How Hotel Investors Can Capitalize on Bonus Depreciation

Hotels are different from most commercial real estate. A typical office building consists mostly of walls, windows and structural systems that depreciate slowly over 39 years. But walk through any hotel and you will find guest rooms filled with furniture, beds, televisions, carpeting and decorative lighting. You will see kitchens stocked with commercial equipment, fitness centers loaded with machinery and pools surrounded by extensive landscaping. All of this personal property can be depreciated far more quickly than the building itself, which creates a significant tax planning opportunity for hotel investors who understand how to take advantage of it.

How Bonus Depreciation Works for Hotel Properties

Commercial real estate typically depreciates over 39 years using the straight-line method. Bonus depreciation changes this by allowing property owners to deduct a large percentage of qualifying asset costs in the first year those assets are placed in service.

The One Big Beautiful Bill Act signed into law on July 4, 2025, permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. This applies to tangible property with a recovery period of 20 years or less under MACRS guidelines. Properties acquired on or before January 19, 2025, remain subject to the previous phaseout schedule regardless of when they were placed in service.

Hotels contain far more personal property than most other commercial buildings. This high concentration of shorter-lived assets makes hotels particularly attractive candidates for bonus depreciation strategies.

What Hotel Assets Qualify for Accelerated Depreciation

To capture bonus depreciation benefits, hotel investors must identify which property components qualify for shorter recovery periods. Five-year property commonly found in hotels includes guest room furniture such as beds, dressers and desks. It also includes carpeting, window treatments, decorative lighting, artwork, televisions, fitness equipment, kitchen appliances, security systems and fire suppression equipment. Seven-year property often encompasses specialized millwork and certain equipment found in spa, restaurant and conference areas. Fifteen-year property covers land improvements like parking lots, landscaping, swimming pools and exterior lighting.

A cost segregation study identifies these components and reclassifies them into the appropriate depreciation categories. With 100% bonus depreciation available, qualifying components can be fully deducted in the first year they are placed in service.

Timing Considerations That Affect Your Tax Benefits

The acquisition date determines whether property qualifies for 100% bonus depreciation. Property must be both acquired and placed in service after January 19, 2025, to receive the full benefit. The IRS looks at binding contract dates rather than closing dates when determining qualification. If you signed a purchase agreement on or before January 19, 2025, even if the property closed later in the year, you would only qualify for 40% bonus depreciation on eligible assets for 2025.

Passive activity rules also affect how these deductions can be used. Depreciation deductions create passive losses, which can only offset passive income unless you qualify as a real estate professional under IRS guidelines.

Plan for Depreciation Recapture When You Sell

Using bonus depreciation creates future tax considerations that deserve attention. When you sell a hotel property, the IRS requires you to recapture depreciation previously claimed and pay taxes at rates higher than typical capital gains rates.

Personal property items like furniture and equipment face recapture at ordinary income tax rates. The building itself faces recapture at a maximum rate on gain attributable to straight-line depreciation. This is called unrecaptured Section 1250 gain.

A 1031 like-kind exchange allows investors to defer both capital gains and depreciation recapture by reinvesting proceeds into a replacement property. The depreciation claimed on the original property carries over to the new property’s basis, which may create larger recapture exposure down the road. Some investors also time property sales to occur during years when they expect to be in lower tax brackets.

Make Strategic Decisions About Your Tax Deductions

Documentation matters when claiming accelerated depreciation. Work with cost segregation specialists who use engineering-based methodologies and can support their findings during potential audits. Also consider state tax implications, as many states do not conform to federal bonus depreciation rules.

The size and complexity of your hotel will determine whether a cost segregation study makes sense for your situation. Properties with higher depreciable bases and more personal property components generally produce greater tax savings from these studies.

Partner with Real Estate Tax Professionals for Hotel Investments

The permanent restoration of 100% bonus depreciation creates a valuable opportunity for hotel investors to accelerate tax deductions and improve cash flow. Hotels contain a high concentration of furniture, fixtures and equipment that qualifies for shorter depreciation periods, making them well-suited for these strategies.

At James Moore, our real estate tax professionals help hotel investors develop depreciation strategies tailored to their specific portfolios. From cost segregation studies to exit planning and 1031 exchanges, we provide the expertise needed to optimize your tax position. Contact a James Moore professional to explore how bonus depreciation can benefit your hotel investments.

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