mo
@Robert S. you're reading 168(i)(8)(A) correctly and I think the confusion is that it keeps getting mixed up with your situation. That provision, along with the current version of Reg 1.167(a)-4(a), says leasehold improvements are depreciated under Section 168 without regard to the lease term. So if you had a 16-year lease and you renovated the kitchen, you'd depreciate that renovation over its normal MACRS life, not 16 years. That's what the statute says and you're right about that.
But your condo purchase isn't a leasehold improvement. You're acquiring the leasehold interest itself. That's a fundamentally different asset. When the lease ends in 16 years, your interest is gone, there's nothing left to depreciate. Section 178, which you cited in your original post, governs the cost of acquiring a lease and provides that renewal options get included in the term for recovery purposes. So check whether your lease has renewal options that push the total term past 27.5 years. If not, the remaining term is your ceiling because the asset's useful life can't outlast the lease.
For a client I'd break this into three buckets. The building component of your leasehold interest is Section 168 property but the recovery period is bounded by the useful life of the interest, which is the remaining lease term plus renewals. Your land lease component isn't depreciable at all. And any improvements you make to the unit after purchase fall under 168(i)(8)(A) at normal MACRS lives with no lease term cap. Three different assets, three different rules.
Worth getting a CPA who has handled Hawaii leaseholds to walk through the basis allocation with you. The split between building and land lease components will have real dollar impact on your return.
@Elaine Park I think you are getting right at my point in your last reply.
"The building component of your leasehold interest is Section 168 property but the recovery period is bounded by the useful life of the interest"
Where is the guidance which allows for 168 property to be depreciated over the term of the lease? I can't find anything on this.
- 6moAshish AcharyaBusiness MemberCPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
This is a good question. Even though the land lease only has 16 years left, you generally don’t shorten the depreciation period for the condo to match that. For tax purposes, the building is still depreciated under MACRS using the standard recovery period 27.5 years if it’s residential (which most short term rentals still are) or 39 years if it’s nonresidential. The lease term doesn’t override that. The only piece that does follow the 16-year term is any value allocated to the leasehold interest itself, which is treated as an intangible and amortized over the remaining lease. Then when the lease actually expires, if you still have undepreciated basis in the building, you typically write that off at that point.
Happy to connect.
INVESTOR FRIENDLY CPA®4.9242 Reviews - Accountant · Chicago, IL · Member since 2026 · 11 posts · 21 votes6mo
Robert, the citation you're looking for is Reg 1.162-11(a). It says when a leasehold is acquired for business purposes for a specified sum, the purchaser deducts an aliquot part of that sum each year, based on the number of years the lease has to run. Section 178 layers on top of that for how renewal options factor into the term. And Pub 527 restates it in plain English in the rental expenses section: if you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease.
The reason 168 doesn't get you a different answer is that 168 governs depreciation of property you own. When you acquire a leasehold condo, what you actually own is a wasting contractual right to use real property for 16 more years, not the underlying building. The asset you're recovering basis in is the lease itself, so it gets booked as amortized lease cost, not as MACRS depreciation on a 1250 building.
Some practitioners will argue you can carve out the building component of a long ground lease and depreciate it under 168 separately. That argument tends to apply when the lessee actually constructed the building or has all the indicia of ownership of the structure. With a Hawaii leasehold condo where the developer built the building and it reverts to the fee owner at lease end, that's a much harder position to defend. Most CPAs I know would treat the whole purchase price as cost of acquiring a leasehold under 1.162-11(a) and amortize over the lease term, with a basis allocation between the building piece and any prepaid land rent.
Hawaii leaseholds are unusual enough that I'd want a CPA who's actually filed returns on these to sign off before you commit. The rules are clear. The application to a specific deal is where it gets squishy.
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