100% Bonus Depreciation is back for 2025! This tax rule allows short-term rental hosts in North Carolina to deduct the full cost of qualifying property improvements and purchases in the same year, instead of over several years. From furniture to appliances, this can significantly reduce taxable income and free up cash for reinvestment. Here’s what you need to know:
- What it covers: Items like furniture, appliances, and property upgrades with a recovery period of 20 years or less.
- Why it matters: Immediate tax savings can offset W-2 income and improve cash flow.
- State-specific rules: North Carolina requires short-term rental hosts to add back 85% of the federal bonus depreciation deduction to their state taxable income in the first year, effectively spreading the deduction over five years**.** This addback rule applies to property placed in service through 2024. Guidance on whether it will apply to property placed in service in 2025 and beyond is still pending.
- Key Changes: Bonus depreciation has been fully restored to 100% through 2027, under the new law signed July 4, 2025. It will begin to phase out starting in 2028, unless Congress extends it further.
If you’re a rental property owner, this is a game-changer for managing taxes and growing your business. Keep reading for tips on qualifying assets, depreciation timelines, and maximizing deductions.
100% Bonus Depreciation Coming Back? (DON’T File Until You Watch)
Qualifying Assets and Depreciation Timelines
With the reinstatement of the 100% bonus depreciation benefit, knowing which assets qualify and how depreciation timelines work is key to maximizing tax savings. For North Carolina short-term rental hosts, understanding these rules can help you make informed decisions about upgrading your property or purchasing new assets. The IRS has specific guidelines, and following them can ensure you take full advantage of available deductions.
Property That Qualifies for Bonus Depreciation
Bonus depreciation applies to assets depreciated under MACRS (Modified Accelerated Cost Recovery System) with a recovery period of 20 years or less. This includes items like furniture, appliances, and property upgrades that enhance the guest experience.
For NC rental hosts, qualifying assets include:
- Appliances: Refrigerators, dishwashers, stoves (5 years)
- Furniture: Beds, couches, dining sets (5 years)
- Carpets: (5 years)
- Cabinets: (5 years)
- Fences: (15 years)
Even depreciable computer software qualifies. This means purchases like property management software, smart home systems, or other digital tools for your business can be fully deducted. Additionally, qualified leasehold improvement property – such as renovations to improve your rental’s appeal – can also qualify.
One critical distinction: while improvements and expansions are eligible for bonus depreciation, repairs and maintenance are not.
| Asset Type | Depreciation Period | Bonus Depreciation Eligible |
|---|---|---|
| Appliances | 5 years | Yes |
| Furniture | 5 years | Yes |
| Carpet | 5 years | Yes |
| Cabinets | 5 years | Yes |
| Fences | 15 years | Yes |
| Building Structure | 27.5 years | No |
Depreciation Timelines for Short-Term Rentals
The timeline for depreciation depends on the type of asset and whether bonus depreciation is applied. Residential rental real estate is depreciated over 27.5 years, but many items you purchase for your rental can be depreciated much faster.
With 100% bonus depreciation, the full cost of qualifying assets can be deducted in the first year they’re placed in service. This offers immediate tax benefits, avoiding the need to spread deductions over several years.
The IRS allows for segmented depreciation, which means you can treat different components of your rental property as separate assets, each with its own recovery period. For example, appliances are categorized separately from the building itself, allowing for faster depreciation of these items.
To maximize first-year deductions, many rental hosts turn to cost segregation studies.
Cost Segregation Studies
A cost segregation study breaks down a property into components that can be depreciated over shorter periods – typically 5, 7, or 15 years – rather than the standard 27.5 or 39 years. This approach can significantly boost first-year deductions, especially when paired with bonus depreciation.
On average, 15% to 30% of a building’s depreciable basis can be reclassified for faster write-offs. For short-term rentals, this often includes items like flooring, HVAC systems, and other tangible property. In fact, cost segregation studies can reclassify 20-40% of a property’s components for accelerated depreciation.
This strategy is especially beneficial for rentals with luxury finishes or high-end amenities, as these features often increase the proportion of assets eligible for faster depreciation. Qualifying assets might include:
- Tangible property: Furniture, electronics
- Land improvements: Landscaping, parking areas
- Real property components: Specialized flooring, HVAC systems
Timing is critical. Conducting a cost segregation study in the year you purchase, remodel, or construct the property ensures you maximize deductions. However, if you’ve missed this window, a “look-back” study can be performed on properties purchased in prior years to claim missed depreciation.
