How Bonus Depreciation Can Reduce a High-Income Household's Tax Bill

For households earning $400,000 to $800,000 in W-2 and business income, the federal marginal rate reaches 35–37%. Each dollar of deduction eliminates 35–37 cents of federal tax — before state tax. A cost-segregated STR with 100% bonus depreciation can generate a year-one deduction large enough to meaningfully reduce that bill.

This article walks through an illustrative scenario to show how the math works, what assumptions drive the outcome, and what risks to consider.

The Setup: A High-Income Household Buys an STR

Year-1 Depreciation Calculation

The depreciable basis includes the building plus renovation costs: $600,000 + $30,000 = $630,000.

• 7-yr basis: $630,000 × 22% = $138,600 → bonus: $138,600
• 15-yr basis: $630,000 × 8% = $50,400 → bonus: $50,400
• 27.5-yr basis: $630,000 × 70% = $441,000 → annual SL: $16,036
• Furnishings: $35,000 × 100% = $35,000
• Total year-1 depreciation: $240,036

The STR Operating Loss

Depreciation is added to any operating loss (or subtracted from operating profit) from the property. In this example, assume the STR is breakeven on a cash basis — revenue roughly covers mortgage interest, property taxes, insurance, management fees, and maintenance. That means the total year-1 STR loss is primarily the depreciation itself: ~$240,000.

Because this household meets the STR material participation exception (average stay ≤7 days, 500+ hours of activity), this $240,000 loss is non-passive and offsets W-2 income directly.

Tax Impact — Before vs. After STR (Year 1)

Without STR: $550,000 gross income → approximately $137,000 in federal income tax at a ~24.9% effective rate.

With STR: The $240,000 STR loss reduces adjusted gross income to approximately $310,000. Federal income tax drops to approximately $69,000 — a reduction of ~$68,000 from the depreciation benefit alone.

Where the Math Gets Complicated

NIIT (Net Investment Income Tax)

NIIT at 3.8% applies to net investment income above $250,000 (MFJ). An STR that qualifies under the material participation tests is generally notinvestment income for NIIT purposes — it's an active business. This is another benefit of qualifying, but it requires the same PAL documentation.

QBI (Qualified Business Income Deduction)

STR activities that rise to the level of a trade or business may qualify for the §199A QBI deduction — up to 20% of net business income. Whether an STR qualifies involves additional tests. This calculator does not currently model QBI. Consult a CPA.

Depreciation Recapture at Sale

Depreciation taken now is subject to recapture when you sell. §1250 recapture on structures is taxed at a maximum rate of 25%; §1245 recapture on personal property is taxed as ordinary income. The tax savings today must be weighed against the future recapture tax — though time value of money typically favors the current deduction.

State Tax Conformity

Texas has no income tax, so this scenario captures the full federal benefit. In California, the same property would generate limited state depreciation (California does not conform to federal bonus depreciation), reducing total combined savings significantly.

Is the STR Cash-Flow Positive?

The tax savings are real regardless of cash flow — depreciation is a non-cash deduction. But the best scenario combines a cash-flowing property with the depreciation benefit. The STR Property section of the calculator lets you model revenue, expenses, mortgage payments, and operating cash flow alongside the tax impact.

Try Your Numbers

Every household is different. The outcome depends on your income level, filing status, state, purchase price, cost seg results, and whether you qualify under PAL rules. The STR Benefit Calculator lets you model all of these variables together — income, property, depreciation, and tax — to see the combined picture for your specific situation.