How does depreciation work for a short-term rental?

Depreciation is how you deduct the cost of the house and what's in it over several years instead of in the year you pay. Everything below comes from IRS publications, the Schedule E instructions and the tax code, read on Nov 4, 2026 and listed under Sources. This isn't tax advice. Settle the 27.5-or-39-year question with a CPA or EA before you file the first return for the property. For the wider picture (the 14-day rule, Schedule E or C, Form 1099-K), see short-term rental taxes.

What you can and can't depreciate

Publication 527 (2025) (opens in a new tab) lets you depreciate property you own, use to produce income, that has a determinable useful life and is expected to last more than a year. You're the owner even if the property has a mortgage.

• Land is out. Publication 527 says land generally doesn't wear out or get used up, so its cost can't be depreciated. Clearing, grading and landscaping are usually part of the land's cost too. The 2025 Instructions for Schedule E (opens in a new tab) say the same in four words: land is not depreciable.
• Split the price. When one purchase price covers land and building, divide it by the fair market value of each at the time you buy. If you aren't sure of those values, Publication 527 lets you use the split in your property tax assessment.
• Furniture and principal aren't expenses. Publication 527 says you can't simply deduct mortgage principal or the cost of furniture, fixtures and equipment as an expense. You recover them through depreciation.
• Only the rental part. You depreciate only the part of the property used for rental. Days you use the place yourself split your costs, as covered in the 14-day rule.
• Repairs vs improvements. The Schedule E instructions treat fixing a broken lock or painting a room as a deductible repair, and adding substantial insulation or replacing an entire HVAC system as an improvement that you capitalize and depreciate. Publication 527 depreciates an improvement, such as a new roof, as its own item over the same period as the building.

When depreciation starts and stops

It starts when the property is placed in service, which Publication 527 defines as ready and available for its use in the rental, whether or not anyone has booked it. In its own example, a house ready for rent on July 5 and first rented on September 1 starts depreciating in July.

• A former home. Depreciation begins when the use changes to rental, on a basis of the lower of your adjusted basis or the fair market value that day (Publication 527).
• Slow months. Publication 527 says to keep depreciating property that's temporarily idle.
• The end. You stop when you've recovered your whole basis or retire the property, whichever comes first.
• Skipped years still count. Publication 527 says that if you don't claim all the depreciation you were entitled to, you still reduce your basis by the full amount you could have deducted. Publication 946 (2025) (opens in a new tab) explains how to correct it, by amended return or a change in accounting method.
• Conventions. Buildings use a mid-month convention: property placed in service any time in a month is treated as placed in service at the middle of that month. Furniture and appliances use a half-year convention, or mid-quarter if more than 40% of the year's basis in property other than buildings went into service in the last 3 months of the year.

Depreciation goes on Schedule E line 18. The Schedule E instructions say you attach Form 4562 for property first placed in service that year.

27.5 years or 39 years

The key is the definition of a dwelling unit. IRC 168(e)(2)(A)(ii)(I) (opens in a new tab) defines it as a house or apartment that provides living accommodations, but excludes a unit in a hotel, motel or other establishment where more than half of the units are "used on a transient basis." Publication 527 and Publication 946 repeat that exclusion in plain words.

Why this matters for short-term rentals

Read the definitions in order. A unit in that exclusion isn't a dwelling unit. A building that gets less than 80% of its rent from dwelling units isn't residential rental property. Real property that isn't residential rental property (and has no shorter class life) is nonresidential real property, recovered over 39 years.

So a rental used mostly for short stays may fall outside residential rental property. What the sources don't settle:

• Neither publication defines "transient" as a number of days.
• Neither says how the hotel, motel or establishment wording applies to a single house or condo rented by the night.

Don't assume either answer. Take your booking list with each stay's length, your personal-use days and a list of the services you provide to a CPA or EA in the first year. The choice sticks: Publication 527 says that once you start using a percentage table, you continue with it for the whole recovery period unless certain basis adjustments occur.

Furniture, appliances and other contents

Publication 527's Table 2-1, for property used in rental activities:

Both publications tie the 5-year class to contents used in a residential rental real estate activity. If your building turns out to be nonresidential real property, neither gives a one-line answer for the contents; Publication 946 points to its class-life tables in Appendix B. Ask your CPA which class fits.

Two first-year options can change the numbers:

• Special depreciation allowance. Publication 946 (2025) says that for qualified property acquired and placed in service after January 19, 2025, you must take a 100% special depreciation allowance unless you elect out (or elect 40% instead for the first tax year ending after that date). Qualified property includes tangible property with a recovery period of 20 years or less, so 5-year furniture can qualify and the building can't.
• Section 179. Publication 527 describes it as a separate way to deduct part or all of qualifying property in its first year, with a 2025 limit of $2,500,000. Whether it fits a rental is a question for your preparer.

Hypothetical example

The numbers are ours and round. The rules are from the sources above.

You buy a house for $400,000 and the property tax assessment puts 20% of the value in land. You spend $20,000 on furniture and appliances. The house is furnished, listed and bookable on April 15, and the first guest arrives May 2, so it's placed in service in April. Closing costs are left out to keep it simple.

• Building. Both classes use the straight-line method, so a full year is $320,000 ÷ 27.5 or ÷ 39. The 39-year schedule deducts $3,431.23 less a year, spread over more years rather than lost.
• Year one. Under the mid-month convention, April counts as 8.5 months, so the first year is about 8.5/12 of the full-year figure, roughly $8,240 or $5,810. Use the percentage tables in Publication 527 (27.5 years) or Publication 946 (39 years) for the exact amount.
• Contents. Bought and placed in service after January 19, 2025, they get the 100% special allowance unless you elect out, so all $20,000 in year one. If you elect out, Publication 527's 5-year table gives 20% in year one with the half-year convention, or $4,000.

Depreciation recapture when you sell

Publication 544 (2025) (opens in a new tab) says that when you sell depreciated property at a gain, part of the gain may be taxed as ordinary income under the depreciation recapture rules, and the part of a long-term gain on real property that comes from depreciation is unrecaptured section 1250 gain, figured on a worksheet in the Schedule D instructions.

What to bring to your CPA or EA

• Closing statement and property tax assessment, for the land and building split.
• The date the place was first bookable.
• Receipts and dates for furniture, appliances and improvements, kept apart from repairs.
• Your booking list with each stay's length, your personal-use days and the services you provide.

Our income and expense spreadsheet keeps purchases and repairs in separate columns.

Sources

Read Nov 4, 2026:

• Publication 527 (2025), Residential Rental Property (opens in a new tab), IRS, page updated Apr 30, 2026.
• Publication 946 (2025), How To Depreciate Property (opens in a new tab), IRS, page updated Apr 30, 2026.
• 2025 Instructions for Schedule E (Form 1040) (opens in a new tab), IRS, page updated Apr 30, 2026.
• Publication 544 (2025), Sales and Other Dispositions of Assets (opens in a new tab), IRS, page updated Apr 30, 2026.
• 26 U.S. Code § 168 (opens in a new tab), subsections (c) and (e)(2), Legal Information Institute, Cornell Law School (no date shown).