For a property investor or owner in Florida, getting a big first-year depreciation deduction can be an attractive proposition. But this deduction is only actually useful if it will offset taxable income; otherwise it is wasted. Investing in short-term rentals can provide a legal distinction on that property that is different from more traditional rental activities.
For property owners who are considering cost segregation for Florida rental property, having a proper understanding of material participation, the property’s actual use and the correct record-keeping methods are all crucial. Differences in tax classification can determine whether or not accelerated depreciation will be beneficial or not.
What the Numbers Look Like
Consider a Florida investor who acquires a nonresidential commercial property for $4,200,000, of which $700,000 is allocated to land, leaving a depreciable building basis of $3,500,000. The investor separately purchases $95,000 of furniture, fixtures and equipment. The property is placed in service in January.
Without a cost segregation study, the building is depreciated over 39 years and the first-year deduction under the mid-month convention is $86,135; the separately purchased FF&E receives 100% bonus depreciation of $95,000 whether or not a study is performed, for a total of $181,135.
With a study, $455,000 is reclassified to five-year personal property and $385,000 to 15-year land improvements, giving $840,000 of accelerated basis eligible for 100% bonus depreciation. The remaining $2,660,000 stays on the 39-year schedule and produces $65,463 in year one. Adding the $95,000 of FF&E, the first-year deduction is $1,000,463.
The study’s incremental contribution is $819,328, which at a 37% marginal federal rate defers roughly $303,151 of tax.
Understanding How Passive Activity Limits Work
These deductions are not automatically usable.
Under IRC Sec. 469, rental real estate is generally a passive activity, and passive losses offset only passive income; unused losses are suspended and carried forward until the taxpayer has passive income or disposes of the activity in a fully taxable transaction. A taxpayer who qualifies as a real estate professional under Sec. 469(c)(7) and materially participates may treat the losses as non-passive.
Separately, a rental with an average guest stay of seven days or less is not a rental activity under Reg. Sec. 1.469-1T(e)(3)(ii)(A), so material participation alone can make the losses non-passive without real estate professional status.
Short-Term Renting is Treated Differently
As discussed above, the length of guest stays can be absolutely crucial for determining how rental property is treated according to passive activity rules. But even if short-term renting is occurring, that doesn’t automatically make passive activity loss on that property non-passive. Material participation requirements must still be satisfied.
Keeping Good Records Can Make Material Participation Easier to Prove
For any property owner or investor that is looking to make a material participation claim on a short-term rental property, good record-keeping is your best friend.
Any and all records of an owner’s participation in activities like communicating with guests, decisions about the property’s management, administration and booking duties, coordination of maintenance and any other responsibilities associated with short-term property rental can be hugely beneficial to a material participation claim.
Depreciation Recapture is Possible
Accelerated depreciation is a deferral, not forgiveness.
On a taxable sale, depreciation claimed on the five- and 15-year property a study reclassifies is recaptured under IRC Sec. 1245 as ordinary income to the extent of depreciation taken, potentially at rates up to 37%, rather than the 25% maximum applying to unrecaptured Sec. 1250 gain on the building itself.
A study therefore shifts part of future gain from Sec. 1250 to Sec. 1245 treatment. The net benefit depends on the time value of the deferral and the expected holding period, and is generally weaker for property expected to be sold within a few years.
How Does the OBBBA Fit In
The One Big Beautiful Bill Act (P.L. 119-21), signed July 4, 2025, made the 100% first-year bonus depreciation rate under IRC Sec. 168(k) permanent for qualifying property acquired and placed in service on or after January 20, 2025. Before that change the rate was phasing down on a fixed schedule of 80%, 60%, 40%, 20% and then 0%.
Property acquired before January 20, 2025 remains subject to the phase-down percentage in effect at the time of acquisition.
Florida’s Corporate Add-Back Changes the Picture
Florida imposes no personal income tax, so an individual investor’s benefit is measured entirely at the federal level. C corporations are treated differently.
Florida requires an add-back of federal bonus depreciation for corporate income tax purposes, and the treatment of qualified improvement property is harsher than the standard add-back: QIP bonus depreciation added back does not qualify for the seven-year recovery mechanism available to other bonus depreciation add-backs, so the corporate-level deferral is lost rather than spread. Entity choice therefore materially changes the outcome in Florida.
Closing
For property owners in Florida or out of state, cost segregation can be a powerful tax strategy. For short-term rental property owners, being able to prove material participation and satisfying the passive activity analysis is crucial to this process.
