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If you use your short-term rental personally for more than 14 days, or more than 10 percent of the days you rent it at a fair price, whichever is greater, Section 280A treats the property as a residence. That label changes the cost segregation math in a big way: your rental deductions, including bonus depreciation from a study, cannot create a rental loss. They are capped at the income the property produces, and the excess carries forward. Stay at or below the limit, and the property is an ordinary rental, where cost segregation, the short-term rental rules and material participation work together as designed.
Abe and Dana bought a lake house on Buffalo Springs Lake, a few miles southeast of Lubbock, Texas, in March 2025 for $800,000. They listed it on the major booking platforms, hired a cleaner and handled guest messages themselves. A friend at a dinner party told them a cost segregation study on a short-term rental could produce a large first-year deduction, and that with the right involvement the loss might offset their W-2 income. The study came back showing roughly $170,000 of property that qualified for accelerated depreciation. At a 37 percent federal rate, they were counting on about $62,000 of tax savings.
When their CPA prepared the return, the savings for the year came to about $7,000. The reason had nothing to do with the study or the short-term rental rules. Abe and Dana had spent 32 nights at the lake house themselves, plus a handful of nights when Dana's brother stayed at a discounted rate. Those days pushed the lake house over the personal-use line, and once it crossed, the loss strategy shut down for the year.
Personal use is the most overlooked limit in short-term rental tax planning, and it can be managed with a calendar.
Section 280A starts with a general rule that individuals cannot deduct expenses for a dwelling unit they use as a residence, then carves out exceptions, including one for rental use. Section 280A(d) defines when a unit is used as a residence: when the taxpayer uses it for personal purposes for more than the greater of 14 days, or 10 percent of the days during the year it is rented at a fair rental price. "Dwelling unit" is broad: a house, condominium, lake house, lake house, beach condo or converted garage apartment. IRS Publication 527 explains the rules in detail.
At or under the limit, your rental expenses are deductible against rental income in the normal way, and a loss is evaluated under the passive activity rules, or as a nonpassive loss if you qualify under the short-term rental rules below. Over the limit, the property is a residence. You divide expenses between rental and personal use, and Section 280A(c)(5) limits total rental deductions to the gross rental income from the property. Deductions that cannot be used carry forward, subject to the same limit in later years.
Under Section 280A(d)(2), you are treated as using the unit for personal purposes on any day it is used by you or anyone else with an interest in the property; by a family member of you or a co-owner, which means spouses, siblings, parents, grandparents, children and grandchildren, but never cousins, nieces, nephews, aunts or uncles; by anyone under an arrangement that lets you use another dwelling unit, such as a home swap; or by anyone who pays less than a fair rental price. A friend at the "family and friends rate" turns a rented day into a personal day. The one exception is a family member who pays fair rent and uses the property as their main home, which rarely applies to a short-term rental.
Days you spend at the property working substantially full time on repairs and maintenance do not count as personal use, even if family members are along for recreation. Keep a record of the work and the hours; a week replacing a deck qualifies, a weekend of relaxing with a few minutes of yard work does not. Vacant days and days offered but not booked are neither rental days nor personal days, because the test counts days actually rented at a fair price. A home rented 250 nights has a limit of 25 personal days; a home rented 80 nights has a limit of 14.
Rented 100 days, the limit is 14, and 15 personal days makes it a residence. Rented 210 days, the limit is 21; 20 is safe and 22 is not. Rented 300 days, the limit is 30. The rule is a cliff. One day over the line changes the treatment for the entire year, which is why a calendar review before year end can be worth more than almost any other planning step.
A cost segregation study reclassifies parts of a building from 27.5-year or 39-year property into 5-, 7- and 15-year categories, and property acquired and placed in service after January 19, 2025 generally qualifies for 100 percent bonus depreciation, so those components are deducted in the first year. Our article on 100 percent bonus depreciation after the One Big Beautiful Bill Act explains the timing rules.
That deduction is still depreciation, subject to every limitation on rental deductions, and Section 280A is one of them. In a residence year, rental income is applied first against the rental portion of mortgage interest, taxes and casualty losses; then against operating expenses such as utilities, insurance, cleaning and management fees; and only then against depreciation, which gets whatever is left and no more. Bonus depreciation from a study is large and front-loaded, so it is the item most likely to be stuck, and the carryforward can only be used against income from that same property. In a mildly profitable house, that can take a very long time.
