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

Vermont does not conform to federal bonus depreciation under Internal Revenue Code Section 168(k). Under 32 V.S.A. § 5811, as explained in Vermont Department of Taxes Technical Bulletin TB-44, a Vermont taxpayer who claims bonus depreciation on a federal return must add that amount back to income when computing Vermont taxable income for the year the property is placed in service. TB-44 was originally issued to address the 50% bonus depreciation created by the 2008 federal stimulus law, and Vermont's Department of Taxes continues to apply its addback-and-recovery methodology to later, larger versions of federal bonus depreciation, including the 100% bonus depreciation now in effect under the One Big Beautiful Bill Act (OBBBA). This is not a permanent disallowance — it is a timing difference. In subsequent years, the taxpayer takes a subtraction modification equal to the difference between the depreciation that would have been allowed without bonus (standard MACRS) and what was actually claimed federally, effectively spreading the Vermont-level deduction back out over the asset's normal recovery period instead of taking it all at once.

This decoupling means a cost segregation study does not accelerate your Vermont state income tax deduction the way it accelerates your federal one. But it still delivers full value where it matters most: on your federal return, where the OBBBA restored 100% bonus depreciation for qualifying assets, so every dollar of building components a cost segregation study reclassifies into 5-, 7-, or 15-year property can be deducted immediately at the federal level in the year placed in service. Vermont taxpayers still see that federal cash-flow benefit — they simply need to plan for the addback on the state return and the multi-year Vermont subtraction that follows.

The case for pursuing cost segregation despite the state addback is reinforced by Vermont's tax environment more broadly. Vermont's property taxes are routinely cited among the highest in the nation, with an effective rate around 1.5% of assessed home value, driven in part by the state's statewide education property tax layered on top of municipal levies. Vermont's graduated personal income tax also reaches a top marginal rate of 8.75%, which applies to a taxpayer's taxable income above the top bracket threshold — including rental income taxed at the individual level once total taxable income crosses that point, though the rate itself is a general top-bracket rate rather than something specific to rental or pass-through income. Against that backdrop, maximizing the federal depreciation deduction on a rental property — even with a Vermont-specific timing adjustment — remains one of the most effective ways to improve after-tax cash flow on a Vermont investment property.

Without a cost segregation study, the IRS default is to depreciate an entire residential rental building over 27.5 years, or a commercial building over 39 years, using straight-line depreciation applied uniformly to every component from the roof to the flooring. A cost segregation study is an engineering-based analysis that walks through the property, identifies individual components — cabinetry, carpet and other flooring, decorative and specialty lighting, certain plumbing and electrical work tied to appliances, fencing, landscaping, driveways, and similar site improvements — and reclassifies them into much shorter IRS-recognized recovery periods of 5, 7, or 15 years. Because the OBBBA, signed into law in July 2025, permanently restored 100% bonus depreciation for qualifying property acquired after January 19, 2025, any component landing in one of those shorter categories can typically be deducted in full in the very first year the property is placed in service, rather than trickling out over decades. For a Vermont owner, that federal-level acceleration is the primary driver of the study's value, even though — as described above — the equivalent state deduction is deferred and recovered over subsequent tax years instead of taken up front.

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

Suppose an investor purchases a $650,000 short-term rental condo near the Killington ski resort, with roughly $500,000 of that price allocated to the depreciable building (the remainder attributable to land). Depreciated straight-line over 27.5 years with no cost segregation, that produces a modest first-year federal deduction of roughly $18,000. A cost segregation study might reclassify somewhere in the range of 20-30% of the building's value — call it $120,000, purely as a round-number illustration — into 5-, 7-, and 15-year property. Under 100% bonus depreciation, that reclassified amount could potentially be deducted in year one at the federal level, dramatically increasing first-year deductions compared to the default schedule. On the Vermont return, that same $120,000 would need to be added back to state taxable income in year one, then recovered gradually as subtraction modifications in the years that follow as the property depreciates on its normal, non-bonus schedule. The federal acceleration is real; the state acceleration is deferred rather than lost. Actual allocations, savings, and tax impact depend on the specific property, its components, the owner's income tax bracket, and passive activity or material participation rules, and should be confirmed with a qualified CPA.

Investors who purchased or renovated a Vermont rental property in a prior tax year have not missed the opportunity. A look-back cost segregation study can be performed on a property already in service, and the accumulated catch-up depreciation is claimed by filing IRS Form 3115, Application for Change in Accounting Method, which allows the entire cumulative difference between depreciation already taken and what should have been taken to be captured in a single Section 481(a) adjustment on the current year's federal return. No amended returns are required for the years already filed. For a Vermont owner, the same state-level addback and subsequent-year subtraction mechanics described above still apply to any bonus depreciation swept up in that catch-up adjustment, so the look-back study's federal and Vermont impacts should be modeled together rather than assumed to mirror one another dollar for dollar.

• Short-term rental and Airbnb hosts operating in Vermont's established vacation markets, including Stowe, Killington, Woodstock, Manchester and Stratton, Okemo/Ludlow, and the Burlington and Lake Champlain Islands area
• Long-term residential rental property owners across Vermont looking to improve early-year cash flow on a buy-and-hold investment
• Investors who recently purchased, built, or substantially renovated a Vermont rental property and have not yet had a cost segregation study performed
• Owners of larger ski-country properties, multi-unit lodges, or condo-hotel style units where furnishings, fixtures, and site improvements represent a significant share of purchase price
• High-income owners evaluating the short-term rental material participation strategy, where an average guest stay of seven days or fewer and material participation in the activity can allow rental losses (including those generated by cost segregation) to offset active W-2 or business income rather than being trapped as passive losses