October 2025 Rental Property Book Updates

Real estate tax planning continues to evolve, and October’s focus is on practical plays that pair wealth building with tax efficiency. This month we stitched together four topics rental property owners and real estate investors ask about often: building a rental strategy that actually defeats PAL limits, the (sometimes spicy) conversion of STRs to personal use, why Qualified Improvement Property (QIP) matters for short-term rentals, and how to choose between bonus depreciation and Section 179 without stepping on a recapture landmine.

Keep in mind that all these blurbs are shrunk down versions of sections from our rental property book, “I Just Got A Rental, What Do I Do?”

Rental Property Tax Strategy

Real estate investors often start with “what tax deductions can I take?” The foundation question is “how do I leverage those deductions?” If your modified adjusted gross income (MAGI) is above $150,000, you’re likely boxed in by passive activity loss (PAL) rules, and ordinary rental losses get suspended on Form 8582 unless you (a) qualify for REPS, (b) qualify for the STR loophole (≤7-day average stay with material participation), or (c) have other passive income to net against.

Once PAL limits are set aside with (a) or (b) above or you have a (c) situation, a cost segregation study can reclassify parts of the building to shorter-life Section 1245 property, enabling accelerated deductions. Layer in bonus depreciation (100% again for 2025–2030), and a $400,000 building might yield a $70,000–$90,000 first-year deduction in typical fact patterns. That’s cash-flow, not magic; you’re pulling future depreciation forward.

Sidebar: Where did the $70,000 to $90,000 come from? With 100% bonus depreciation, about 18% to 22% of the building will be accelerated. Where did the 18% to 22% come from? WCG CPAs & Advisors especially our Rental Expert Pod has seen thousands of cost segregation reports. We could say tens of thousands, but that would be a lie.

Supporting strategies—home office (to convert local trips from commuting to tax deductible business travel related to your rental property) and auto—can add smaller deductions. Just keep the Section 162 “ordinary and necessary” standard in mind; aggressive vehicle structures (e.g., luxury car self-rental from you to the rental) demand tight documentation and carry related-party risk. Finally, don’t forget maintenance days: when “substantially all” of a day is bona fide repair/maintenance, it generally doesn’t count as a personal-use day under vacation home rules—useful for lifestyle alignment without blowing the tax profile.

Speaking of blowing up, click on the button below to get the blown up version from our rental property book of this summary.

Arbitrage of Converting STR to Second Home

This is the edgy one: do a cost seg + bonus as an STR, then pivot to second home soon after. Can it work? Sometimes—but risk depends on timing and facts, and how another person (read, IRS agent) would view your intentions.

Key mechanics: Section 179 can be recaptured as ordinary income when business use falls to 50% or less (predominant use), potentially at the moment of conversion. Bonus depreciation typically avoids this midstream recapture (except for listed property like passenger autos and certain electronics, so basically unrelated to rental properties); instead, bonus is recaptured at sale unless you execute a 1031 like-kind exchange.

Risk spectrum:

• converting STR→LTR/MTR is relatively tame
• STR→vacation home is moderate
• STR→second home/primary in a few years is higher
• immediate New-Year pivot after a big cost seg is the most aggressive and could be challenged (all in on black, let it ride- kidding!)

Practical takeaway: if your long-term vision or retirement plan includes eventual personal use, bias to bonus depreciation over Section 179 and stretch the horizon to support legitimate business purpose and continuity.

Also mind state decoupling: many states disallow bonus depreciation but allow Section 179 (with limits). The optimal mix changes once you look at federal + state combined.

Qualified Improvement Property (QIP) for STRs

This one is often overlooked! Qualified Improvement Property (QIP) = interior, non-structural improvements to nonresidential buildings after the property is placed in service. QIP is 15-year property, so it’s eligible for bonus depreciation and also Section 179. The twist: a rental proeprty can be nonresidential when more than half of units are used on a transient basis—practically, an average stay of ≤30 days. That unlocks QIP treatment for things like kitchen and bath renovations (post-in-service date), which can be expensed via bonus (or Section 179 where appropriate).

