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

Rhode Island decouples from federal bonus depreciation under R.I. Gen. Laws § 44-61-1, which has disallowed bonus depreciation for state tax purposes since the provision was first enacted in 2002 and has never been re-adopted, including for OBBBA's restored 100% bonus depreciation. The mechanism is an add-back-and-recover system, not a permanent loss of the deduction: on Rhode Island Schedule M, taxpayers add back the bonus depreciation claimed federally in the year of purchase (page 2, line 2d), then in later years — once federal depreciation on that asset drops below what ordinary, non-bonus Rhode Island MACRS would allow — the difference is subtracted from Rhode Island income (page 1, line 1i). Practically, this means investors and their preparers need to keep a second depreciation schedule for every Rhode Island property, tracking federal and state basis separately for the life of the asset.

The good news for cost segregation specifically: the acceleration doesn't disappear, it just gets rescheduled. A cost segregation study's main job is reclassifying components — carpet, cabinetry, decorative millwork, site lighting, fencing, landscaping, portions of the driveway and parking areas — out of 27.5- or 39-year straight-line treatment and into 5-, 7-, and 15-year MACRS lives. Those shorter recovery periods, combined with the accelerated (200%/150% declining-balance) methods available under ordinary MACRS, still depreciate faster than straight-line real property for Rhode Island purposes even with no bonus depreciation at all. Meanwhile, your federal return gets the full benefit of 100% first-year bonus depreciation on that same reclassified basis, undiminished by anything Rhode Island does.

Property values reinforce the case. Rhode Island's average effective property tax rate runs about 1.19% of home value, above the national average, and that burden is amplified by the high per-square-foot values of coastal and historic properties in Newport, Narragansett, and Block Island. For illustration only: on a $900,000 Newport-area rental, that can mean an annual property tax bill in the $10,000–$11,000 range — a hypothetical example, not a projection — reason enough to want every available lever, including accelerated depreciation, working to improve near-term cash flow.

Without a study, the IRS defaults every residential rental building to a 27.5-year straight-line schedule and every commercial building to 39 years, meaning you write off a fixed, even slice of the building's value each year regardless of how the property is actually built. A cost segregation study is an engineering-based analysis — typically involving a site visit, review of the purchase settlement statement or construction cost records, and a component-by-component breakdown of the property — that identifies which parts of the building qualify for much shorter 5-, 7-, or 15-year depreciable lives under IRS cost segregation guidelines. Appliances, certain flooring and window treatments, decorative fixtures, and specialty electrical or plumbing typically fall into the 5- or 7-year buckets; site work like paving, curbing, fencing, and landscaping typically falls into the 15-year bucket. The One Big Beautiful Bill Act, signed into law on July 4, 2025, permanently restored 100% first-year bonus depreciation for qualifying property acquired and placed in service after January 19, 2025, so on your federal return, most of that reclassified 5-, 7-, and 15-year basis can be deducted in the year the property is placed in service rather than spread over decades.

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

Say an investor buys a $900,000 short-term rental cottage near downtown Newport, with roughly $700,000 allocated to the building after backing out land value. A cost segregation study might identify around 25% of that building value — roughly $175,000 — as 5-, 7-, and 15-year property: kitchen and bath finishes, furniture built into the sale, decking, outdoor lighting, and the driveway and landscaping. On the federal return, with 100% bonus depreciation available for property acquired and placed in service after January 19, 2025, that $175,000 could be deducted in year one, on top of normal 27.5-year depreciation on the remaining $525,000 of building basis. On the Rhode Island return, that same $175,000 gets added back on Schedule M in year one (RIGL § 44-61-1), then recovered gradually over the following years as ordinary, non-bonus Rhode Island depreciation on the 5-, 7-, and 15-year components outpaces the (now much smaller) remaining federal depreciation on those same components. The federal cash-flow benefit lands immediately; the Rhode Island benefit lands over time. All figures here are round numbers for illustration and not a promise of any particular outcome.

Cost segregation isn't limited to the year you close. If you've owned a Rhode Island rental for several years without a study, a look-back study lets you claim the missed depreciation without amending any prior tax returns. Your accountant files IRS Form 3115 (Application for Change in Accounting Method) with your current-year return, and the accumulated difference between what you actually depreciated and what you should have depreciated is claimed as a single Section 481(a) catch-up adjustment in the current year. For Rhode Island purposes, the same add-back-and-recover mechanism under RIGL § 44-61-1 applies to any bonus-depreciation-eligible portion of that catch-up, so coordinating the federal Form 3115 filing with a parallel Rhode Island depreciation schedule is something to work through with your CPA before you file.

• Short-term rental and Airbnb hosts in Newport, Block Island (New Shoreham), Narragansett, Westerly/Watch Hill, and other South County beach markets, where property values and nightly rates support meaningful reclassifiable basis
• Long-term rental and multifamily owners in Providence, Pawtucket, Cranston, and Warwick looking to improve early-year cash flow on buy-and-hold properties
• Recent buyers or investors who just completed a renovation, since a study can be done for any prior tax year through a Form 3115 look-back, not just the year of purchase
• High-income owners exploring the short-term rental material participation strategy — STRs with an average guest stay of seven days or less and material participation by the owner can generate losses that offset active W-2 or business income on the federal return, a strategy where the accelerated deductions from a cost segregation study do most of the work
• Owners weighing a sale, since RIGL § 44-61-1 requires gain on disposition to be computed using Rhode Island's own (non-bonus) depreciation basis, which is worth understanding before and after a study