I spent 90 minutes on the phone last week with the person who helped write the IRS cost segregation rulebook.
James C. Peacock spent nearly 39 years as a General Engineer at the IRS. He was among the first IRS engineers to examine cost segregation, contributed to the Cost Segregation Audit Techniques Guide from 2004 through the February 2025 update, and served as the IRS's primary technical expert on Section 179D from 2014 until his retirement in September 2025.
Per James, he trained roughly 200 new IRS engineers on cost segregation before he left. Those engineers are still working.
If you own a short-term rental, an Airbnb, a vacation cabin, a beach house, and you have made interior improvements in the last few years, what James told me matters to your tax return.
Quick Answer: Short-term rentals with average stays under 30 days are 39-year non-residential property, not 27.5-year residential. That classification unlocks 15-year Qualified Improvement Property for interior improvements. With 100% bonus depreciation now permanent, STR owners can often deduct QIP and land improvements in year one.
The Classification Mistake That Costs STR Owners Thousands Every Year
Most short-term rental owners assume their property depreciates the same way a standard rental house does. It does not.
The IRS draws the line at 30 days.
If your average guest stays more than 30 days, your property is residential rental property: 27.5-year straight-line depreciation. If your average guest stays fewer than 30 days, which covers virtually every Airbnb, VRBO, and vacation rental, your property is non-residential property under the tax code: 39-year depreciation.
That extra 11.5 years of depreciation period is not trivial. On a $500,000 cabin with $400,000 in depreciable basis, the difference is roughly $14,545 per year in straight-line depreciation (27.5-year) versus $10,256 per year (39-year). Over a 10-year hold, you are leaving $42,890 in uncaptured depreciation on the table compared to a long-term rental, before you do anything else.
The 39-year classification is not a penalty. It is just the baseline. What matters is what you do next.
What QIP Is and Why It Changes Everything for STR Owners
Qualified Improvement Property is an IRS classification for interior improvements made to a nonresidential building after the building was placed in service.
Three conditions has to be met:
- The improvement has to be to the interior of a nonresidential building
- The building must already have been placed in service before the improvement was made
- The improvement cannot be an enlargement of the building, an elevator or escalator, or work on the structural framework
If those conditions are met, the improvement is 15-year property, not 39-year, and it qualifies for 100% bonus depreciation under the One Big Beautiful Bill, which made bonus depreciation permanent starting in 2025.
Here is why this is significant for STR owners specifically: because your STR is classified as nonresidential, your interior improvements qualify for QIP treatment. A long-term residential rental does not get this. Renovating a 27.5-year residential rental does not generate QIP. Renovating your 39-year STR does.
The classification that seems like a disadvantage, 39-year non-residential, is actually what unlocks QIP.
The Stacking Effect: Cost Segregation Plus QIP Plus Bonus Depreciation
QIP covers interior improvements made after the building was already placed in service. Cost segregation covers the original building and everything placed in service at acquisition.
They work together, not against each other.
When you buy an STR and commission a cost segregation study, the engineer reclassifies building components into 5-year, 7-year, and 15-year property buckets. Carpeting, specialty lighting, decorative fixtures, certain electrical systems, and land improvements like pools, parking, and landscaping all move into shorter asset classes.
Then, if you make interior improvements after you acquire the property, those improvements layer on top as QIP, 15-year property with 100% bonus depreciation.
James walked me through how this stacking effect works on a typical property. "The land improvements, pools, landscaping, parking lots, those are 15-year property no matter what. Whether you have a short-term rental or a long-term rental, those components come out of the 39-year or 27.5-year bucket. The STR benefit is that the interior improvements, the renovations you do after you own the property, those become QIP because the building itself is nonresidential."
Consider a practical example. You acquire a $650,000 STR in Tennessee, $130,000 allocated to land, $520,000 depreciable basis.
Without a cost segregation study, you depreciate $520,000 over 39 years: $13,333 per year.
