Cost segregation and bonus depreciation

Boston, Massachusetts
Tax, SDIRAs & Cost Segregation
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Cost segregation and bonus depreciation

Megan OConnorPro Member
Member since 2024 · 12 posts · 1 vote

I’m looking for insight from  y’all that are familiar with cost seg and bonus depreciation. 

This year we will STR our primary home for 5-6 months. Our town only allows STR if it's your primary (so max 6m minus one day). We purchased the home in 2020 and did a full gut renovation this year (06/2025-06/2026). It's listed and booking well. We are moving into a MTR for Sept-Nov this year while it is STR. We pay approx $75k in income tax. Are we able to do a cost seg and take bonus depreciation since it's our primary? How does this complicate the process?

Looking for a CPA, but in the meantime I am curious what education you all can provide. 

Thank you, 

Megan

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Julius VincentBusiness Member
Tax Strategist | CPA, MBA + Wharton FP&A | CFO-Level Planning · Houston, TX · Member since 2025 · 157 posts · 172 votes
1mo

Hi @Megan OConnor - you can cost seg any building, but with your dynamics the bonus depreciation probably won't achieve what you're hoping. Since the home is your primary residence and your personal use days are far above the 14 day threshold, the vacation home rules apply. Those rules unfortunately cap your rental deductions at your rental income. 

A cost seg can help wipe out the tax on the STR income itself, which is worth something, but it cannot create a loss that offsets W-2 income or the rest of that $75k. Unused deductions carry forward. And the rules apply deductions in a set order with depreciation last, behind mortgage interest, property taxes, and operating expenses. So in practice, a big chunk of the accelerated depreciation just sits as carryforward.

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  • Megan OConnorPro Member
    OP
    Member since 2024 · 12 posts · 1 vote
    1mo
    Quote from @Megan OConnor:

    I’m looking for insight from  y’all that are familiar with cost seg and bonus depreciation. 

    Looking for a CPA This year we will STR our primary home for 5-6 months. Our town only allows STR if it's your primary (so max 6m minus one day). We purchased the home in 2020 and did a full gut renovation this year (06/2025-06/2026). It's listed and booking well. We are moving into a MTR for Sept-Nov this year while it is STR. We pay approx $75k in income tax. Are we able to do a cost seg and take bonus depreciation since it's our primary? How does this complicate the process?

    Looking for a CPA, but in the meantime I am curious what education you all can provide. 

    Thank you, 

    Megan


    0Reply
  • Julius VincentBusiness Member
    Tax Strategist | CPA, MBA + Wharton FP&A | CFO-Level Planning · Houston, TX · Member since 2025 · 157 posts · 172 votes
    1mo

    Hi @Megan OConnor - you can cost seg any building, but with your dynamics the bonus depreciation probably won't achieve what you're hoping. Since the home is your primary residence and your personal use days are far above the 14 day threshold, the vacation home rules apply. Those rules unfortunately cap your rental deductions at your rental income. 

    A cost seg can help wipe out the tax on the STR income itself, which is worth something, but it cannot create a loss that offsets W-2 income or the rest of that $75k. Unused deductions carry forward. And the rules apply deductions in a set order with depreciation last, behind mortgage interest, property taxes, and operating expenses. So in practice, a big chunk of the accelerated depreciation just sits as carryforward.

    [email protected]281-407-7353
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    2Reply
  • Sean O'KeefePro Member
    CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 871 votes
    1mo
    Quote from @Megan OConnor:

    I’m looking for insight from  y’all that are familiar with cost seg and bonus depreciation. 

    This year we will STR our primary home for 5-6 months. Our town only allows STR if it's your primary (so max 6m minus one day). We purchased the home in 2020 and did a full gut renovation this year (06/2025-06/2026). It's listed and booking well. We are moving into a MTR for Sept-Nov this year while it is STR. We pay approx $75k in income tax. Are we able to do a cost seg and take bonus depreciation since it's our primary? How does this complicate the process?

    Looking for a CPA, but in the meantime I am curious what education you all can provide. 

    Thank you, 

    Megan

    @Julius Vincent covered the vacation home income cap really well, that's the part that trips up most STR owners converting a primary residence. One thing worth adding since you're in MA: watch the state conformity gap. Massachusetts doesn't follow federal bonus depreciation, so even if the cost seg and bonus wipe out your federal tax on the STR income, you could still owe MA tax on that same income because the state makes you add it back and depreciate on the old MACRS schedule instead. A lot of people assume "no federal tax" means "no tax" and get surprised come state filing time.

