Cost Segregation Case Study: $520K Vacation Rental in Gatlinburg

Property Overview

This case study examines a cost segregation analysis conducted for a vacation rental property located in Gatlinburg, Tennessee, one of the most popular short-term rental markets in the southeastern United States. The property was a four-bedroom, three-bathroom mountain cabin purchased for $520,000, with a land allocation of $78,000, resulting in a depreciable basis of $442,000.

The property was purchased as a turnkey vacation rental, fully furnished and move-in ready for Airbnb and VRBO guests. It included a hot tub, game room, outdoor fire pit area, extensive landscaping, and premium interior finishes throughout.

Study Results

The Stratum cost segregation study identified the following reclassifications from 27.5-year property to shorter recovery periods:

5-Year Personal Property: $92,820 (21.0% of depreciable basis). This included all furniture and furnishings, kitchen appliances, washer and dryer, hot tub, game room equipment, window treatments, decorative light fixtures, smart home technology, and all decor and accessories.

7-Year Personal Property: $17,680 (4.0% of depreciable basis). This included specialty cabinetry, built-in entertainment systems, and security and camera systems.

15-Year Land Improvements: $39,780 (9.0% of depreciable basis). This included landscaping, the gravel driveway, stone walkways, the outdoor fire pit and patio area, retaining walls, exterior lighting, and fencing.

The remaining $291,720 (66.0%) was classified as 27.5-year real property, covering structural components such as the foundation, framing, roof, exterior walls, interior walls, plumbing, electrical, and HVAC systems.

Tax Savings Analysis

The total amount reclassified into accelerated categories was $150,280, representing 34.0% of the depreciable basis. With applicable bonus depreciation, the investor was able to claim substantially larger first-year deductions than would have been available under straight-line depreciation alone.

Under straight-line depreciation, the annual deduction would have been approximately $16,073 ($442,000 divided by 27.5 years). With the cost segregation study, the first-year depreciation deduction was significantly higher, creating a paper loss that the investor used to offset active income under the STR tax exception.

The investor's estimated first-year tax savings exceeded $45,000, representing a return of more than 12x the cost of the study. Over the first five years of ownership, the cumulative tax benefit was projected at approximately $65,000 in present-value terms.

Key Takeaways

This case study illustrates several important points for vacation rental investors. Fully furnished properties yield higher reclassification percentages due to the significant personal property content. The Gatlinburg market's typical cabin features, such as hot tubs, game rooms, and outdoor entertainment areas, provide substantial reclassifiable components. The STR tax exception allowed the investor to use the accelerated depreciation against active W-2 income. And the cost of the study was recovered many times over in the first year alone.