Short term rental depreciation

8 Replies

I'm wondering if a non-owner occupied short term rental (Air BnB) should have a depreciation term of 27.5 years  (residential rental building) or 39 years (commercial rental)? I own 2 small single family homes which are rented exclusively as Air BnBs.  I read the Air BnB official tax manual written by Ernst & Young which says that 27.5 year depreciation is appropriate, but my accountant disagrees. 

This is his reply to my email:

"I read most of what E&Y has to say, and I agree with all of this, including the 27.5 yr life for ‘residential rental buildings’.

But I do think you could be challenged for buildings that are used exclusively for short term rentals. For example in your situation, you do not use the structure as any part of your personal residence, so I do not think this is truly classified as residential rental, I think it is commercial rental."

@Sara Erickson - what would his opinion be if they were month to month rentals? I'm no accountant, but my thought would be: If the building is a 1-4 use the residential term, if >4 use commercial term.
Originally posted by @Sara Erickson :

I'm wondering if a non-owner occupied short term rental (Air BnB) should have a depreciation term of 27.5 years  (residential rental building) or 39 years (commercial rental)? I own 2 small single family homes which are rented exclusively as Air BnBs.  I read the Air BnB official tax manual written by Ernst & Young which says that 27.5 year depreciation is appropriate, but my accountant disagrees. 

This is his reply to my email:

"I read most of what E&Y has to say, and I agree with all of this, including the 27.5 yr life for ‘residential rental buildings’.

But I do think you could be challenged for buildings that are used exclusively for short term rentals. For example in your situation, you do not use the structure as any part of your personal residence, so I do not think this is truly classified as residential rental, I think it is commercial rental."

I think it is 39-year depreciation term - non residential. Per IRS instructions on how to depreciate property:

"A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis." 

732-333-1477

In tax law there are kind of tiers of what determine something....

There are interpretations and rulings that lead to how things are actually applied. 

It's still a residential building. Period. The above citation/guide with relation to non-residential is to specifically say that buildings built to hold multi units, for overnight living, are commercial. 

A house is still a house. Your air bnb may be rented for 2 days, or 30. There is no intent there. It's also not a multi unit -commercial building. 

I vote 27.5. I've yet to see a CPA put a SFH for air bnb on 39 year.

@Jake Hottenrott @Steven Hamilton II Am I off base here ?

@Natalie Kolodij - I think you nailed it.  The IRS designations are not Commercial and Residential, they are Residential property at 27.5 years and Non-Residential property at 39 years. 

While the Short Term rental may play a role in determining whether it's a passive income or an active income stream, the depreciation should still follow the use of the building, a residence.

@Natalie Kolodij and @Jake Hottenrott , the issue here is that if a property's average period of customer use is 7 days or less (as many if not most Airbnbs are though I'm not sure about @Sara Erickson 's case), it's not considered a rental activity under Reg §1.469-1T(e)(3)(ii)(A) and therefore would not be depreciated under 27.5 years, which is reserved for residential rental property under §168.

That being said, the scope of Reg §1.469-1T(e)(3)(ii) limits the scope of Reg §1.469-1T(e)(3)(ii)(A) to the 7-day-or-less rule to Reg §1.469-1T(e)(3), not §168 and not the entire IRC.

And of course the regs for the 7-day-or-less rule are temporary regs issued in 2002, and the shelf life on temporary regs is 3 years.

But nevertheless these regs probably give some insight into Treasury's thought process here.

Speaking of which...Airbnb wasn't a thing in 2002, and Treasury's presumption back then may have been that the "rental" of a property with an average period of customer use of 7 days or less would likely have been bundled with some significant services, thus making the entire activity a trade or business rather than a rental.

But things are different now, though obviously some services are provided with the typical Airbnb (e.g., the provision of clean sheets, television, complimentary snacks, etc.) that aren't provided in the typical rental...

What do I do?  Absent specific, current guidance on this point, I figure out what's best for my clients, let them know which is best, let them know what guidance we have, and let them make the decision.  This goes for 27.5-yr vs 39-yr as well as Sch C vs Sch E for properties with average use of 7 days or less, such as most Airbnb properties.

Anyway this is my thought process, thinking not so much from a this-is-the-law standpoint (because I do think that this is still a grey area) but from a risk-mitigation standpoint, and I know other tax professionals approach this issue differently, so I welcome others' insights into this issue and my thought process.

Originally posted by @Logan Allec :

@Natalie Kolodij and @Jake Hottenrott , the issue here is that if a property's average period of customer use is 7 days or less (as many if not most Airbnbs are though I'm not sure about @Sara Erickson 's case), it's not considered a rental activity under Reg §1.469-1T(e)(3)(ii)(A) and therefore would not be depreciated under 27.5 years, which is reserved for residential rental property under §168.

That being said, the scope of Reg §1.469-1T(e)(3)(ii) limits the scope of Reg §1.469-1T(e)(3)(ii)(A) to the 7-day-or-less rule to Reg §1.469-1T(e)(3), not §168 and not the entire IRC.

And of course the regs for the 7-day-or-less rule are temporary regs issued in 2002, and the shelf life on temporary regs is 3 years.

But nevertheless these regs probably give some insight into Treasury's thought process here.

Speaking of which...Airbnb wasn't a thing in 2002, and Treasury's presumption back then may have been that the "rental" of a property with an average period of customer use of 7 days or less would likely have been bundled with some significant services, thus making the entire activity a trade or business rather than a rental.

But things are different now, though obviously some services are provided with the typical Airbnb (e.g., the provision of clean sheets, television, complimentary snacks, etc.) that aren't provided in the typical rental...

What do I do?  Absent specific, current guidance on this point, I figure out what's best for my clients, let them know which is best, let them know what guidance we have, and let them make the decision.  This goes for 27.5-yr vs 39-yr as well as Sch C vs Sch E for properties with average use of 7 days or less, such as most Airbnb properties.

Anyway this is my thought process, thinking not so much from a this-is-the-law standpoint (because I do think that this is still a grey area) but from a risk-mitigation standpoint, and I know other tax professionals approach this issue differently, so I welcome others' insights into this issue and my thought process.

 Spot on. I like to refer to it to people as though it is a hotel which means a business and non residential. 

Thank you all so, so much for your thoughtful responses! This is my first time posting and I'm incredibly impressed with the Bigger Pockets community. My rentals have averaged 2-5 days, only a couple have been over 7 days. I'll go with the 39-yr. 

Join the Largest Real Estate Investing Community

Basic membership is free, forever.