Mountain Cabin STR Saves $34K Extra via Augusta Rule Stacking with Cost Seg

The Problem

This client, a business owner operating an S-Corporation generating $380,000 in net income, purchased a $520,000 mountain cabin in Montana in July and began operating it as a short-term rental. The property generated $64,000 in gross rental income for the partial year with $24,000 in operating expenses. The client's CPA planned to depreciate the property over 39 years using the mid-month convention, which for a July acquisition would produce only $5,600 in depreciation for the first year.

The client was unaware of three critical opportunities. First, cost segregation could dramatically accelerate depreciation. Second, the Augusta Rule (IRC §280A(g)) could allow the client's S-Corporation to rent the cabin for business meetings and retreats for up to 14 days per year, with the rental income excluded from the client's personal return while the rental payments were deductible to the S-Corp. Third, mid-year acquisitions receive full bonus depreciation on short-lived components regardless of the month of purchase, because bonus depreciation uses the half-year convention which provides the full deduction in the placed-in-service year.

AE Tax Strategy

1. Cost Segregation Study Under IRC §168 with Mid-Year Acquisition

We commissioned a cost segregation study identifying $182,000 (35% of depreciable basis after $40,000 land allocation) in accelerated components: $88,000 in 5-year property (appliances, flooring, window treatments, decorative lighting, built-in entertainment systems), $42,000 in 7-year property (furniture, outdoor fire pit, hot tub equipment), and $52,000 in 15-year property (driveway, landscaping, fencing, outdoor lighting, retaining walls). Under 100% bonus depreciation, the entire $182,000 was deductible in Year 1 regardless of the July acquisition date, because bonus depreciation under IRC §168(k) allows the full deduction in the year the property is placed in service.

2. Augusta Rule Strategy Under IRC §280A(g)

We implemented the Augusta Rule, which allows a taxpayer to rent their personal residence (or any dwelling unit) for up to 14 days per year without reporting the rental income. The client's S-Corporation paid fair market rent of $2,800 per day for 12 days of documented business retreats, strategy sessions, and team meetings held at the cabin. The total rental payments of $33,600 were deductible to the S-Corporation under IRC §162 as ordinary and necessary business expenses, while the $33,600 in rental income was excluded from the client's personal return under IRC §280A(g). At the S-Corp's effective tax rate (passed through to the client at the 32% marginal rate), this produced $10,750 in tax savings.

3. STR Classification and Material Participation

The property operated as a short-term rental with an average guest stay of 3.6 days, qualifying for the non-rental exception under Treas. Reg. §1.469-1T(e)(3)(ii). The client personally managed all bookings, guest communications, and maintenance coordination, logging 165 hours of participation. This exceeded the 100-hour safe harbor under Treas. Reg. §1.469-5T(a)(3), establishing material participation and allowing the net losses (after the $182,000 in bonus depreciation) to offset the client's S-Corp income. The combined first-year deductions of $216,000 ($182,000 cost seg + $33,600 Augusta Rule) at the 32% marginal rate produced approximately $69,000 in total tax reduction.

Before & After Comparison

Tax Category	Before	After	Savings
Standard Depreciation (39-Year)	$5,600	$0	$5,600
Cost Seg Bonus Depreciation	$0	$182,000	$182,000
Augusta Rule Deduction (S-Corp)	$0	$33,600	$33,600
Total Year 1 Tax Benefit	$1,790	$69,000	$67,210
Total	$5,600	$215,600	$216,000 (Year 1 deductions)

Key Takeaways

• Mid-year property acquisitions receive full bonus depreciation on short-lived components — there is no proration for the month of purchase under the bonus depreciation rules.
• The Augusta Rule under IRC §280A(g) allows up to 14 days of tax-free rental income per dwelling unit, making it a powerful strategy when combined with an S-Corporation that can deduct the rental payments.
• Augusta Rule rentals must be at fair market value, documented with written rental agreements, and supported by comparable market rental data for similar properties in the area.
• Stacking cost segregation with the Augusta Rule can produce six-figure first-year deductions on properties valued at $500K or more.