With a cost segregation study on a property like this, a competent engineer typically reclassifies:
- 15-20% of the depreciable basis into 5-year personal property (furniture, appliances, specialty systems)
- 8-12% into 15-year land improvements (pool, deck, driveway, landscaping)
- The remainder stays in the 39-year building bucket
On $520,000 depreciable basis, that might look like:
- $78,000 to $104,000 in 5-year property: 100% bonus depreciation in year one
- $41,600 to $62,400 in 15-year land improvements: 100% bonus depreciation in year one
- $353,600 to $400,400 remaining in the 39-year bucket
Year-one depreciation: $119,600 to $166,400 from cost seg components alone, versus $13,333 straight-line.
Then, suppose you spend $80,000 on interior renovations in year two, new kitchen, bathroom updates, flooring throughout. Because your STR is nonresidential, that $80,000 qualifies as QIP: 15-year property, 100% bonus depreciation. Full $80,000 deductible in year two.
The IRS is not hiding this from you. These are the rules as written.
100% Bonus Depreciation Is Now Permanent
James confirmed what many tax advisors are still treating as uncertain: the One Big Beautiful Bill made 100% bonus depreciation permanent.
"Bonus depreciation started at 30 percent after September 11, that was the original provision to stimulate the economy. Over time it moved to 50 percent, then 100 percent for a period, then started phasing down. The new legislation made 100 percent permanent." That means 5-year and 15-year property placed in service today deducts fully in year one. There is no phase-down to plan around.
This matters for STR investors making capital improvements right now. If you are renovating before your next season, those costs are deductible in the year you place the improvements in service, not spread over 15 years.
Land Improvements: The Category That Works for Every Rental Type
One of the cleaner parts of James's explanation: land improvements are 15-year property regardless of whether your rental is short-term or long-term, residential or non-residential.
Pools. Landscaping. Parking surfaces. Outdoor lighting. Fences. Driveways.
These components are defined by their own asset class, not by the building they sit next to. A pool attached to an Airbnb cabin is 15-year property. A pool attached to a long-term rental house is also 15-year property. Both qualify for 100% bonus depreciation.
This means STR investors who have not done a cost segregation study are systematically over-depreciating their land improvements over 39 years (or 27.5 years for LTR owners) when those components should be separated out and depreciated over 15 years with full bonus.
"The land improvements, you'd be surprised how often they stay buried in the building basis," James told me. "The study should pull those out. That's standard engineering practice, and it's a significant number on properties with outdoor amenities."
The Kitchen Cabinet Mistake That Flags Studies at the IRS
STR investors who renovate kitchens face a specific risk in cost segregation. Many providers classify kitchen cabinets, countertops, and sinks as 5-year personal property. The IRS has a specific Tax Court case on this.
Amerisouth v. Commissioner (2012) ruled that kitchen cabinets, counters, and sinks are 1250 property, 27.5-year or 39-year, because they serve "the operation and maintenance of the building." They are not personal property under the tax code.
James was direct about what he looked for when reviewing studies. To classify kitchen components as 5-year personal property, the owner must demonstrate two things: (a) the components were actually removed, and (b) they were actually reused or disposed of elsewhere. This is the Whiteco test. Personal property must not just be theoretically movable. It must have actually moved.
"If someone classified the kitchen cabinets as 5-year property because they could theoretically be removed, that's going to generate an issue. The case law is clear. You need to show they were removed and where they went."
For STR investors renovating kitchens: the cabinets, counters, and built-in appliances are likely 39-year property or 15-year QIP if the renovation happens after the building is placed in service. The appliances themselves, refrigerators, ranges, dishwashers, are separate and can qualify as 5-year personal property. Know the distinction before your provider files the study.
For a detailed breakdown of kitchen cabinet classification rules and the Amerisouth case, see this analysis from FreeCostSeg.
What James Saw in His Last Five Years at the IRS
When I asked James about residential and STR cost segregation studies specifically, he noted the category grew significantly in his final years before retirement.
"We did not see as many residential and short-term rental studies in the early years. That volume increased. More investors were using cost segregation on smaller properties, and that meant more studies of varying quality coming through."
The quality variance is what matters. A well-prepared study on an STR follows the same engineering principles as a study on a commercial office building: site visit, property-specific measurements, RS Means codes down to 12 or 16 digits, documented methodology.
