Written by: Ashley Durmo
Unlocking Hidden Tax Savings for STR Investors
Many short-term rental (STR) investors are unaware that they can retroactively apply cost segregation to properties they already own. This strategy, known as a look-back cost segregation study, allows you to claim missed depreciation deductions and unlock significant tax savings—without needing to amend past tax returns.
1. What is Look-Back Cost Segregation?
A look-back cost segregation study applies the same accelerated depreciation principles to properties purchased in previous years. Instead of missing out on unclaimed deductions, you can recapture depreciation all at once in the current tax year, resulting in an immediate tax benefit.
Want to know more about look-back cost segregation? You can read more about it here or talk to our experts: Connect With a Cost Segregation Specialist
2. Why is 2024 the Best Time for a Look-Back Study?
With bonus depreciation decreasing to 60% in 2024 and further declining in 2025 (40%) and 2026 (20%), this is a critical year to take action. If you haven’t done a cost segregation study on an existing STR property, a look-back study ensures you still benefit before these tax incentives phase out.
3. How Much Can You Save with a Look-Back Study?
A properly conducted cost segregation study can reallocate 20% to 40% of your property’s value into short-life asset categories, allowing you to claim large tax deductions. Investors who apply a look-back study often see tens or even hundreds of thousands in immediate tax savings.
4. Does a Look-Back Study Require Amended Returns?
No! Unlike other tax strategies that require you to amend past returns, a look-back study allows you to file a Form 3115 (Change in Accounting Method) to capture missed depreciation in the current tax year. This simplifies the process and accelerates your tax benefits.
5. Who Should Consider a Look-Back Study?
STR investors who:
- Are planning to reinvest tax savings into new properties or upgrades
- Purchased properties in the past 5-10 years but never conducted a cost segregation study
- Want to maximize tax savings before bonus depreciation phases out
- Have high rental income and need significant tax deductions this year
6. How to Get Started?
If you own an STR property and haven’t taken advantage of cost segregation, now is the time to schedule a free consultation with a Chalet Cost Segregation Specialist. With tax deadlines approaching, this is your last chance to maximize deductions before bonus depreciation continues to decline.
Case Study: Andrew P. and His Airbnb in Hawaii
Andrew P., an experienced real estate investor, purchased an Airbnb property in Hawaii in 2021 for $540,000. Initially, he followed the standard depreciation schedule, which limited his first-year depreciation deduction to $25,064. While this approach provided some tax benefits, it left a significant amount of potential savings untapped.
Realizing the opportunity to optimize his tax strategy, Andrew decided to conduct a look-back cost segregation study. This decision allowed him to retroactively apply cost segregation principles and unlock substantial tax deductions that he had previously missed. As a result, his first-year depreciation skyrocketed to $133,612, more than five times the original amount.
Increased Tax Depreciation (Year 1): $108,548
The impact of this retroactive depreciation was immediate. By applying the look-back strategy, Andrew was able to claim an additional $108,548 in depreciation in the current tax year—without needing to amend prior tax returns. This reduction in taxable income resulted in significant tax savings, allowing him to keep more of his rental revenue.
Many investors don’t realize that they can apply a look-back study to past purchases, meaning they don’t have to miss out on savings just because they didn’t do a cost segregation study at the time of acquisition.
Increased Cash Flow (Year 1): $23,881
By unlocking these additional depreciation deductions, Andrew saw an immediate increase in cash flow of $23,881 in the first year.
This extra liquidity gave him the financial flexibility to reinvest in property upgrades, making his Airbnb more attractive to guests and increasing his nightly rates. Alternatively, he could use the additional cash flow to pay down his mortgage faster, improving his overall equity position in the property.
How Look-Back Cost Segregation Transformed Andrew’s Investment Strategy
By leveraging the look-back strategy, Andrew was able to:
- Retroactively apply cost segregation and claim past depreciation without amending tax returns
- Reduce his taxable income by over $100,000 in one year
- Increase cash flow and reinvest in his rental business
Andrew’s experience is a prime example of how cost segregation—even applied retroactively—can significantly improve the financial performance of a real estate investment. Investors who didn’t take advantage of cost segregation at the time of purchase still have an opportunity to claim tens of thousands of dollars in tax deductions with a look-back study.
Conclusion
For any investor looking to maximize the returns on their Airbnb or other short-term rental properties, cost segregation offers a strategic advantage that can make a significant difference in both the short and long term. With the phase-out of 100% bonus depreciation on the horizon (60% in 2024), now is the time to act and secure these benefits before they diminish.
If you’re interested in learning how much you could save with a cost segregation study, even if you bought the property years ago, connect with our expert team today for a free estimate. Don’t leave money on the table—take control of your investment’s potential and maximize your tax savings and cash flow just like Andrew did.
Contact us now for your free cost segregation estimate and take the first step towards significant tax savings. Our team of top cost segregation specialists is ready to help you navigate this tax-saving strategy.
