The STR tax play that high income earners are using in 2026

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The STR tax play that high income earners are using in 2026

David Totten
Real Estate Consultant · Barstow, CA · Member since 2026 · 86 posts · 59 votes

Bonus depreciation was permanently restored to 100% when the One Big Beautiful Bill was signed on July 4, 2025. For high W2 earners this changes the math on STR investing significantly.

Here is how it works. A qualifying STR property allows the owner to accelerate depreciation and offset ordinary income in year one. On a $500,000 acquisition a cost segregation study typically identifies $100,000 to $135,000 in accelerated components. For a household in the 37% bracket that translates to approximately $50,000 in tax savings in year one.

The catch it only works if you meet material participation requirements, which most active STR investors qualify for. And it only works in markets where the property actually performs. A tax benefit on a poorly selected STR in an oversupplied market is still a bad investment.

The operators winning with this strategy in 2026 are pairing the tax play with supply constrained markets that have durable demand. The tax benefit is the accelerant. The market selection is the foundation.

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John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
6mo

This has been posted about alot already.

4Reply
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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    6mo

    This has been posted about alot already.

    4Reply
  • Justin Miller
    Interior Decorator · Nationwide · Member since 2017 · 44 posts · 35 votes
    6mo

    Yes anyone with an Instagram account has had this message hammered into their feed.

    3Reply
  • Andrew SteffensBusiness Member
    Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes
    6mo

    This has been great for me - my client profile has been elevated significantly.

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    2Reply
    • David Totten
      OP
      Real Estate Consultant · Barstow, CA · Member since 2026 · 86 posts · 59 votes
      6mo
      Quote from @Andrew Steffens:

      This has been great for me - my client profile has been elevated significantly.

      That's exactly it Andrew the clients who understand the tax layer are operating with a completely different decision framework than the ones just looking at cash flow.
      1Reply
    • Collin HaysBusiness Member
      Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
      6mo
      Quote from @David Totten:
      Quote from @Andrew Steffens:

      This has been great for me - my client profile has been elevated significantly.

      That's exactly it Andrew the clients who understand the tax layer are operating with a completely different decision framework than the ones just looking at cash flow.
      ...or the clients are haphazardly making poor investments just because they can get save on their taxes.  
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      1Reply
  • Collin HaysBusiness Member
    Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
    6mo

    I've never understood the fascination, if not obsession, with tax code as it relates to investments.  We aren't getting away with anything.  Accelerated depreciation is still depreciation, which means that your basis in the property is reduced, which in turn means that every penny of that will be recaptured (repaid) when you sell.  That is, unless you continue with the tax avoidance game by a hastily purchased 1031 exchange and kick the can down the road.

    Never, EVER let tax code drive your investment decisions.  Cart before the horse.

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    • David Totten
      OP
      Real Estate Consultant · Barstow, CA · Member since 2026 · 86 posts · 59 votes
      6mo
      Quote from @Collin Hays:

      I've never understood the fascination, if not obsession, with tax code as it relates to investments.  We aren't getting away with anything.  Accelerated depreciation is still depreciation, which means that your basis in the property is reduced, which in turn means that every penny of that will be recaptured (repaid) when you sell.  That is, unless you continue with the tax avoidance game by a hastily purchased 1031 exchange and kick the can down the road.

      Never, EVER let tax code drive your investment decisions.  Cart before the horse.


      That's exactly the point of the post the tax benefit is the accelerant not the foundation. A poorly selected market with bonus depreciation is still a bad investment. The investors winning with this are using the tax play to amplify returns on deals that already work on fundamentals.

      0Reply
    • Dan H.Pro Member
      Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
      6mo
      Quote from @Collin Hays:

      I've never understood the fascination, if not obsession, with tax code as it relates to investments.  We aren't getting away with anything.  Accelerated depreciation is still depreciation, which means that your basis in the property is reduced, which in turn means that every penny of that will be recaptured (repaid) when you sell.  That is, unless you continue with the tax avoidance game by a hastily purchased 1031 exchange and kick the can down the road.