Return to Abe and Dana's lake house. This example is illustrative and simplified.
The lake house was rented 210 nights, so the limit is the greater of 14 or 21, which is 21 days. Abe and Dana limit their own use to 16 nights and charge visiting family the full nightly rate. The property is not a residence, and the Section 280A income cap does not apply.
$62,000 of income, less $27,000 of interest and taxes and $24,000 of operating expenses, leaves about $11,000 of net income before depreciation. Then the first-year depreciation from the study, $170,000 of bonus (never prorated) plus $10,368 of regular depreciation on the remaining $510,000 of building at 2.033 percent, produces a tax loss of roughly $169,400.
What happens to that loss depends on the other rules. If the average guest stay is seven days or less and Abe or Dana materially participates (more than 100 hours and more than anyone else, or more than 500 hours), the activity is not a passive rental activity, and the loss can offset other income. Abe and Dana file jointly, and Section 461(l) caps the business loss a joint return can use against wages and investment income at $626,000 for 2025 ($313,000 single), adjusted annually, so their $169,400 sits well under it. If they do not materially participate, the loss is passive and suspended until they have passive income or sell. Either way, the deduction is allowed in the year it is claimed. See our guide to material participation rules and cost segregation.
Change one thing. The lake house is still rented 210 nights, but Abe and Dana use it for 32 nights, and Dana's brother stays another 4 nights at a discount. That is 36 personal-use days, above the 21-day limit. The lake house is a residence for the year.
Total days of use are 210 rented plus 36 personal, 246 days. The rental fraction is 210 divided by 246, about 85 percent, and under the IRS approach expenses are allocated by that fraction. (The Tax Court in Bolton v. Commissioner allowed interest and taxes to be spread over 365 days instead; your CPA will choose the allocation that fits the return.)
At 85 percent, the rental share of interest and taxes is about $22,950 and the rental share of operating expenses about $20,400 (some items, such as platform fees, may be fully rental, so actual allocations vary). Rental income of $62,000 less those two amounts leaves about $18,650 of income available for depreciation. The rental share of the year's depreciation is about 85 percent of $180,368, roughly $153,300. The allowable depreciation for the year is capped at roughly $18,650, and the remaining $134,700 is carried forward.
Nothing changed except the calendar. Twenty more nights turned an expected six-figure loss into a deduction of about $18,650 plus a carryforward that does not deliver the cash the owners were planning around this April.
Under Treas. Reg. Section 1.469-1T(e)(3)(ii), an activity is not a rental activity if the average period of customer use is seven days or less (or 30 days or less with significant personal services). When that applies, the ordinary material participation tests in Reg. 1.469-5T(a) decide whether the loss is passive: more than 500 hours; substantially all of the participation of everyone in the activity; or more than 100 hours and more than any other individual, including cleaners and managers. The third test is the one most owners use, and a cleaner or manager who works more hours than you do defeats it. Our article on the short-term rental tax loophole and cost segregation goes into the details.
The seven-day rule and material participation answer the question, "Is my loss passive or nonpassive?" Section 280A answers a different question: "Is the property a residence, which limits my deductions to my rental income?" You can pass the first test perfectly and still be stopped by the second. A property used 40 nights by the owner and rented 150 nights may have a seven-day average stay and 600 hours of owner participation, and it still hits the Section 280A cap, because 40 is well above the greater of 14 or 15. The short-term rental rules decide which bucket a loss falls into. Section 280A decides whether there can be a loss at all.
Decide your personal-use budget before the year starts: estimate the nights you expect to rent, take 10 percent, compare it to 14, and block your own dates on the booking calendar early so a spontaneous weekend in November does not push you over. Track days in real time, with who stayed, what they paid and whether the night was rental or personal. A friend at half price is personal use, so either charge the going rate or count the days. Document repair days with receipts, photos and hours, and use that category only for real work. And if heavy personal use is the point of the property, treat it as a second home, accept the Section 280A limits, and order the study later when the calendar changes.
