If you’ve been following the buzz around the “One Big Beautiful Bill” (OBBB), you’ve probably heard it includes a major win for real estate investors: the return of 100% bonus depreciation.

That’s right, investors can again deduct the full cost of certain property improvements and assets in the first year, instead of spreading them out over time.

It’s an exciting development, especially for short-term rental (STR) owners in the Smoky Mountains. 

But there’s one big question everyone wants the answer to. “Does this mean passive investors can write everything off in year one—even if they don’t qualify as “real estate professionals”?

Let’s take a closer look.

 

What Is Bonus Depreciation, Anyway?

Bonus depreciation is a powerful tax tool that lets you deduct certain business-related costs immediately. Think furniture, appliances, HVAC units, and other property components with a useful life under 20 years.

By combining bonus depreciation with a cost segregation study you can break out individual components of a property and assign shorter depreciation periods than the default 27.5-year schedule for rental real estate. 

The Tax Cuts and Jobs Act of 2017 gave us 100% bonus depreciation through 2022, but it began phasing out in 2023. 

The OBBB proposes to reverse that and make 100% bonus depreciation permanent.

 

What the Big Beautiful Bill Says about Real Estate Investing

Here’s what’s in the bill:

• 100% bonus depreciation remains permanently in place, without a phaseout.
  
• Applies to qualified property with a useful life of 20 years or less.
• Allows for an immediate deduction in the year of purchase or service which boosts first-year cash flow and reduces your tax liability. 

So far, so good. But…

 

The Real Question: Active vs. Passive Investor?

Even if your STR qualifies for 100% bonus depreciation, you can only use those deductions to offset your income if the IRS considers your rental activity non-passive.

If you’re not a full-time real estate professional (a status with strict IRS criteria), most of your rental income is considered passive, and passive losses (like depreciation) can usually only offset passive income, not W-2 income, business income, or investment gains.

BUT! Short-term rentals (with average stays of under 7 days) can be considered non-passive, if you materially participate.

You may qualify if:

• You spend 100+ hours on the property and no one else spends more time than you.
• Or you do substantially all the work yourself.
• Or you hit 500+ hours of involvement over the year. 

 

So, What If You Use a Property Manager?

If you’re not personally involved in the day-to-day operations of your STR, say, you use a property management company and rarely interact with guests, then your involvement may not meet the IRS’s standard for material participation.

In that case:

• Yes, you can technically claim bonus depreciation.
• But no, you may not be able to use the deduction this year.
• The losses would be considered passive, and might be suspended and carried forward until you have enough passive income (or sell the property). 

 

What If You Sell the Property?

If you can’t use your bonus depreciation now, all is not lost.

Suspended losses can be applied in the year you sell the property, helping you offset any capital gains from the sale. This can lead to major tax savings down the road.

That’s why it’s so important to work with a tax advisor who understands STRs, cost segregation, and your specific investing goals.

 

TL;DR – Here’s What We Know about the One Big Beautiful Bill 

✅ The Big Beautiful Bill restores 100% bonus depreciation, great news for STR investors.
🚫 But you can’t always use those deductions right away unless you materially participate.
🧾 Material participation, not just ownership, is what makes the difference.
📈 Even if you can’t use the full deduction now, it can benefit you in the future (like at the time of sale).
👨‍💼 Bottom line: Talk to a Tax Professional before you assume you’ll get a massive year-one write-off.

 

We’re actively exploring how this bill could impact Smoky Mountain investors and we’re here to help you stay ahead of the curve.