Bonus depreciation is one of the most powerful tools available for reducing taxable income — but not everyone can use it the same way. The IRS draws a clear line between active and passive investors, and those rules determine how much of your bonus depreciation you can actually use in a given tax year.

If you’re wondering whether bonus depreciation can make a real difference for you, this guide explains the rules — and shows how active, passive, and certain short-term rental owners can benefit.

Bonus Depreciation Explained

Bonus depreciation allows property owners to deduct 100% of eligible property improvements and components in the year they’re placed in service. When paired with a cost segregation study, you can often deduct most of your property’s value in a single year instead of over decades.

New in 2025: Under the latest tax legislation, the 100% rate applies to certain qualifying assets placed in service after January 19, 2025. For assets placed in service before that date, the bonus rate is 40%. The acquisition date and placed-in-service date matter — and a tax advisor can help you determine the applicable rate.

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Passive vs. Active Investor Rules

By default, the IRS considers rental real estate a passive activity unless you qualify as a Real Estate Professional under IRC §469.

A passive investor generally:

• Does not materially participate in daily management.
  
• May invest through syndications, funds, or partnerships.
  
• Often has a full-time job and treats real estate as side income.
  

Passive investors can take bonus depreciation, but losses can only offset other passive income — not W-2 wages, business profits, or portfolio income.

An active investor (or “Real Estate Professional” for tax purposes):

• Performs more than 750 hours per year in real property trades or businesses in which they materially participate.
  
• Spends more than half of all personal services during the year in real estate activities.
  
• Materially participates in management — not just ownership.

To validate the above three items, you should maintain detailed logs, calendars, and notes as documentation in the event you are ever subject to IRS examination. 

If you’re married filing jointly, only one spouse needs to qualify for the benefits to apply to both.

Takeaway: If you qualify, you can use bonus depreciation to offset any type of income — wages, business income, or investment gains.

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The Short-Term Rental Exception

There’s a unique carve-out in the IRS rules:

• If your average rental period is 7 days or less, or 30 days or less with significant services provided (e.g., daily cleaning, concierge, or meals), your activity may not be treated as a rental activity at all for passive loss purposes.
  
• This means you could use bonus depreciation to offset non-passive income without meeting the Real Estate Professional tests.
  
• This is a valuable planning opportunity for Airbnb, VRBO, and vacation rental owners.
  
  

How This Impacts Your Tax Strategy

Example: You own a property that, after a cost segregation study, generates $100,000 in bonus depreciation.

• Active Investor / Real Estate Professional — You can use the $100,000 to reduce any type of taxable income, including W-2 wages or business profits.
  
• Passive Investor — You can only use the $100,000 against other passive income (like rental income from other properties or certain partnerships). Unused losses carry forward until they can be used.
  
• Short-Term Rental Exception — If you qualify, you could apply the $100,000 against any type of income without Real Estate Professional status.
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How Passive Investors Can Still Benefit

Even if you’re passive, bonus depreciation and cost segregation can still be valuable:

• Offset other passive income streams.
  
• Carry forward unused losses to future years.
  
• Pair with future sales or additional investments to unlock tax benefits.
  
  

Maximize Your Tax Savings — Whatever Your Status

Whether you’re aiming for Real Estate Professional status, leveraging the short-term rental exception, or simply maximizing passive income offsets, the key is knowing where you stand — and planning accordingly.

Our team helps you:

• Understand your investor status and eligibility.
  
• Time purchases and improvements for optimal bonus depreciation rates.
  
• Conduct cost segregation studies to unlock deductions faster.
  

Make smarter moves, save more, and invest better — starting now.

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