Federal tax rules as of 2026

How a short-term rental can lower your taxes, and the two tests it takes.

If you qualify, cost segregation and bonus depreciation can turn a rental you buy into a large first-year deduction against W-2 or business income.

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One example, drawn to scale

A household with $400,000 of taxable income buys a $720,000 short-term rental. Here is where the first-year deduction comes from, and the two tests it has to pass.

Simply is a property manager, not a tax advisor. Every number here is illustrative; run your situation by your CPA.

Purchase price

$720,000

Land, about 25%. Not depreciable.: $180,000
Building and improvements: $540,000

A cost-segregation study splits the building

Moved to faster schedules, about 25 to 30%: $135,000 to $162,000
The rest, depreciated slowly over decades: $378,000 to $405,000

Year one, with 100% bonus depreciation
About $135,000 to $162,000
of deductions, on paper
Test 1
Average guest stay of 7 days or less
What this means
When the average guest stay is 7 days or less, the IRS does not treat the property as a rental activity. That takes it out of the rental-activity rules, so if you also materially participate, losses can offset your other income.
Your average stay comes from your own booking record, so check it with your CPA.
Test 2
You materially participate
What this means
You have to do real work on the rental yourself. The usual tests are more than 500 hours in the year, or more than 100 hours and not less than any other individual.
Pass both, and it can offset your W-2 or business income

Rental real estate is normally passive: its paper losses offset only other passive income, not your W-2 salary or business income. The two tests are how a short-term rental gets past that rule. Miss either one and the loss stays passive, carrying forward to later years.

Illustrative only. Land is excluded because it can’t be depreciated; the land-vs-building split is typically set by the county assessor’s ratio and varies by property. Actual deductions depend on your income, a qualified cost-segregation study and current tax law, including annual loss limits.

Rules: Internal Revenue Code §469 (passive activities) and §168(k) (bonus depreciation); Treasury Regulations §1.469-1T(e)(3)(ii)(A) (average stay of 7 days or less) and §1.469-5T (material participation).

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What investors ask us

Does using a manager like Simply rule this out?

Not automatically. The 100-hour test needs more than 100 hours from you and not less than any other individual, including our staff and cleaners. The 500-hour test has no such comparison. Keep a log from day one and confirm with your CPA.

Is the deduction free money?

No. It’s a timing shift. Depreciation lowers your cost basis, so there can be recapture when you sell. A qualified CPA can walk you through what that means for how long you plan to hold.

Can I do this every year?

Each property front-loads its big deduction in year one and can’t repeat it. Each new purchase gets its own cost-segregation study and its own first-year deduction.

How much could I actually save?

It depends on your income, the purchase price and a real cost-segregation study, so any number we show is illustrative. Before you count on anything, have a qualified CPA and a cost-segregation study run the real figures for your situation.

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The deduction only matters if the home earns. We host 16 homes on the Mt. Hood corridor. You bring your CPA and stay involved; we handle the property.

Guests rate our Mt. Hood homes 4.84 out of 5 this year, and 88% of their reviews are five stars.¹