      Never, EVER let tax code drive your investment decisions.  Cart before the horse.


       Not only will it typically need to be repaid, but because the depreciation is moved forward it does not take long for the depreciation to be less than if you used standard depreciation.   Likely somewhere before year 10, the depreciation for the year will be less than standard depreciation.   Do do you sell at that point and recapture or 1031 to push down the road?

      I invest to make money in RE. Even if I did an accelerated depreciation annually, I make money in RE. It does reduce my oassuve income. Note I do not need STR tax benefit or REP to be able to write passive losses of against passive gains.


      good luck

      1Reply
  • Mike GrudzienPro Member
    Lender · Eugene, OR · Member since 2019 · 2k+ posts · 1k+ votes
    6mo

    Thanks for the reminder...

    2Reply
  • Todd Goedeke
    Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes
    6mo

    @David Tottenplease elaborate how material participation rules apply to someone assisting in new construction as a laborer or co project manager.

    1Reply
    • David Totten
      OP
      Real Estate Consultant · Barstow, CA · Member since 2026 · 86 posts · 59 votes
      6mo
      Quote from @Todd Goedeke:

      @David Tottenplease elaborate how material participation rules apply to someone assisting in new construction as a laborer or co project manager.




      Todd material participation for construction work on your STR property follows the standard seven IRS tests. The most relevant is Test 3 you participate more than 100 hours annually and no other individual spent more time on the property than you did.

      Your construction hours as laborer or project manager count toward material participation if it's work on your own STR property. The IRS looks at total participation across all property activities construction, management, maintenance, guest services not just the construction piece.

      The key documentation requirement is contemporaneous records daily logs kept throughout the year showing specific dates, hours, and tasks. After the fact reconstruction gets little weight in audits. Also track contractor hours carefully since they count against your Test 3 claim if anyone exceeds your time.

      0Reply
  • Todd Goedeke
    Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes
    6mo

    @Dan H. the post refers to being able to take massive 1st year accelerated depreciation against active, W-2 income, capital gains and non passive income. This is especially important to those individuals with incomes of $500k and above as well as those people with high tax bills from capital gains.

    In its simplest form cost segregation and accelerated depreciation allows an investor to reduce large amount of taxes now rather than wait 10 years. The rule of tax saving now rather than later revolves around the time value of money. 

    1Reply
    • Dan H.Pro Member
      Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
      6mo
      Quote from @Todd Goedeke:

      @Dan H. the post refers to being able to take massive 1st year accelerated depreciation against active, W-2 income, capital gains and non passive income. This is especially important to those individuals with incomes of $500k and above as well as those people with high tax bills from capital gains.

      In its simplest form cost segregation and accelerated depreciation allows an investor to reduce large amount of taxes now rather than wait 10 years. The rule of tax saving now rather than later revolves around the time value of money. 

      I understand what the post is about.  I have done multiple cost segregations.

      my points are
      - the depreciation is recovered
      - the depreciation is moved forward, typically before year 10 the standard depreciation will exceed what the accelerated depreciation depicts.   This implies you need to keep feeding the pipeline.
      - if you have significant cash flow, you do not need reps or short term exemption to leverage the accelerated depreciation.   I do not require either because I write it off my passive income.   The point or RE is to make money.  Do you think you are making money if you can write off items that are actually being depreciated against active income.  Note the accelerated depreciation reflects actual lifespans of items.   For example, if flooring is listed as 7 year lifespan (depreciated over 7 years), it is expected to have a 7 year lifespan and need to be replaced somewhere near 7 years with the associated expense.  Note I could purchase and do accelerated depreciation annually and not exhaust the write off of passive income.  

      Some people do not understand it gets recaptured at sale.   Some people do not understand it moves the depreciation forward leaving less depreciation for later.  Some people do not realize it captures realistic coming expenses.

      the goal is to make money with your RE investments.   If you are showing a loss with accelerated depreciation (that reflects forecasted upcoming expenses), are you making money with your REIs?   What do you do when the depreciation, because of acceleration, falls below standard depreciation?   Note if you sell, typically the depreciation is recaptured.   Note I had planned to simply feed the pipeline, but due to rate increases it is more challenging to find purchases that achieve the 25%+/year return I expect from RE.