Steps for NC Hosts to Apply Bonus Depreciation
Applying bonus depreciation takes careful planning and thorough record-keeping to ensure you maximize tax benefits while staying within IRS guidelines. For short-term rental hosts in North Carolina, there are additional state-specific rules that can impact your overall tax strategy. Following these steps can help you navigate the process smoothly and avoid common mistakes. The first step? Confirming whether you qualify for these tax perks.
Check Your Eligibility
Before you claim bonus depreciation, make sure your assets meet the IRS’s requirements. Eligible assets must have a useful life of 20 years or less. This excludes the building itself since rental properties depreciate over 27.5 years. To get started, divide your purchases into two categories: land improvements and personal property.
- Land improvements: Items like landscaping, fences, or parking areas, which have a 15-year depreciation period, can qualify.
- Personal property: Furniture, appliances, and electronics that depreciate in less than 10 years are also eligible.
Keep in mind that North Carolina requires adding 85% of the federal bonus depreciation back to taxable income for property placed in service between 2010 and 2024. As of July 5, 2025, bonus depreciation claimed in 2025 and beyond may not be subject to the same addback, but legislative guidance is pending. Taxpayers should consult a CPA for planning. Review all recent purchases and planned upgrades to see if they meet the criteria. If you’re unsure how to classify an item, refer to the MACRS depreciation schedule or IRS Publication 946 for guidance. Note that repairs and maintenance don’t qualify – only improvements that increase value, extend the useful life, or adapt the property for new uses are eligible.
Document Purchases and Improvements
Good record-keeping is critical. Keep detailed documentation for every qualifying asset, including purchase orders, receipts, canceled checks, contracts, and closing statements. Create a running list of improvements and track their costs.
Make sure to record the date each asset was placed in service – this determines the year you can claim the deduction. Hold onto these records for as long as you own the property and for at least three years after filing your tax return for the year you sell it. Organizing your documents by tax year and asset type will make depreciation calculations easier and ensure you’re prepared if the IRS asks for additional details.
Work with a Tax Advisor
The rules around bonus depreciation can be tricky, so it’s a smart move to work with a tax advisor who understands short-term rentals. A knowledgeable advisor can help you determine whether your rental qualifies as an active business, which affects how depreciation deductions apply to your other income. They can also guide you through the material participation requirements and ensure your documentation meets IRS standards.
With the IRS paying closer attention to short-term rental claims, having a reliable bookkeeping system and detailed time logs from the beginning is more important than ever. A tax professional who specializes in real estate and short-term rentals can help you decide between bonus depreciation and Section 179 expensing, assist with cost segregation studies to maximize your deductions, and prepare for depreciation recapture when you sell. Since interpretations of tax law can vary, choose a CPA with experience in short-term rentals and knowledge of the latest tax updates. If maximizing your tax benefits is a priority, it’s best not to tackle this alone.
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Getting the Most Tax Savings While Following Rules
Navigating tax laws can feel overwhelming, especially for North Carolina (NC) hosts juggling local regulations, state tax rules, and shifting federal laws. To make the most of bonus depreciation benefits while staying compliant, it’s essential to balance proactive tax planning with a firm understanding of the rules. Skipping steps could lead to penalties, so sticking to the guidelines is non-negotiable.
Follow Local Regulations
Adhering to local rental ordinances is key to securing your tax benefits. In areas like Raleigh-Durham and the Triangle, municipalities may have unique rules that directly impact your ability to claim depreciation deductions. If your property doesn’t meet local zoning or registration requirements, the IRS could challenge your claims.
To protect yourself, keep detailed records of permits, inspection reports, and any communication with local authorities. These documents demonstrate that you’re running a legitimate business and can strengthen your case if the IRS ever questions your deductions.
Plan for Depreciation Recapture
Beyond compliance, it’s important to plan for depreciation recapture – something that can catch property owners off guard. Depreciation recapture is a tax applied when you sell your property, and it’s an unavoidable part of the equation. The more aggressive your depreciation strategy now, the bigger your potential tax bill later.
Different types of depreciation are taxed differently. For instance:
- Unrecaptured Section 1250 gain on real property is taxed at a maximum rate of 25%.
