In the last six months, my office has taken on an unusual high number of inquiries from buyers in tech and medicine, all asking the same question: how does bonus depreciation work in Sedona?
It’s not a coincidence. Something changed in 2025 that most homebuyers still don’t know about, and the people who DO know are quietly using it to turn Sedona short term rentals into one of the most efficient tax strategies available to high earners right now. If you’re a software engineer at a big tech company, a physician, an attorney, a partner at a firm, or any other high W-2 earner, this article is for you.
Let me walk you through it in plain English.
What changed in 2025
For most of the last few years, “bonus depreciation” was a tax provision in slow decline. It used to let real estate investors write off a huge chunk of a property’s cost in year one, but Congress had it on a phase out schedule. By 2025, it was down to 40%. By 2026, it was supposed to drop to 20%. By 2027, it was set to disappear entirely.
Then on July 4, 2025, the One Big Beautiful Bill Act was signed into law. It permanently reinstated 100% bonus depreciation for qualifying property acquired after January 19, 2025. The phase out is gone. The 20% cap for 2026 is gone. As of right now, bonus depreciation is back at 100%, and unless Congress acts again, it stays there.
The IRS confirmed all of this in Notice 2026-11, issued in January. So we’re not dealing with a rumor or a proposed rule. This is current, active tax law.
What bonus depreciation actually does
When you buy real estate, the IRS normally requires you to depreciate it slowly over decades. A short term rental property, for instance, depreciates over 39 years. So if you buy a $1M property, you might write off about $25,000 a year for 39 years.
That’s fine, but it’s slow. And for high income buyers in the 32%, 35%, or 37% tax brackets, slow doesn’t help much.
Here’s where it gets interesting. Bonus depreciation, combined with something called a cost segregation study, lets you accelerate a huge portion of that depreciation into year one.
A cost segregation study is performed by an engineering firm. They go through your property and identify all the components that legally qualify as “personal property” rather than “real property.” Things like:
- Appliances
- Carpeting and flooring
- Light fixtures
- Decorative finishes
- Cabinetry and built ins
- Landscaping, fencing, driveways
- HVAC components
- Pool equipment
These items have shorter depreciation lives (5, 7, or 15 years instead of 39). Under the new bonus depreciation rules, you can write off 100% of their value in year one.
For a typical Sedona short term rental, a cost segregation study can identify 20% to 40% of the purchase price as accelerated depreciation. On a $1M property, that’s $200K to $400K of deductions in year one.
Why this matters specifically for high W-2 earners
Here’s where most articles about real estate depreciation lose people, so I’ll keep it simple.
Normally, rental property losses are considered “passive.” That’s an IRS category, and it has one big consequence: passive losses can only offset passive income. They cannot reduce your W-2 income or your business income. So the depreciation we just talked about would be useless against your tech salary or your medical practice income.
BUT. There’s a specific exception in the tax code (IRC Section 469) that says if your rental’s average guest stay is 7 days or less, AND you materially participate in running it, the activity is no longer treated as passive. It’s treated as an active business.
This is huge. Because once it’s active, those depreciation losses can offset your W-2 income. Your tech salary. Your physician’s salary. Your bonuses, your RSUs, anything taxed at ordinary income rates.
This is what people in the industry call the “STR loophole.” It’s not a loophole in the negative sense. It’s literally written into the tax code. The IRS knows about it. Your CPA almost certainly knows about it. It’s just not widely advertised because it requires a specific kind of property and a specific kind of buyer behavior.
And Sedona, as it happens, is one of the strongest STR markets in the United States.
The math on a real Sedona purchase
Let me walk you through a hypothetical example based on properties I’m working with right now. Numbers are illustrative. Your situation will differ. Talk to your CPA.
That’s a real outcome that’s happening right now in Sedona for buyers who fit this profile. Cash that would otherwise have gone to the IRS instead stays in your pocket, in the form of an income producing piece of Sedona real estate that has historically appreciated.
