Cost Segregation for San Diego Short-Term Rentals

Most San Diego short-term rental owners are leaving tens of thousands of dollars of tax savings on the table in year one. Not because they're doing anything wrong, but because their depreciation is set up the default way: one big number, spread evenly over 27.5 years.

Cost segregation changes that. Paired with 100% bonus depreciation, which is now permanent for property acquired after January 19, 2025, it can turn a Mission Beach or Pacific Beach STR into one of the most tax-efficient assets you'll ever own.

I own and advise on short-term rentals here in San Diego, and this is the conversation I wish every investor had before they closed, not after. Here's how it works, the rules of thumb, and the moves most people don't know about.

Depreciation in plain English

Depreciation is the IRS letting you deduct the wear and tear on a building, even while the property goes up in value. Think of it like a car: the engine, tires and seats wear out over time, so you get to write that wear off as an expense each year.

For residential rentals, the IRS says the building wears out over 27.5 years. So each year you deduct roughly 1/27.5 of the building's value, about 3.6%.

The catch is the land. Land never wears out, so it can't be depreciated. Before you depreciate anything, you split your purchase price into two buckets:

• Land: not depreciable, ever.
• Structure (the building): depreciable over 27.5 years.

Your starting point is your purchase price plus most closing costs, minus the land. That number is your depreciable basis, and everything in this article works off it.

The San Diego land value problem

In coastal San Diego, the land is often worth more than the house sitting on it. A 1950s cottage in Mission Beach, Point Loma or La Jolla can easily be 60% or more land, and that eats directly into your depreciation.

Here's what that does on a $1.5M purchase:

Same property, a $10,900 difference every year for 27.5 years, just from how the split was set.

Three common ways to set the split:

1. County assessor ratio. The default most people use. Easy, but in San Diego it often leans heavily toward land.
2. Independent appraisal. An appraiser values land and improvements separately. Often the strongest support for a higher building share.
3. Cost segregation study. A good study will also document the land allocation, using replacement cost for the structure.

Whatever you use, it needs to be reasonable and documented. Don't just pick a number you like.

What cost segregation actually does

A cost segregation study is an engineering-based report that breaks your building into its parts and puts each part in the right depreciation bucket. Instead of treating the whole house as one 27.5-year asset, it pulls out the pieces the IRS says wear out faster.

Think of your building basis as one big jar of coins you're only allowed to spend over 27.5 years. Cost seg sorts the jar. Some coins turn out to be 5-year and 15-year coins, and with bonus depreciation, you can spend all of those right now.

The rule of thumb: a cost seg study on a residential STR typically reclassifies around 20% to 30% of the building basis into 5-year and 15-year property. Furnished, amenity-heavy STRs often land at the higher end.

When it's worth it: studies typically run from a few thousand dollars for a single-family home up to around $10,000 for larger properties. As a rough guide, once your building basis (not purchase price) is around $400,000 or more, and you have income to actually use the deduction, the numbers usually work. Below that, a lighter "desktop" study may still make sense.

Year one vs. year two onwards

With cost seg and bonus depreciation, year one is a cliff, not a slope. You take the whole 5-year and 15-year bucket in the first year, plus a partial year of the 27.5-year building.

From year two onwards, only the 27.5-year portion is left. And because cost seg already pulled 20% to 30% out of it, your yearly deduction is actually smaller than if you'd never done the study.

It's like getting a big chunk of your salary as a signing bonus: great now, but your monthly paycheck shrinks afterward.

Two things to know about year one:

• It's prorated. Residential buildings use the mid-month convention, so a property placed in service in June gets about 6.5 months of building depreciation in year one. The bonus portion is 100% regardless of month.
• The acquisition date matters. 100% bonus applies to property acquired after January 19, 2025. Property bought before that date still follows the old phase-down rates (40% in 2025, 20% in 2026, zero after).

The year-two play: add a pool

Here's the move most owners miss. Because bonus depreciation is permanent now, every new improvement with a life of 20 years or less gets its own 100% write-off in the year it's placed in service. You can create another big deduction in year two, three or ten.

For an STR, these also tend to be the upgrades that lift your nightly rate. A pool in Pacific Beach or a fire pit patio in Point Loma isn't just a tax play, it's a booking play.

Upgrades that usually qualify:

• In-ground pool and spa (15-year land improvement)
• Hardscape: pavers, patios, walkways, driveways, retaining walls (15-year)
• Landscaping: shrubs, irrigation, turf, planters (15-year)
• Fencing and gates, outdoor lighting (15-year)
• Outdoor kitchen components, fire pits, built-in BBQ (often 15-year; some components 5-year)
• Furniture and decor refresh, hot tub, outdoor furniture, game room gear, appliances (5 to 7-year)

What usually does not qualify: a new roof, HVAC system, windows, or an interior remodel of walls and plumbing. On residential property those are 27.5-year building components, no bonus.

Two timing tips:

1. Place it in service by December 31. The pool has to be finished and available for guests, not just started.
2. Time it for a high-income year. If you sell a property, get a big commission year or a bonus, that's the year to build.

