One Big Beautiful Bill & Short-Term Rental Taxes (2026 Guide)

Tenby is an AI-powered property management platform for independent landlords and short-term rental operators managing 1-50 units. Tenby keeps every expense mapped to a Schedule E line item year-round and tracks each property's depreciation schedule, so when your CPA runs a cost-segregation study the numbers flow straight into a clean, audit-ready tax package instead of a shoebox of receipts.

The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, quietly rewrote the math on short-term rental (STR) investing. The headline that matters to STR owners is not a new deduction — it is the return, and this time the *permanence*, of 100% first-year bonus depreciation under IRC §168(k). Stack that on a cost-segregation study and the well-established "STR loophole" under IRC §469, and a single furnished rental can generate a six-figure Year-1 deduction that offsets your W-2 or business income. Here is exactly how the pieces fit, what changed, and the honest caveats no one selling you a cost-seg study will lead with.

100% bonus depreciation is now permanent

Before OBBBA, bonus depreciation was on a scheduled death march. The Tax Cuts and Jobs Act of 2017 gave 100% bonus depreciation and then began phasing it down: 80% for property placed in service in 2023, 60% in 2024, and — critically — it was set to drop to just 40% in 2025 before disappearing entirely by 2027.

OBBBA reversed that. For qualified property acquired and placed in service after January 19, 2025, the first-year bonus rate is restored to 100% — permanently. There is no sunset and no phase-down to plan around. The IRS addressed transition and eligibility questions in guidance (Notice 2026-11).

The single most misunderstood point: bonus depreciation only applies to qualified property with a recovery period of 20 years or less. Your rental *building* is 27.5-year real property — it is not bonus-eligible and never has been. You cannot write off the building in Year 1.

What *is* bonus-eligible are the 5-, 7-, and 15-year components buried inside that building: appliances, furniture, carpet and flooring, cabinetry, specialty electrical and plumbing, window treatments, and land improvements like driveways, fencing, and landscaping. On a normal tax return those items are lumped into the 27.5-year building and depreciated a sliver at a time. You need a way to pull them out. That is what cost segregation does.

Cost segregation is the unlock

A cost-segregation study is an engineering-based analysis that reclassifies a portion of your property's depreciable basis out of the slow 27.5-year bucket and into the fast 5/7/15-year buckets. For a furnished short-term rental, a study typically reclassifies 20-35% of the depreciable basis into short-life property — furnished STRs skew high because they are stuffed with exactly the kind of personal property and improvements that qualify.

Under permanent 100% bonus depreciation, that entire reclassified amount is deductible in Year 1. You can estimate your number before you ever call an engineer. Here is a worked example on a $750,000 furnished STR:

So roughly $176,500 of deductions in the first year on a $750,000 property — about $168,000 of it from the cost-seg-plus-bonus stack alone. The remaining $432,000 of building basis keeps depreciating on the ordinary 27.5-year straight-line schedule. Run your own purchase price, land allocation, and cost-seg percentage through the STR Bonus Depreciation Calculator to see the number for your deal.

The short-term rental "loophole" — why it beats a normal rental

A $176,500 deduction is worthless if you can't use it against income you actually pay tax on. This is where STRs pull decisively ahead of long-term rentals.

Most rental real estate is a passive activity under IRC §469. Passive losses can only offset passive income — they cannot touch your W-2 salary or active business income, and they sit suspended until you have passive income or sell. To break out of passive treatment on a *long-term* rental, you generally need Real Estate Professional Status (REPS) under §469(c)(7), a high bar (750+ hours and more than half your working time in real property trades) that a full-time W-2 earner cannot meet.

Short-term rentals get a different, easier door. Treas. Reg. §1.469-1T(e)(3)(ii)(A) says that if the average period of customer use is seven days or less, the activity is not a "rental activity" for §469 purposes. Take it out of the rental bucket and it is no longer *automatically* passive.

From there, you only need to materially participate. Material participation is met by satisfying any one of seven tests in Treas. Reg. §1.469-5T, and the two most reachable for STR owners are:

• The 500-hour test — you participate more than 500 hours in the activity during the year; or
• The 100-hour test — you participate more than 100 hours and no other individual (including your cleaner, co-host, or property manager) participates more than you.