And that’s just year one. Standard depreciation continues on the remaining basis for the rest of the property’s life. The first year is just the biggest year.
Run Your Own Numbers
Want to see what these numbers look like for a specific purchase price and tax bracket? Try the Sedona STR Tax Savings Estimator — takes about 30 seconds.
What you have to actually do
The strategy is real but not automatic. To make it work, you need to satisfy three things.
1. The 7 day average rule. Your property must be rented out as a short term rental, with an average guest stay of 7 days or less across the year. This is exactly how Airbnb and VRBO bookings typically work. A quick weekend trip plus a five day vacation averages well under 7 days.
2. Material participation. The IRS has 7 tests for this, but the most practical one for high earners is the “100 hours and more than anyone else” test. You need to spend at least 100 hours actively involved in your STR (guest communication, pricing decisions, coordinating cleaners, handling maintenance, listing optimization), AND no one else can spend more time on it than you. Property managers can help, but if you outsource everything, you fail this test. Track your hours. Keep a contemporaneous log. This is the part the IRS scrutinizes most.
3. A real cost segregation study. This is performed by an engineering firm, not your CPA. A quality study costs $5K to $15K depending on property size and complexity. The fee is more than offset by the tax savings, but pick a firm with a defensible methodology because audits do happen.
Why Sedona specifically
You can do this strategy with an STR anywhere in the country. So why Sedona?
A few reasons that I see play out in practice:
The nightly rates are exceptional. Sedona’s vacation rental market commands some of the highest nightly rates in the Southwest, year round. We’re a 365 day destination. There’s no off season the way there is in beach markets or ski towns. That keeps occupancy steady and supports the cash flow side of the equation.
The market is genuinely STR friendly. Recent VOCA news made it even friendlier. Arizona state law also explicitly protects STR rights, which is not the case in many markets where local bans have hurt operators.
The buyer profile fits the property profile. Tech executives and physicians who want to use the property a few weeks a year for personal vacation, then rent it the rest of the year, find Sedona checks every box. It’s an actual destination they want to spend time in, not just a numbers play.
Property values have historically appreciated. The tax strategy is the front end. The back end, when you eventually sell or 1031 exchange, is the equity you’ve built. Sedona has been a remarkably durable real estate market for decades.
Where I come in
I am not a CPA. I’m not a tax attorney. I will not give you tax advice and you should not take tax advice from any real estate agent. What I AM is the person who finds the property that ACTUALLY qualifies for this strategy, in a market I have lived in for 35 years and worked in for nearly two decades.
Not every Sedona property is a good fit for the STR strategy. Some HOAs prohibit short term rentals (which we now have to verify on a case by case basis). Some neighborhoods are zoned in ways that make compliance harder. Some properties simply won’t generate the rental income you need to make the math work. Knowing the difference is the work.
If you’re already exploring this with your CPA and you need someone who knows the ground in Sedona, I’d love to help. Schedule a call below or send me a note. I will tell you honestly whether what you’re looking at makes sense, and I’ll point you to qualified cost segregation firms and CPAs if you don’t have one yet.
The window is real. The 100% bonus depreciation rate isn’t going anywhere under current law, but the buyers who are paying attention right now are the ones who are going to own the best inventory in Sedona by the end of 2026.
Important disclosure. William Hamburg is an Associate Broker, not a tax professional. Nothing in this article is tax, legal, or financial advice. The numbers shown are illustrative examples, not promises. Actual tax outcomes depend on your specific income, filing status, state of residence, the specifics of your property, the results of your cost segregation study, your level of material participation, and many other factors. The 100% bonus depreciation provisions discussed are based on the One Big Beautiful Bill Act (signed July 4, 2025) and IRS Notice 2026-11. Tax law can change. Audit risk exists for any tax position. Consult a qualified CPA or tax attorney before making any real estate investment decision based on tax considerations.