- Section 1245 recapture on personal property, like furniture or appliances, is taxed at ordinary income rates, which can go as high as 37%.
Here’s the kicker: depreciation recapture applies whether or not you claimed all your deductions. So skipping deductions won’t help you avoid it – it just means you’re leaving money on the table. Instead, claim the deductions you’re entitled to and plan strategically.
One way to ease the impact of depreciation recapture is by using a 1031 exchange. This allows you to defer both capital gains and recapture taxes by reinvesting the proceeds into another like-kind property. However, timing is critical – you have 45 days to identify a new property and 180 days to close. Another strategy is to time your sale during a year when your income is lower, which could reduce the tax rate on recaptured amounts.
Stay Updated on Law Changes
Tax laws are always evolving, and staying informed is essential – especially when it comes to depreciation.
Thanks to the new tax law signed in July 2025, bonus depreciation has been fully restored to 100% for qualified property placed in service from 2025 through 2027. Unless extended again, the benefit will phase down starting in 2028 and fully expire after 2029. This update overrides the previous schedule, which would have reduced the bonus rate to 40% in 2025 and eliminated it by 2027.
The Tax Cuts and Jobs Act (TCJA) provisions, originally set to expire after 2025, have also been extended or made permanent in many areas – including full expensing, Section 179 limits, and the 20% QBI deduction — which helps preserve key benefits for real estate investors, including those in the short-term rental space.
North Carolina’s policy may still limit immediate state-level tax benefits. As of now, the state requires an 85% add-back of federal bonus depreciation for qualified property placed in service through 2024, effectively spreading the deduction over five years. It’s still unclear whether the state will apply the same rule to assets placed in service after 2024, so further guidance is expected.
Given the complexity of these laws, working with a professional can make all the difference. A tax advisor who specializes in short-term rentals can help you adapt your strategy to changing regulations, ensuring you take advantage of every benefit while staying compliant.
Finally, document everything. Keeping clear records of your major tax decisions not only prepares you for audits but also helps you plan smarter for the future. With the right approach, you can maximize your tax savings while staying firmly within the rules.
Bonus Depreciation vs Section 179 Expensing
For North Carolina hosts looking to make smart tax decisions, knowing the difference between bonus depreciation and Section 179 expensing is crucial. Bonus depreciation allows you to deduct a percentage of an asset’s cost upfront, while Section 179 provides a fixed-dollar deduction. For 2025, bonus depreciation has been fully restored to 100% for qualifying property placed in service between January 1, 2025, and December 31, 2027. This allows businesses to fully expense eligible capital investments in the year of purchase.
Section 179 expensing limits have also been increased under the new law. For tax year 2025, businesses can deduct up to $2,500,000 in qualifying asset purchases, with the phase-out threshold beginning at $4,000,000. You can actually use both methods together by applying Section 179 up to its limit and then using bonus depreciation for any remaining assets. This combination can be a powerful tool in your overall tax strategy.
One key advantage of Section 179 is its flexibility – it can be applied on an asset-by-asset basis. This means you can decide which items to deduct and how much to deduct for each one. Bonus depreciation, on the other hand, must be applied uniformly to all assets in the same category. For instance, if you claim bonus depreciation on one piece of furniture, you must apply it to all furniture within that asset class for the tax year.
Another important difference is how taxable income impacts these methods. Section 179 deductions are limited to your taxable business income and cannot create a net loss. Bonus depreciation has no such limit – it can even generate a net loss, which could be useful if you’re anticipating higher income in future years.
Timing plays a role when choosing between bonus depreciation and Section 179.
Under the newly passed 2025 tax law, bonus depreciation is restored to 100% through the end of 2027. Unless extended again, it will begin phasing down in 2028, not 2026 as previously scheduled.
Section 179 remains a stable and permanent option, now with higher limits: up to $2,500,000 in deductions for 2025, with phase-outs starting at $4,000,000. Its consistent availability makes it a reliable tool for long-term tax planning, especially for small to mid-sized businesses.
When deciding which method to use, consider your income and spending habits. If you have enough taxable income and want the most flexibility, Section 179 might be the better choice. On the other hand, if your purchases exceed Section 179’s limits or you want to create a loss to offset other income, bonus depreciation could work better.