Clear the ≤7-day average *and* material participation, and your STR losses are non-passive — they offset W-2 wages, self-employment income, and active business income, with no Real Estate Professional Status required. That combination — cost segregation + permanent 100% bonus depreciation + the ≤7-day §469 carve-out + material participation — is the entire STR tax strategy in one sentence, and OBBBA just made the biggest ingredient permanent.

The honest caveats (read these before you buy)

This is a powerful, legitimate strategy. It is also fact-specific and full of traps. Anyone who pitches it as free money is selling you something.

• The §461(l) excess-business-loss cap. IRC §461(l) limits how much business loss can offset *non-business* income in a single year — roughly $313,000 (single) / $626,000 (married filing jointly) for 2025, indexed annually for inflation. Losses above the cap aren't lost; they carry forward as a net operating loss (NOL) to future years. On very large deductions, you may not absorb the whole thing in Year 1.
• §1245 depreciation recapture at sale. Bonus depreciation is a deferral, not a gift. The accelerated depreciation you claimed on that 5/7/15-year property is recaptured as ordinary income under IRC §1245 when you sell. You are borrowing the deduction against your future self at ordinary rates. A 1031 like-kind exchange can defer that recapture into a replacement property.
• Documentation is everything. Both the ≤7-day average stay and material participation must be proven with contemporaneous records — booking data showing average guest stays and a real-time time log of your hours. Aggressive STR loss claims are a known IRS audit focus; a reconstructed log built the week before an audit does not hold up.
• State conformity varies. Many states decouple from federal bonus depreciation and require you to add it back and depreciate on a slower schedule for state purposes. Your federal windfall may not fully translate on your state return.
• The deduction only helps if you can keep operating. A six-figure write-off means nothing if your city bans or permit-caps your rental next quarter. STR regulations change constantly — night caps, permits, occupancy taxes. STR Compliance Watch monitors your market's official sources so a rule change doesn't quietly strand the asset you just depreciated. And model your real take-home per booking with the Airbnb fee calculator before you underwrite the deal.

This is not a loophole that expires — it is baked into the permanent code now — but it *is* fact-specific enough that a CPA and a qualified cost-segregation engineer are non-negotiable.

QBI (§199A) is permanent too

OBBBA also made the 20% Qualified Business Income deduction under IRC §199A permanent (it was scheduled to sunset after 2025). This matters in your *profitable* years. When your STR rises to the level of a trade or business — which an actively managed, materially-participated short-term rental often does — up to 20% of its qualified net income can be deducted on top of everything above. In the big-deduction Year 1 you are generating losses, but in the cash-flowing years that follow, permanent §199A is a real, ongoing benefit.

How Tenby helps

The strategy lives or dies on clean records, and that is exactly where most STR owners lose it. Tenby keeps every expense categorized to its Schedule E line item the moment it hits your account, tracks the depreciation schedule for each property (including the cost-seg short-life components and the 27.5-year building basis), and logs the operating data — booking lengths and your management hours — that substantiates both the ≤7-day test and material participation. When tax time comes, the cost-seg and bonus numbers flow into an organized package your CPA can work from directly. See plans and features at Tenby.

The bottom line

OBBBA didn't invent the STR tax play — it made its most valuable piece permanent and predictable. 100% bonus depreciation is back for good on property placed in service after January 19, 2025, applied to the 5/7/15-year components a cost-segregation study carves out of your building (never the 27.5-year building itself). Pair that with the ≤7-day §469 carve-out and material participation, and a materially-participating STR owner can offset active W-2 income without Real Estate Professional Status. Just respect the guardrails: the §461(l) loss cap, §1245 recapture at sale, airtight documentation, and state decoupling.

This article is educational information, not tax or legal advice. Every property and taxpayer situation is different, the dollar figures here are illustrative, and the rules are fact-specific. Before acting, consult a licensed CPA and a qualified cost-segregation specialist who can review your actual numbers.