On most short-term rentals I underwrite, the cost segregation study is where the year-one tax benefit actually comes from. Here's what a study does, what it tends to find on a Colorado STR, and a calculator to estimate yours.
The IRS normally has you depreciate a rental building over 27.5 or 39 years. A cost segregation study, done by an engineer, goes through the property and pulls out everything with a shorter life: furniture, appliances, finishes, cabinetry, lighting, landscaping, driveways and outdoor features. Those get 5-, 7- or 15-year lives instead.
On a furnished short-term rental, that's often 20% to 30% of the building's cost. The 2025 tax law restored 100% bonus depreciation for property acquired after January 19, 2025, so those short-life parts can be deducted in the first year the rental is in service rather than spread over decades.
Whether that deduction can offset your salary is a separate question. It comes down to the 7-day average stay rule and material participation, which I walk through on the STR tax loophole page.
Land can't be depreciated. In ski towns a big share of the price can be the lot, which shrinks what a study can work with. Front Range and foothills homes often have more building in the price.
Furniture, hot tubs, game rooms and outdoor spaces are the short-life items a study pulls out. A rental designed for guests usually has more of them than a typical home.
The deduction only helps this year if you pass the short-term rental tests. Colorado's income tax starts from federal taxable income, so a federal deduction usually lowers your state bill too.
Already own a short-term rental? Put in the property's details for a rough year-one figure. The calculator is built by R.E. Cost Seg, the firm that did the studies on my own rentals.
For a number on a specific property, I'll run it with you on a call. For a quick ballpark before you buy, the STR tax calculator works on any device.
On a phone? Swipe sideways inside the calculator, or open this page on a laptop for the full view.
The estimate comes from R.E. Cost Seg's calculator, not from Covest. The engineer's study sets the real number, and your CPA decides how it goes on your return. Covest is an R.E. Cost Seg partner and may be paid a referral fee when a study is ordered through this calculator.
An engineering study that splits a property's cost into parts with different tax lives. Furnishings, appliances, finishes, landscaping and driveways get 5-, 7- or 15-year lives instead of the 27.5 or 39 years used for the building. On a furnished short-term rental that is often 20% to 30% of the building's cost.
It depends on three things: the price, how much of that price is land (land can't be depreciated, and in some mountain towns it's a big share), and whether you can use the loss against your other income. If you qualify under the short-term rental rules, a study often turns a profitable property into a large year-one tax loss.
The deduction goes on the return for the year the rental is placed in service. The study can be finished after December, as long as it's done before you file that year's return.
Yes. A look-back study catches up the depreciation you missed on this year's return through Form 3115, without amending old returns.
Usually. Colorado's flat income tax starts from your federal taxable income, so a federal depreciation deduction generally lowers your state bill as well. Confirm with your CPA.
Covest is a licensed real estate brokerage, not a tax or legal advisor. This page is general education, not tax advice. Confirm any strategy with your CPA before you act on it.
If you're buying in Colorado, I model the study into the pro forma before you make an offer. The real numbers for a specific property come on a call.