    On the strategy side, even capped at rental income, there's still real value in maximizing what actually counts as a rental expense during those 5-6 STR months. How you allocate mortgage interest and property taxes between personal and rental use matters more than people realize, the Tax Court (Bolton) method often frees up more room under that income cap than the default IRS method, which changes how much of your cost seg deduction gets used this year versus sitting in carryforward. Also worth double checking your depreciable basis on conversion, it's the lesser of adjusted basis or fair market value at the time it became a rental, not just what you paid plus renovation costs. Whoever runs the cost seg study should be talking directly to whoever preps the return so those numbers line up. Happy to Connect!

    This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

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  • Aristotle Kumpis
    Specialist · Long Beach, CA · Member since 2011 · 877 posts · 397 votes
    1mo

    I don't have an answer for you. But if you are looking for a CPA, I have several that I can recommend. And they work with investors

    0Reply
  • Aaron WeikleBusiness Member
    Member since 2026 · 76 posts · 23 votes
    1mo

    Megan, Julius is correct on the vacation-home limitation, but there's a bit more to the picture because of your renovation. Since the gut renovation runs June 2025 through June 2026, you likely have two separate depreciable assets being the original structure and the renovation itself. Cost seg on the renovation could be especially productive because newly constructed components qualify for bonus depreciation in a way that sometimes gets murky as it gets older. That said, the vacation-home rules under IRC §280A will almost certainly apply here. Your personal-use days will exceed 14 days which is 10% of rental days, so you're capped. Deductions get applied in tiers which means mortgage interest and taxes first, then operating expenses, and depreciation last. A cost seg study front-loading 5-year and 15-year property via bonus depreciation hits that last part, so most of it piles into carry-forward rather than offsetting your $75k tax bill. The one real exception worth exploring with your CPA is the STR loophole where material participation lets STR losses offset ordinary income without being subject to passive activity rules. But if personal use exceeds the §280A threshold, that path closes before you even get to the participation question. Given the size of your renovation, a cost segregation study is probably still worth pricing out since it protects basis and the carry-forwards aren't worthless, but I would go in with realistic expectations on year-one cash impact.

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  • Megan OConnorPro Member
    OP
    Member since 2024 · 12 posts · 1 vote
    1mo

    Thank you for this. It’s exactly what I was looking for. 

    0Reply
  • Megan OConnorPro Member
    OP
    Member since 2024 · 12 posts · 1 vote
    1mo

    Thank you!

    0Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    1mo

    Megan, you may be able to do a cost segregation study, but I would not order one until a CPA looks at how this property is being used during the year. Your situation has a few moving pieces that make it different from a normal STR.

    Because this is still your primary residence and you’re personally using it for a significant part of the year, the vacation-home/mixed-use rules come into play. When a home has both personal and rental use, the rental expenses generally have to be allocated between the two, and if the property is treated as a residence under those rules, deductions can be limited so you don’t simply create an unlimited rental loss against your other income.

    The September through November MTR period matters too. I'd want to know the actual number of rental days and the average guest stay during the STR months because that can affect the passive activity analysis. So I wouldn't assume that "STR + cost seg = write off my $75K tax bill." There are several tests between those two points.

    Cost segregation itself can still be useful. It can identify shorter-life components and accelerate depreciation, but because you purchased the home in 2020, the bonus depreciation rules also need to be looked at carefully. The restored 100% bonus depreciation generally applies to qualifying property acquired and placed in service after January 19, 2025, while property acquired before that date can fall under the prior rules. New qualifying renovation assets may have a different result from the original home.

    I’d have a CPA model the personal-use allocation, rental days, placed-in-service dates, renovation costs, cost seg, and material participation before paying for the study. There could be a good strategy here, but the details really matter.

    Happy to connect!

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  • Jason MalabuteBusiness Member
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 901 votes
    1mo

    You can run a cost seg on just about any building, but with the way your setup looks the bonus depreciation probably won't get you what you're after. Because this is your primary and your personal-use days are well past the 14-day mark, you fall under the vacation home rules, and those cap your rental write-offs at your rental income. A cost seg can still knock out the tax on the STR income itself, which isn't nothing, but it can't spin off a loss to wipe out your W-2 or the rest of that $75k. Anything you don't use carries forward, and the deductions get applied in a set order with depreciation going last, behind your mortgage interest, property taxes, and operating costs, so in practice a big chunk of that accelerated depreciation just sits there as a carryforward. How this shakes out depends on your specific facts, so it's worth running it by your own CPA or tax advisor.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    1mo

    If its your personal residence, your rental losses will be capped to rental income.
    Normal deductions(depreciation, interest, taxes, insurance, repairs, etc) will likely wipe out the income without having to do a cost segregation study.

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  • Xavier Milsoni
    Member since 2026 · 27 posts · 3 votes
    1mo

    Doing a cost segregation study on a primary home that converts to short-term rental can get pretty tricky with the mixed usage rules. Definitely consult a specialized CPA to run the numbers before making any moves.

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