Cost Segregation Study in Indiana for Airbnb and Short-Term Rental Investors

The Indiana Department of Revenue has decoupled the state from IRC Section 168(k) bonus depreciation for years, and Income Tax Information Bulletin #118 spells out the mechanics: a taxpayer who claims bonus depreciation federally must recompute net income as if the bonus method had never been used, then add back the difference on the Indiana return in the year the property is placed in service. Because the property's total depreciable basis never changes, only the timing does, Indiana lets that add-back reverse out as a subtraction in the years that follow, as ordinary (non-bonus) MACRS deductions keep running on the federal side. In practice, an Indianapolis or Fort Wayne rental owner who has enough taxable income and tax liability to use the deduction — subject to the passive-activity-loss and at-risk rules discussed below — still captures the federal cash benefit of 100% bonus depreciation in year one and simply carries a short add-back/subtraction schedule on the state return for a few years afterward.

Senate Bill 243, enacted in Indiana's 2026 legislative session and signed by Governor Braun on March 5, 2026, extended that decoupling posture even further by cutting Indiana off from bonus depreciation under the newer IRC Section 168(n) category for qualified production property, with a retroactive effective date of July 4, 2025 for that provision. It's a clear signal that Indiana's legislature intends to keep controlling the pace of depreciation deductions on its own books rather than automatically importing whatever Congress allows at the federal level.

None of this weakens the case for cost segregation. Indiana's flat 2.95% individual income tax rate is comparatively low, and the state's average effective property tax rate of roughly 0.76% of assessed value (Tax Foundation) sits well under the national average — with rural counties like Switzerland County under 0.5% and Indiana's highest-taxed urban county, Marion County, still topping out under 1% at roughly 0.93%. That combination keeps an investor's ongoing carrying costs manageable while the federal bonus depreciation windfall a cost segregation study unlocks does the heavy lifting on year-one cash flow.

Without a cost segregation study, the IRS depreciates a residential rental building on a straight line over 27.5 years and a commercial building over 39 years. An engineering-based study walks the property component by component and identifies pieces that legally belong in shorter recovery classes — things like land improvements (parking areas, landscaping, exterior lighting, fencing), certain interior finishes, cabinetry and flooring, and specialty electrical or plumbing tied to specific equipment — and reassigns them to the 5-year, 7-year, and 15-year lives the tax code already provides for those asset types. Once reclassified, those components become eligible for bonus depreciation rather than being stuck depreciating alongside the building shell for decades. Under the One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, Congress permanently restored 100% bonus depreciation for qualifying property acquired after January 19, 2025, meaning a large share of the reclassified components can be deducted in the very first year the property is placed in service.

For illustration only — your results depend on your property and tax situation, and this is not a projection of actual savings.

Suppose an investor buys a short-term rental cabin near Nashville in Brown County for $600,000, with $120,000 allocated to land and $480,000 to the building and its contents. A cost segregation study might reclassify roughly 25% to 30% of the depreciable basis, in this case about $120,000 to $144,000, into 5-, 7-, and 15-year property covering items such as furniture, appliances, decking, outdoor lighting, and the gravel driveway. At 100% federal bonus depreciation, the owner could potentially deduct that entire reclassified amount in year one, compared to a small fraction of that figure under standard 27.5-year straight-line depreciation. On the Indiana return, that same reclassified amount would need to be added back in year one and then recovered as a subtraction over the following several years as federal depreciation on those components runs down. Actual allocations, timing, and total tax impact vary by property and require a qualified engineer and CPA.

Missed cost segregation when you first bought or renovated your Indiana rental? You don't need to amend prior-year returns to claim it now. A look-back study lets a CPA file IRS Form 3115, Application for Change in Accounting Method, and claim the entire missed depreciation — both regular and bonus — as a single Section 481(a) catch-up adjustment on the current-year return. That means an investor who purchased a rental in South Bend, Fort Wayne, or Michigan City in 2022, 2023, or 2024 without ever having a cost segregation study performed can still capture those deferred deductions today, in one return, without reopening any prior-year filings.

• Short-term rental and Airbnb hosts in Indiana's established vacation markets, including Indianapolis, Fort Wayne, South Bend/Notre Dame, Westfield, Brown County/Nashville, and the Lake Michigan shoreline around Michigan City and the Indiana Dunes
• Long-term residential and multifamily rental owners across the state looking to accelerate early-year deductions and improve cash flow
• Investors who recently purchased, built, or substantially renovated a rental property and haven't yet had a cost segregation study performed
• Commercial property owners with retail, office, industrial, or self-storage buildings placed in service in the last several years
• High-income owners exploring the short-term rental material participation strategy, which requires meeting the average 7-day-or-less guest stay test and materially participating in the activity in order to treat resulting losses as non-passive against other income