What most owners (and agents) miss

1. California doesn't play along. Bonus depreciation is a federal benefit only. California has decoupled from it, so on your state return those 5-year and 15-year assets are depreciated over their normal lives instead. The federal win is real, but don't expect the same hit on your California bill.

2. The short-term rental "loophole" is what makes the losses usable. Normally rental losses are passive and can't offset your W-2 or business income. But if your average guest stay is 7 days or less, the IRS doesn't treat it as a rental activity. Add material participation (for example, 100+ hours a year and more than anyone else, including your cleaner and co-host) and those paper losses can offset your active income. Without it, the losses still exist, they just carry forward.

3. Keep a time log. Material participation is the first thing an auditor asks about. Log guest messages, turnovers you manage, maintenance, pricing and listing work as you go.

4. Write furniture into the purchase. If you're buying a turnkey STR, list the furniture separately with a bill of sale and a value. Otherwise it gets buried in the purchase price and partly allocated to land.

5. "Placed in service" means ready to rent. Not the first booking. Get the listing live, photos up and calendar open before December 31 to claim the year.

6. Bought a few years ago? You can still catch up. A "look-back" cost seg study lets you claim missed depreciation in the current year through a change in accounting method (Form 3115), without amending old returns. The bonus percentage follows your original acquisition date.

7. Renovating? Write off what you rip out. When you replace the original kitchen or flooring, a partial asset disposition can deduct the remaining value of the old components. A cost seg study makes that easy because it already itemized them.

8. Small purchases can be expensed outright. Under the de minimis safe harbor, items up to $2,500 each (lamps, mattresses, small appliances) can generally be deducted immediately.

9. You can't skip depreciation to avoid recapture. The IRS taxes recapture on depreciation "allowed or allowable" when you sell, whether you claimed it or not. Not taking it only costs you.

10. Recapture is a loan, not a gift. When you sell, 5-year and 15-year assets are recaptured at ordinary income rates, and the building portion at up to 25%. A 1031 exchange defers it, and holding until death can wipe it out through a stepped-up basis. Plan the exit before the entry.

11. You don't have to take it all. If you won't have income to use a giant deduction, you can elect out of bonus by asset class and keep it for later years.

A San Diego example

An investor buys a Mission Beach STR in June 2026 for $1,600,000, with $20,000 of closing costs. An appraisal supports a 55% land / 45% building split, and $40,000 of furniture is bought on a separate bill of sale.

• Building basis: $729,000
• Cost seg reclassifies 25% to 5-year and 15-year property: $182,250
• Remaining 27.5-year building: $546,750
• In year two, they add a pool, pavers and landscaping for $120,000

Federal depreciation only. All three columns include the $40,000 of furniture expensed in year one.

If this investor qualifies under the STR loophole and sits in the 35% federal bracket, the cost seg study is worth roughly $62,000 in extra federal tax savings in year one. The pool adds roughly another $42,000 in year two, on an upgrade that also lifts the nightly rate.

Your numbers will differ. This is an illustration, not a projection.

FAQ: Cost segregation for San Diego STRs

Is 100% bonus depreciation still available in 2026?

Yes. It's permanent at the federal level for qualifying property acquired and placed in service after January 19, 2025.

How much of my San Diego property can I write off in the first year?

A cost seg study typically reclassifies 20% to 30% of the building value into 5-year and 15-year property, all of which can be deducted in year one with bonus depreciation. Land is never deductible.

Does cost segregation work for a single condo or small home?

Often, yes, as long as the building basis is high enough to justify the study fee and you can use the deduction. Lower-cost desktop studies exist for smaller properties.

Does California allow bonus depreciation?

No. California has decoupled from federal bonus depreciation, so your state deduction is calculated on the normal schedule.

Can I use STR losses to offset my W-2 income?

Potentially, if your average guest stay is 7 days or less and you materially participate. Work with a CPA who specializes in short-term rentals.

Is a pool a good investment for a San Diego Airbnb?

It can be on two fronts: it typically raises nightly rates and occupancy, and as a 15-year land improvement it qualifies for 100% bonus depreciation in the year it's completed.

Buying an STR in San Diego? Plan the taxes before you write the offer

The best cost seg results start before closing: choosing the right property, documenting the land split, writing the furniture into the contract, and timing the purchase and upgrades. That's the work I do with investors every week, and I'm happy to connect you with the STR-focused CPAs and cost seg firms I trust.

Reach out at [email protected] or 760.704.3820, or visit aussiejosh.com.

This article is for general education only and is not tax, legal or financial advice. Tax rules change and every situation is different. Talk to a qualified CPA before acting on anything here.

Sources

• IRS: Treasury and IRS guidance on 100% additional first year depreciation (Notice 2026-11)
• BDO: One Big Beautiful Bill Act expands 100% depreciation
• Potomac Law: New 100% bonus depreciation rules
• Policy Risk: California nonconformity with bonus depreciation