      I believe a lot of people understand the good part about accelerated depreciation without understanding what is implied for future cap ex and the consequences of moving forward.

      best wishes
      1Reply
  • Todd Goedeke
    Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes
    6mo

    @Collin Hays Smart affluent investors realize that reducing taxes now is far better than waiting years. It’s called “ time value of money” law.

    No, depreciation does not need to be recaptured when making a gift. Many investors are heavily involved in charitable giving. Donating RE that has been highly depreciated does not reduce the value of the donation. The donor’s charitable donation value is based on the market value not the depreciated basis. 

    STVR investors are using accelerated depreciation to eliminate taxes on IRA transfers to a Roth IRA. Example: $500k ( $200k downpayment)new construction STVR is placed in service in 2026 generating $185k in accelerated depreciation. It's used to offset $185k in IRA Roth conversion income. Result, Zero tax on conversion.

    1Reply
    • Collin HaysBusiness Member
      Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
      6mo
      Quote from @Todd Goedeke:

      @Collin Hays Smart affluent investors realize that reducing taxes now is far better than waiting years. It’s called “ time value of money” law.

      No, depreciation does not need to be recaptured when making a gift. Many investors are heavily involved in charitable giving. Donating RE that has been highly depreciated does not reduce the value of the donation. The donor’s charitable donation value is based on the market value not the depreciated basis. 

      STVR investors are using accelerated depreciation to eliminate taxes on IRA transfers to a Roth IRA. Example: $500k ( $200k downpayment)new construction STVR is placed in service in 2026 generating $185k in accelerated depreciation. It's used to offset $185k in IRA Roth conversion income. Result, Zero tax on conversion.

      I guess this means I’m neither smart nor affluent.  😂
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      0Reply
    • Christopher Tile
      Accountant · Long Island, NY · Member since 2021 · 189 posts · 153 votes
      6mo
      Quote from @Todd Goedeke:

      @Collin Hays Smart affluent investors realize that reducing taxes now is far better than waiting years. It’s called “ time value of money” law.

      No, depreciation does not need to be recaptured when making a gift. Many investors are heavily involved in charitable giving. Donating RE that has been highly depreciated does not reduce the value of the donation. The donor’s charitable donation value is based on the market value not the depreciated basis. 

      STVR investors are using accelerated depreciation to eliminate taxes on IRA transfers to a Roth IRA. Example: $500k ( $200k downpayment)new construction STVR is placed in service in 2026 generating $185k in accelerated depreciation. It's used to offset $185k in IRA Roth conversion income. Result, Zero tax on conversion.


       Great tax planning play here. 

      Even see clients looking to get down to the 0% LTCG tax rate (taxable income of $48,350 for single/MFS and $96,700 for MFJ).

      Liquidate a taxable brokerage account, invest in STR, drive down taxable income to 0% LTCG rates

        1Reply
    • Todd Goedeke
      Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes
      6mo

      @Collin Hays See investment law, Time value of money.

      0Reply
    • Todd Goedeke
      Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes
      6mo

      @David Totten the Test 3 compliance does not apply to contractor hours during new construction of a STVR. Using common sense it would be impossible to qualify if an investor had to log more hours than each subcontractor. Test 3 applies to a property once it is open, doing business as a STVR.

      0Reply
      • David Totten
        OP
        Real Estate Consultant · Barstow, CA · Member since 2026 · 86 posts · 59 votes
        6mo
        Quote from @Todd Goedeke:

        @David Totten the Test 3 compliance does not apply to contractor hours during new construction of a STVR. Using common sense it would be impossible to qualify if an investor had to log more hours than each subcontractor. Test 3 applies to a property once it is open, doing business as a STVR.


        You're absolutely right. Test 3 wouldn't be practical during new construction with multiple subcontractors. I was thinking of operational STR activities. For new construction, Test 1 (500+ hours) would be the more realistic path during the build phase. Good clarification.

        0Reply
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