Cost Segregation and Bonus Depreciation with REP Status: Can You Use Them on Mid- and Long-Term Rentals?

At a Glance

• Yes — with Real Estate Professional (REP) status, you can apply cost segregation and bonus depreciation to mid- and long-term rentals (MTRs/LTRs).
• Without REP, depreciation losses from these rentals are passive and can’t offset W2 income.
• REP status reclassifies your rental activity as non-passive, letting losses reduce active income.
• Proper documentation of material participation is critical — the IRS scrutinizes REP claims heavily.
• Bonus depreciation + REP status = a powerful tax shield against high W2 or business income.

Understanding the REP Advantage

When you or your spouse qualify as a Real Estate Professional (REP), the IRS allows you to treat your rental activities as non-passive.

This means depreciation deductions (including cost segregation + bonus depreciation) don’t just offset rental income — they can offset your W2 wages, commissions, or business income.

Without REP status, only short-term rentals (STRs) qualify for this special treatment under the STR Loophole. Mid-term and long-term rentals stay locked in the passive bucket.

What Is Cost Segregation?

Cost segregation is a tax strategy that breaks down a property into components with shorter depreciable lives:

• 5-year property – appliances, carpet, furniture.
• 7-year property – fixtures, specialty equipment.
• 15-year property – land improvements like landscaping, driveways, fencing.

Normally, residential rental property depreciates on a 27.5-year schedule. With cost segregation, much of that depreciation gets pulled forward.

Bonus Depreciation: The Game Changer

Thanks to the Opportunity to Build and Boost Bill (OBBB), 100% bonus depreciation is back. That means you can fully expense eligible 5-, 7-, and 15-year assets in Year 1.

• Example: Buy a $1M long-term rental.
• Cost seg identifies $250K in short-life assets.
• With REP status, that $250K flows directly against your W2 income.
• At a 37% tax bracket, you just saved $92,500 in federal taxes.

REP vs. STR Loophole

Here’s how REP compares to the STR loophole:

IRS Scrutiny and Documentation

REP status is one of the most audited sections of the tax code. To protect yourself:

• Keep daily or weekly time logs.
• Document material participation — meetings, calls, tenant interactions, repairs.
• Consider tools like REPSLog or custom spreadsheets.
• Work with a CPA who specializes in REP and STR tax planning.

At ViaSTR, we recommend WCG Inc. (wcginc.com), a firm we’ve personally worked with. They specialize in STR tax strategy, REP status planning, and make the complex rules easy to navigate.

Example Walkthrough

• You earn $500K W2.
• Buy a $1.2M long-term rental.
• Cost segregation generates $300K bonus depreciation.
• With REP status, that $300K applies to your W2 income.
• Federal tax savings at 37% ≈ $111K.

That’s how high earners use REP status to transform long-term rentals into powerful tax shields.

Key Takeaways

1. Yes, you can use cost segregation and bonus depreciation on mid- and long-term rentals if you qualify as a Real Estate Professional.
2. Without REP, those losses are stuck as passive and can’t offset W2 income.
3. The STR loophole is simpler, but REP expands your tax strategy across all rental types.
4. Documentation and CPA support are non-negotiable.

See Also

• The STR Loophole Explained: Offset W2 Income Without REP
• Passing STR Wealth to Your Kids, Tax-Free
• I Just Got a Rental, What Do I Do Next?

Sources & Further Reading

• IRS Publication 925: Passive Activity and At-Risk Rules
• WCG Inc. – Real Estate Professional Status Overview