Sidebar: Why does this rule mention “more than half the units?” There are common situations where commercial real estate has retail stores on the first floor with several floors above dedicated to residential (and in some cases, nonresidential) living. You could also have a large complex with many units, and some are short-term while others are mid- to long-term. For common real estate investors, this is a not an issue.

Caveats: touch structural framework, enlarge the building, or add elevators/escalators, and you’re out—those costs move to 27.5/39-year schedules depending on the residential versus nonresidential use. Sequence matters: (1) place the property in service as an STR (ready and available, advertised), (2) get actual guest stays to establish the STR profile, then (3) take it offline temporarily for qualified interior work. That ordering supports the nonresidential/QIP position.

Another Sidebar: Taking a rental property offline does not take the property out of service provided you intend to rent it again. This can be confusing. Once a rental property is placed in service for its intended income-producing purpose, it remains in service until the intent changes. This is a big deal when it comes to renovations since operating expenses can still be deducted during construction when the rental property is offline. Your material participation time continues as well!

Bonus vs Section 179 on QIP? Consider cash-flow needs, state conformity, entity-level traps (e.g., Section 179 can’t create a loss at the partnership level and is suspended at the entity, while bonus can create a loss), and whether future business use could dip below 50% (recapture risk for Section 179). And if you’re replacing HVAC / roof on nonresidential property: those aren’t QIP, but Section 179 may still apply via the statute’s carve-outs.

We just dropped a huge comment at the end with HVAC and roof replacements on nonresidential property under Section 179. There is a special carve out to allow for this. Click on the button below for a deeper dive.

Accelerated Depreciation & Section 179

This section from our book got a big makeover to include more examples, a fun table and some additional considerations. We hardly to it justice with this tiny recap-

Two primary tools compress time: bonus depreciation (IRC Section 168(k)) and IRC Section 179. After phasing down to 60% in 2024, bonus is scheduled at 100% for 2025–2030 under current law, the One Big Beautiful Bill Act. Bonus depreciation is unlimited, applies to property with ≤20-year lives, and can create losses (useful with REPS/STR). Section 179 is elective expensing with annual dollar limits, can’t create losses at the entity level (notably in partnerships), and is subject to recapture if predominant business use later falls to ≤50%.

Sidebar: Section 179 expenses that create losses on rental properties personally owned by you (or your revocable trust) and reported on Schedule E which also bypass passive activity loss limits with short-term rental loophole or real estate professional status can offset W-2 income. Read that again please since that is an incredibly long sentence but an important one. This same rental in a partnership (multi-member LLC, for example) is trapped.

Planning levers (sounds fancy):

• Electing out of bonus depreciation: allowed by asset class / year if you anticipate higher future rates or just need better matching to deductible income later (e.g., REPS in a future year). In other words, this becomes a tax planning event since you might want to opt-out of 5-year bonus, for example, to keep some depreciation in your pocket for future years.
• Trade or business threshold: rental properties generally qualify as a trade or business when conducted with continuity, regularity, and a profit motive (facts and circumstances). Single, ultra-hands-off rentals can be problematic.
• State conformity: many states decouple from bonus depreciation and we’ve mentioned before; some limit Section 179 expensing but still permit it. Optimize for combined federal/state outcomes, not just federal.
• Asset menu: 5/7/15-year Section 1245 property can be bonused or Section 179’d; yes, those are verbs. QIP (interior, non-structural, nonresidential) qualifies for both; land improvements are bonus-eligible (15-year) but not Section 179; HVAC / roof / security in nonresidential can be Section 179 via carve-outs.

Here is a great summary table from this section in our book-

Bottom line: you can mix Section 179 first, then apply bonus depreciation to the remainder for a tailored deduction profile—especially handy when coordinating entity limits, PAL outcomes, and state rules, and blah blah blah.