Key Points for NC Hosts
Here’s a quick rundown of important tax strategies for short-term rental hosts in North Carolina:
Bonus depreciation can lead to major tax savings for hosts in North Carolina. With 100% bonus depreciation reinstated for qualified property placed in service between January 1, 2025, and December 31, 2027, the new tax law creates a valuable opportunity to maximize immediate tax savings. Unless extended, bonus depreciation will begin to phase down in 2028 and fully expire after 2029.
This expanded window gives investors and business owners a clear incentive to accelerate purchases and capitalize on full expensing while it’s available.
Here’s how you can take advantage of these strategies:
- Use a cost segregation study to speed up deductions: A cost segregation study breaks down property components to determine which qualify for faster depreciation. Items like appliances, HVAC systems, and land improvements can be depreciated over shorter timeframes instead of the standard 27.5 years. For instance, one study reclassified $125,000 worth of assets, raising the annual depreciation deduction from $21,818 to $38,940 and saving $5,993 annually in taxes.
- Keep detailed records of assets and upgrades: It’s essential to document all property purchases, improvements, and related expenses. The IRS has strict requirements for cost segregation studies, so working with a certified expert ensures compliance.
- Work with a tax professional for tailored advice: A knowledgeable tax advisor can help you navigate bonus depreciation rules, oversee cost segregation studies, and prepare for depreciation recapture when selling your property.
Timing matters – As part of the 2025 tax law signed in July, bonus depreciation is now restored to 100% for qualified property placed in service between January 1, 2025, and December 31, 2027. This full expensing benefit provides a powerful incentive to act quickly on property acquisitions and improvements.
Unless extended again, bonus depreciation will begin to phase down in 2028 and fully expire after 2029.
To maximize deductions and long-term ROI, property owners and investors should consider accelerating purchases during this 3-year window.
Stay current on federal and state tax changes – especially if you’re planning major capital expenditures. Additional extensions or new legislation could shift the timeline again.
Lastly, don’t overlook local regulations. Make sure your short-term rental complies with North Carolina’s rules while implementing these tax strategies. By combining bonus depreciation, cost segregation studies, and thorough documentation, you can reduce your tax liability and grow your wealth through rental properties in the Triangle area.
FAQs
What are the advantages of 100% bonus depreciation compared to traditional depreciation for short-term rental hosts in North Carolina?
The 100% bonus depreciation rule gives short-term rental hosts in North Carolina a powerful tax advantage. It allows you to deduct the entire cost of qualifying assets – like furniture, appliances, renovations, and even specific property components (think flooring or HVAC systems) – in the year they’re put into use. This approach is much faster than traditional depreciation methods, which typically stretch deductions across 27.5 or 39 years for real estate.
By taking these deductions upfront, you can significantly lower or even eliminate your taxable rental income on paper. This means reduced tax bills and better cash flow. When combined with a cost segregation study – a process that pinpoints assets eligible for accelerated depreciation – you can unlock even greater tax savings, making a noticeable difference in your 2024 and 2025 tax strategies.
How does North Carolina’s tax policy affect federal bonus depreciation for short-term rental owners?
While federal tax law now allows 100% bonus depreciation through 2027, North Carolina does not conform to this provision. For property placed in service in tax years 2010-2024, North Carolina requires taxpayers to add back 85% of the federal bonus depreciation to their state taxable income in the first year. This effectively spreads the deduction over five years, rather than allowing a full write-off upfront.
As of now, North Carolina has not formally updated its policy to address the new 2025 bonus depreciation rules, so it’s unclear whether the 85% addback will apply to property placed in service in 2025 and beyond. Until further guidance is issued, property owners should assume the addback rule may still apply.
Although this adjustment reduces the immediate tax benefit at the state level, the deduction is still preserved and realized over time, offering significant savings across multiple years.
How does a cost segregation study maximize the benefits of 100% bonus depreciation for short-term rental owners?
A cost segregation study is a powerful tool for short-term rental owners looking to take full advantage of 100% bonus depreciation. It works by pinpointing and reclassifying certain parts of your property – like flooring, appliances, and HVAC systems – into shorter depreciation timelines, such as 5, 7, or 15 years. This approach speeds up depreciation deductions, letting you write off a bigger chunk of your property’s cost sooner rather than later.
When paired with bonus depreciation, this strategy can dramatically cut your taxable rental income, shrink your tax liability, and boost your cash flow – especially in those critical early years of property ownership. If this hasn’t been on your radar yet, it’s worth considering how it could fit into your tax planning toolkit.