Accessory dwelling units — garage conversions, backyard builds, basement units — contain a high concentration of recently installed depreciable components. Under the 2026 OBBBA, 100% of reclassified assets are deductible in year one.
Get my free estimate→New flooring, cabinetry, dedicated electrical panels, plumbing fixtures, HVAC mini-splits, appliances, and exterior improvements like walkways and fencing — these are all reclassifiable from the 27.5-year default to 5 or 15-year recovery periods. In a typical ADU, 30–40% of the construction or conversion cost qualifies for acceleration.
Most ADU owners don't realize that a $150K–$350K build or conversion contains $45K–$140K in assets that qualify for immediate expensing — instead of spreading them over 27.5 years.
Unlike older properties where components have already been partially depreciated, an ADU places 100% of its cost basis into service on the completion date. Every component — from the foundation to the light switches — gets a fresh depreciation clock.
Garage conversions, backyard new-builds, and basement ADUs all contain dedicated electrical circuits, separate HVAC systems, new plumbing runs, and individual finish-out components. A $200K ADU build typically yields $60K–$80K in 5-year personal property and $15K–$25K in 15-year land improvements.
If your ADU is used as a short-term rental (average stay 7 days or fewer) and you materially participate, you may qualify for the STR Loophole — allowing the accelerated depreciation to offset your W-2 or business income. Even as a long-term rental, the $25,000 rental loss allowance under IRC §469(i) lets you deduct losses against active income if your AGI is under $150,000.
We analyze every component of your property. Here's what a typical ADU study identifies:
| Asset Category | Recovery Period | Examples | % of Basis |
|---|---|---|---|
| Personal Property | 5 years | Flooring, cabinetry, appliances, mini-split HVAC, electrical panel, plumbing fixtures | 22–30% |
| Land Improvements | 15 years | Walkways, driveway extension, fencing, exterior lighting, landscaping, utility connections | 8–12% |
| Building Components | 27.5 years | Structural framing, foundation, roof, exterior walls | 55–70% |
| Land | Non-depreciable | Lot value | 15–25% |
On a $250K ADU build, that typically means $75K–$105K in accelerated deductions available in year one.
How you use your depreciation losses depends on your participation level and how the property is rented. Under IRC §469 (unchanged by OBBBA), there are three paths to using cost segregation losses against your active income:
If your average guest stay is 7 days or fewer (Airbnb, VRBO, vacation rental), the activity is not treated as a rental activity. Losses can offset W-2 and business income — provided you materially participate. No REPS qualification needed.
For long-term rentals, qualify as a Real Estate Professional to treat rental losses as non-passive. You must: (1) spend more than 750 hours per year in real property trades or businesses, and (2) that time must represent more than 50% of your total working hours. One spouse can qualify for a joint return.
If you actively participate in your rental (make management decisions, approve tenants, authorize repairs) and your AGI is under $150,000, you can deduct up to $25,000 in rental losses against active income. Phases out between $100K–$150K AGI. Excess losses carry forward.
What changed in 2026: The OBBBA permanently restored 100% bonus depreciation under IRC §168(k) for qualified property acquired after January 19, 2025. This means a cost segregation study now creates larger first-year paper losses than ever — making the path you use to deduct those losses more important than ever. The passive activity rules under §469 remain unchanged.
Bottom line: If you qualify through any of these three paths, a cost segregation study combined with 100% bonus depreciation can produce $30,000–$150,000+ in first-year tax savings on a single property. We'll confirm your eligibility on a free 15-minute call before you commit to anything.
Your property is generating tax savings right now. The only difference is whether you're claiming them or leaving them for the IRS.
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