Not all short-term rental (STR) properties are created equal, especially when it comes to tax benefits.
A waterfront STR with significant land improvements—such as a boathouse, dock, and multiple boat lifts—can be an exceptional candidate for a cost segregation study.
If you are unaware, cost segregation allows property owners to identify components of a property that can be depreciated over shorter periods, typically 5, 7, or 15 years, rather than the standard 39-year schedule used for STRs.
Implementing component level depreciation accelerates depreciation deductions and can significantly improve cash flow and reduce your IRS tax liability.
Waterfront properties often contain substantial assets outside the primary residence itself. Items such as:
- Docks, piers and boathouses
- Boat lifts and associated electrical systems
- Bulkheads and seawalls
- Landscaping, retaining walls, and other site improvements
- Exterior lighting and utility infrastructure
Most of these improvements qualify as land improvements with a 15-year recovery period, and under current bonus depreciation rules, portions of these assets are eligible for 100% Bonus Depreciation.
The 100% Bonus Depreciation can be incredible!
Consider a waterfront STR featuring a boathouse and three boat lifts. The value of these improvements can represent a meaningful percentage of the property’s total cost basis. We reclassified o total of 58% on a property like this recently. That is significantly higher than most. The one pictured above created 48% reclassified short-life assets for amazing Bonus Depreciation.
This can be particularly meaningful, when leveraging the STR Loophole. This bonus depreciation from a cost segregation study can reduce taxable income and increase after-tax cash flow. This provides additional capital for renovations, or the acquisition of the next investment property.
In many cases, the combination of a high-performing waterfront STR and extensive marine improvements creates a perfect scenario where cost segregation delivers outsized tax benefits.
Investors who own these unique assets should strongly consider a professional cost segregation study to ensure they are maximizing every available tax advantage.