A poor study on an STR uses square footage models, vague descriptions, and inflated 5-year classifications. James described what the first IDR (Information Document Request) typically targets: "We go for the purchase agreement and the cost seg study first. Then we want to see the contractor's final application for payment, the plans and specs. If the study has vague RS Means codes, 'RS Means mechanical' with no actual code number, that generates more IDRs."
For STR investors, the practical implication: if you paid $700 for an online cost segregation report and no engineer ever visited your property, that report is not defensible. The IRS will not automatically audit you because of it, James confirmed that cost seg studies are discovered inside audits already opened for other reasons, not used as triggers. But if you are ever examined, a study that cannot survive scrutiny means the deductions get reversed.
On the question of audit risk, see does cost segregation trigger an IRS audit for what James told me about how low that risk actually is and how audit selection really works.
A Real Dollar Example: Mountain Cabin STR
Here is how the full picture assembles on a realistic STR acquisition.
Property: 3-bed mountain cabin, purchased for $480,000 Land allocation: $72,000 (15%, reasonable for rural mountain property) Depreciable basis: $408,000
Straight-line depreciation (39-year, no study): $408,000 / 39 = $10,462 per year
With cost segregation study:
- 5-year personal property (furniture, window treatments, specialty lighting, appliances): $61,200 (15%)
- 15-year land improvements (deck, gravel driveway, landscaping, fire pit pad): $40,800 (10%)
- 39-year building remainder: $306,000 (75%)
Year-one depreciation with 100% bonus:
- $61,200 (5-year) + $40,800 (15-year) = $102,000 in year one
- Plus $306,000 / 39 = $7,846 straight-line on building portion
- Total year-one depreciation: $109,846
Two years later: kitchen and bath renovation $55,000 spent on interior improvements after property already in service. Qualifies as QIP: 15-year non-residential, 100% bonus depreciation. Additional year-two deduction: $55,000
Combined two-year deductions: $164,846 versus $20,924 straight-line.
At a 37% marginal rate, the tax difference is approximately $53,500 in cash saved over two years. The cost segregation study fee on a property this size typically runs $3,500 to $5,500. The QIP classification costs nothing, it is just proper categorization on your return.
The math is not subtle.
What This Means for STR Owners in 2026 and Beyond
The One Big Beautiful Bill making 100% bonus depreciation permanent removes the planning uncertainty that had been building for the past few years. Investors no longer need to time acquisitions around depreciation phase-downs.
For existing STR owners who have never done a cost segregation study: the study can still be done on properties you have owned for years through a catch-up election (a "look-back" study filed via Form 3115). You can capture the accumulated depreciation in one year.
For STR owners who have made interior improvements since acquisition: those improvements need to be reviewed against QIP requirements. If your property is non-residential (under-30-day average stay), improvements made after placed-in-service likely qualify for 15-year treatment and full bonus, not the 39-year life you may have applied.
For STR owners considering renovations now: document everything. Contractor invoices, completion dates, what was removed versus what was added. The difference between 5-year personal property and 15-year QIP versus 39-year building comes down to what you can prove.
James's mantra, borrowed from a colleague he quoted throughout our conversation: "It's the support, not the report." The cost segregation report is a filing document. What protects it is the underlying documentation that justifies every classification.
If you want to run the numbers on your specific property before commissioning a study, FreeCostSeg offers a free estimate based on property type, purchase price, and improvement history.
For a full comparison of how cost segregation providers vary in quality and what to look for, see how to choose a cost segregation provider and best cost segregation companies compared.
If you are a W-2 earner using STR losses to offset ordinary income, the interaction between cost segregation and material participation requirements is covered in cost segregation for W-2 earners.
About the Expert
James C. Peacock spent nearly 39 years at the IRS as a General Engineer and Subject Matter Expert in the LB&I Division. He was among the first IRS engineers to examine cost segregation, contributed to the Cost Segregation Audit Techniques Guide from 2004 through the 2025 update, and served as the IRS's primary technical expert on Section 179D from 2014 through his retirement in September 2025. He holds a degree in Architectural Engineering from The University of Texas at Austin and, per his account, trained approximately 200 IRS engineers on cost segregation methodology before retiring. He now runs J Peacock Cost Seg Advisors LLC.