Under Section 280A(c)(5), amounts disallowed by the income limit carry forward to the next year, where they face the same limit again. If the property stays a residence every year, the carryforward can accumulate for a long time. If you reduce personal use so the property is no longer a residence, the carried-forward deductions become available, subject to the passive activity and other rules that apply that year.
Basis is a separate question. Depreciation you could have claimed but never claimed reduces basis anyway under the "allowed or allowable" rule, while depreciation that Section 280A disallowed and carried forward generally does not reduce basis until the year it is finally allowed. Discuss that with your CPA; it connects to our articles on depreciation recapture and cost segregation and suspended passive losses when you sell.
Section 280A is one hurdle of several. Nonpassive losses face the Section 461(l) excess business loss cap; see our guide to the 2026 excess business loss limit. At-risk and basis limits apply to every activity. And passive rental income may face the 3.8 percent net investment income tax, which turns on the same classification.
The engineering does not change because a property has personal use. A fully engineered and accounted study works through the lake house component by component under the first two approaches the IRS Audit Techniques Guide describes: detailed engineering from actual cost records where they exist, and engineering with documented estimates reconciled to the purchase price where they do not. The review is a live video walkthrough, or a guided photo and video checklist you follow with the team reviewing every frame, or an in-house analyst's inspection on larger properties. The result is a component schedule your CPA imports and an examiner can trace line by line, signed by credentialed professionals, and Cost Seg America defends it for as long as you own the property, with no time limit, no hour cap and no additional fee. An estimated study applies a percentage to the purchase price and stops, which leaves nothing to trace when an examiner asks what is in the number. What changes on a mixed-use property is how the resulting depreciation is used on the return: your CPA divides furniture, appliances, hot tubs and outdoor features between rental and personal use, as we cover in our guide to furniture, hot tubs, and outdoor spaces in a short-term rental, and depreciation starts when the property is ready to rent, as explained in what "placed in service" really means. The proposal lists the documents to gather and the fee before anything is ordered.
A residence label does not automatically rule a study out. It can still pay when the property is highly profitable, so rental income absorbs a meaningful amount of depreciation after interest, taxes and operating costs; when you expect to reduce personal use soon and want the carryforward in place; or when you plan a long hold and want an accurate depreciation schedule from the start. Model the timing and size of the benefit before you commit, so you know whether the first-year deduction will be $170,000 or $18,650 plus a carryforward.
A study does not make sense below $180,000 of depreciable basis after land, Cost Seg America's minimum, where the fee eats the benefit. It does not make sense on a lake house you plan to sell within a year or two, where Section 1245 recapture at ordinary rates arrives almost as fast as the deduction. And it does not make sense on a property that will be a residence every year with thin rental income, where the carryforward grows and nothing comes off this year's tax bill. In each case the proposal will say so.
It is the Section 280A residence test. Use a rental personally for more than the greater of 14 days or 10 percent of the days it is rented at a fair price, and it is a residence for the year, with rental deductions limited to rental income.
Yes. The question is how much of the depreciation you can use currently. Under the limit, the property is a rental. Over it, depreciation is capped by the property's rental income and the excess carries forward.
Days you work substantially full time on repairs and maintenance do not count, even if family members use the property recreationally on the same days. Keep records of the work.
Yes, even if they are not with you, unless they pay fair rent and use the property as their main home. Family means spouses, siblings, ancestors and lineal descendants.
Under Section 280A(g), if a residence is rented for fewer than 15 days in the year, the rental income is excluded and no rental expenses are deductible. A study would produce no rental deduction in that situation.
No. The seven-day rule decides whether the activity is a rental activity under the passive loss rules. The 14-day and 10 percent rule decides whether the property is a residence under Section 280A. You need to pass both.
No. Bonus changes how quickly you deduct shorter-lived property. A larger first-year deduction simply makes the income limit matter more in a residence year.
Send Jim Dougherty and his team the property address, the purchase price, your expected rental nights and your personal-use plans. You will have a free proposal within 24 hours showing the estimated first-year deduction, the method and the fee, with the personal-use question answered before anything is ordered. The study is delivered in 30 days, with rush available. Call 1-888-365-5023 or email info@costsegamerica.com.
This article is educational and is not tax advice for your situation; confirm the treatment with your CPA before filing.
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