Bonus Depreciation for VRBO Rentals
- Rick Ruberg
- Nov 3
- 5 min read
Jason stared at his laptop... refreshing the same spreadsheet for the third time.
His VRBO house was booked most weekends, rave reviews, cash flow steady.
On paper? He was winning.
In reality? The IRS had just taken nearly half his profits.
Over coffee the next morning, he vented to me:
“I want to buy two more properties next year… but at this rate, I feel like I'm just working for the IRS.”
Sound familiar?
Thousands of short-term rental hosts hit the same wall.
Revenue’s great, but taxes kill momentum.
Every new property means higher income and higher tax brackets.
Here’s the twist Jason didn’t see coming: He was sitting on a tax strategy used by the wealthiest real estate investors in the country.
His VRBO was a tax-savings machine... one that could offset W-2 income, fund new down payments, and accelerate portfolio growth.
Bonus depreciation + the short-term rental loophole.
Within six months of learning this combo, Jason:
✔ Amended last year’s return and got money back
✔ Used those savings to buy his next property
✔ Built a plan to scale to five rentals, without getting crushed by taxes
No gimmicks. No gray areas. Just smart structuring.
If you’re a VRBO host trying to go from “side hustle” to “real portfolio,” this is the playbook. Let’s break down how it works and how to know if you qualify.
Understanding the Short-Term Rental Loophole
Here's where you clock in and understand the short-term rental loophole is a legitimate IRS provision that can transform your vacation rental from a passive investment into an active business for tax purposes.
Why Does This Matter?
Normally, rental real estate losses are considered "passive" and can only offset other passive income due to passive activity loss (PAL) rules. This means if your rental shows a tax loss, you typically can't use it to reduce your W-2 salary or business income.
But STRs that meet specific criteria are treated differently.
The VRBO Formula to Qualify
Your VRBO rental can qualify for the short-term rental loophole if it meets BOTH of these IRS requirements:
Average guest stay is 7 days or less
Calculate the average across all bookings for the year. If your typical guest books for a weekend or week-long vacation, you likely qualify.
You provide "substantial services"
This doesn't mean you personally clean every toilet. Substantial services include:
Concierge services
Breakfast or meal service
Tours or recreational activities
Regular cleaning between guests
Linen and toiletry replenishment
Most VRBO hosts already provide these services, they just don't realize it qualifies them for significant tax benefits.
What Happens When You Qualify for Bonus Depreciation?
When your STR rental meets these criteria, it's classified as a non-passive business activity rather than passive rental real estate.
Which means:
✔ Losses can offset your ordinary income (W-2 wages, business income, etc.)
✔ You can take advantage of bonus depreciation on furnishings and improvements
✔ Combined with cost segregation studies, you can generate substantial paper losses
✔ These losses reduce your overall tax liability, sometimes dramatically
The Jason Situation:
Jason purchases a $400,000 condo. After a cost segregation study, he identifies:
$80,000 in personal property (furniture, appliances, décor)
$40,000 in land improvements (landscaping, parking area)
With 60% bonus depreciation (2024 rate), he can deduct:
$48,000 from personal property (60% of $80,000)
$24,000 from improvements (60% of $40,000)
Total first-year deduction: $72,000 (plus regular depreciation on the structure)
If Jason's property generates $30,000 in rental income but has $50,000 in deductions (including the accelerated depreciation), he has a $20,000 loss.
Because his rental qualifies under the short-term rental loophole, he can use this $20,000 loss to offset his $90,000 day job salary, significantly reducing his tax bill.
Cost Segregation = The Secret Weapon
Bonus depreciation benefits work inline with a cost segregation study. This is an engineer analysis that identifies which portions of your property can be depreciated over shorter timeframes (5, 7, or 15 years) instead of the standard 27.5 years for residential rental property.
Residential cost segregation studies typically cost $3,000 – $10,000 but can identify $50,000 – $200,000+ in accelerated deductions for an average VRBO property. The ROI is often 5 - 10x the study cost in first-year tax savings.
Misconceptions About the STR Loophole
Myth 1: "This is a sketchy tax trick"
Reality: The short-term rental classification is explicitly recognized in IRS regulations and tax court rulings. It's legitimate tax law, not a loophole in the evasion sense. However, you must genuinely meet the requirements.
Myth 2: "I need to self-manage my property"
Reality: You can use property managers and cleaning services. What matters is that substantial services are provided, not who provides them. Keep documentation of these services.
Myth 3: "Any vacation rental automatically qualifies"
Reality: You must meet the 7-day average stay requirement and provide substantial services. A monthly rental or a bare-bones cabin without services won't qualify.
Myth 4: "The IRS will definitely audit me"
Reality: While you should maintain thorough documentation, properly executed short-term rental tax strategies are defensible and common. Work with a qualified CPA experienced in vacation rental taxation.
Material Participation: Another Consideration
Beyond the short-term rental loophole, some VRBO owners qualify for non-passive treatment through material participation. This requires logging 500+ hours annually in rental activities (or meeting other IRS tests for material participation).
For most hosts with other full-time jobs, this is difficult to achieve. The short-term rental classification is typically much easier and more practical.
Protect Your Tax Position
To successfully leverage the short-term rental loophole and bonus depreciation, maintain meticulous records:
✔ Booking records showing guest stay lengths
✔ Service contracts with cleaning companies and property managers
✔ Receipts and invoices for all furnishings and improvements
✔ Cost segregation study (if performed)
✔ Detailed expense tracking throughout the year
Consider using vacation rental accounting software like Stessa, Baselane, or Landlord Studio to maintain organized financial records.
Find Cost Seg Professionals
This is not a DIY tax strategy. Work with a CPA or tax advisor who specializes in short-term rental taxation. They should understand:
Cost segregation studies
Passive activity loss rules and exceptions
Short-term rental classification requirements
State tax implications (some states have different rules)
Interview potential firms specifically about their experience with vacation rental tax strategies. Ask how many VRBO or Airbnb clients they work with and whether they've handled cost segregation studies.
🚩🚩🚩 Red flags: If a tax professional doesn’t seem to know much about short-term rental classifications or tries to steer you away from looking into it without really understanding your unique situation, that’s a cause for concern.
The Host with the Most
If you own or are considering a VRBO rental property, here's your action plan:
Assess your property's qualification status
Calculate your average guest stay length and document the services you provide.
Schedule a consultation with a qualified CPA
Specifically discuss short-term rental classification and cost segregation opportunities.
Consider timing for property purchases
While bonus depreciation is phasing down, significant benefits remain in 2024-2025.
Gather documentation
Start organizing booking records, service contracts, and expense receipts now.
Run the numbers
Model your potential tax savings to understand the real financial impact.
Get Bonus Depreciation On Your VRBO
The short-term rental loophole, paired with bonus depreciation, is a wealth-building strategy for the ages. It's all about setting up your VRBO investment(s) to benefit from legitimate deductions. Whether you’re a seasoned investor or have just bought your first VRBO property, 2025 is the perfect time to look into how these tax provisions can boost your returns.
Nugget of Knowledge: Every dollar you save on taxes is a dollar you can reinvest into your property, use to buy more rentals, or reinvest in your business.
Disclaimer: This site is for educational purposes only and does not constitute tax advice. Tax laws are complex and individual situations vary. Always consult with a qualified tax professional before implementing any tax strategy.
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