Price one guest room and multiply by your key count. In the $12,000,000 select-service example below, the 5-year bucket works out to roughly $16,600 per key before anyone prices the kitchen, the laundry, or the parking field. That per-key arithmetic is why hospitality routinely reclassifies 30% to 45% or more of depreciable basis, at the top of any property-type table.
It is also why a single cost segregation hotel study, run once at acquisition and filed away, captures less than half of what is available to you. Your franchisor already scheduled the rest of it.
Key takeaways
- The guest room is a repeating unit of value. Whatever one room contains, multiply by your key count, and it is nearly all 5-year property.
- Hotels commonly reclassify 30-45%+ of depreciable basis, driven by FF&E in every room, a commercial kitchen, laundry, amenities, and a large site package.
- Your franchisor-mandated property improvement plan is a recurring cost segregation and partial asset disposition opportunity. That is the planning insight most hotel owners miss.
- Your hotel is probably not a rental activity under §469, because average customer stay is under seven days. That changes who can use the deduction.
- Purchase price allocation comes first, across real property, personal property, and often intangible value.
Price One Guest Room, Then Multiply
A $12,000,000 office building is a shell with tenant space in it. A $12,000,000 hotel is a shell containing 120 furnished bedrooms, a commercial kitchen, an industrial laundry, a pool, a lobby full of millwork, and a parking field. You have fifteen room types at most, priced once and applied 120 times.
Nearly everything in one room is 5-year personal property.
Casegoods and furniture: headboards, nightstands, dressers, desks, chairs, luggage benches, lounge seating. Mattresses and box springs. Televisions and mounts. In-room safes, mini-refrigerators, microwaves, coffee equipment. Lamps, sconces, and decorative fixtures, as distinct from general building lighting. Artwork and mirrors. Window treatments, including blackout drapery, track, and hardware. Carpet and luxury vinyl plank. Bath accessories and vanity casework.
Easy to miss in the same room: the PTAC or fan-coil unit, its dedicated electrical, the electronic door lock, and the cabling and access point behind the wall. Back-of-house office furniture and fixtures generally fall to 7-year rather than 5-year. Class assignments vary by asset, which is why an engineer rather than a template should make the call; our 5-, 7-, and 15-year property catalog walks the distinctions.
Worked Example: A 120-Key Select-Service Hotel at $12M
Example: a 120-key select-service hotel acquired for $12,000,000 in February 2026 Land allocated at $1,500,000, leaving $10,500,000 of depreciable basis after the purchase price allocation. Study reclassifies 34%: 19% to 5-year, 3% to 7-year, 12% to 15-year land improvements.
| Asset class | Basis | Life and method | Year-one deduction |
|---|---|---|---|
| 5-year (FF&E, kitchen, systems) | $1,995,000 | 5-yr 200% DB, 100% bonus | $1,995,000 |
| 7-year (office furniture and fixtures) | $315,000 | 7-yr 200% DB, 100% bonus | $315,000 |
| 15-year land improvements | $1,260,000 | 15-yr 150% DB, 100% bonus | $1,260,000 |
| 39-year building | $6,930,000 | 39-yr SL, mid-month | $155,717 |
| Total | $10,500,000 | $3,725,717 |
Without a study, your $10,500,000 on 39 years yields about $235,935 in year one. The study adds roughly $3,490,000 of deduction, worth about $1,221,000 of deferred tax at a combined 35% rate.
That $1,995,000 of 5-year property across 120 keys is the $16,600 per key. Hold the figure in your head, because your PIP will replace most of it inside a decade. And note that the $1,221,000 assumes you materially participate; an investor holding this through an LP interest with no other passive income sees none of it this year.
Your PIP Cycle Is the Spine of the Plan
Your franchise agreement requires a property improvement plan on a predictable cycle, typically soft goods at five to seven years and a full casegoods and public-space renovation at ten to fourteen. You already budget for it. What you probably do not do is treat each PIP as two separate tax events.
Event one: the new spend
A PIP is short-life heavy by design. Carpet, casegoods, mattresses, televisions, lighting, drapery, and bath finishes are §1245 property, bonus-eligible at 100% for property acquired and placed in service after January 19, 2025 under the One Big Beautiful Bill Act.
Interior work that is neither §1245 property nor an excluded item can qualify as 15-year qualified improvement property, since your hotel is nonresidential real property; the exclusions are enlargement, elevators and escalators, and internal structural framework. Sort in that order, §1245 first and QIP second, or you will strand 5-year assets on a 15-year straight-line schedule. Our guide to renovations and tenant improvements covers the sequence.
Event two: what you threw away
The carpet, casegoods, and fixtures you removed still carry adjusted basis on your books. Treas. Reg. §1.168(i)-8 lets you elect to recognize a loss on the remaining basis of the disposed component, stop depreciating property that is in a landfill, and reduce your future §1250 recapture.
The election is annual and generally irrevocable, made on a timely filed return for the year of disposition, so it has to be planned before the PIP year closes rather than discovered at extension. See the partial asset disposition election for the basis methods.
Miss it and you are depreciating two generations of carpet at once. Owners on their third PIP frequently are. This is also the argument for the acquisition study: without asset-level detail carrying a traceable basis, there is nothing to dispose of when the renovation crew arrives.
The Assets Your PIP Will Never Touch
Your renovation cycle churns the guest rooms and the public space. It leaves alone a second block of short-life property that you price once, at acquisition or at construction, and then keep.
The kitchen. Your highest cost-per-square-foot space, and almost entirely equipment: the cooking line, the exhaust hood and its fire suppression, walk-in coolers and freezers with remote refrigeration, prep equipment, ice machines, dishwashing, and the bar package. Then the infrastructure that exists only because the kitchen exists: dedicated gas, grease waste piping and the interceptor, dedicated hot water, dedicated panels and circuits, and floor and trench drains. The 2025 IRS Audit Techniques Guide addresses allocating primary switchgear based on electrical load, which is the correct method for splitting a panel feeding both cooking equipment and general building loads. A full-service restaurant inside your hotel gets the same treatment as a stand-alone operator's, covered in our restaurant cost segregation guide.
The laundry. Commercial washers, dryers, and folding equipment, plus the dedicated plumbing, gas, steam, exhaust, and electrical serving them.
Amenities and technology. Your pool and spa mechanical package is 5-year property while the pool shell and deck are 15-year land improvements. Add fitness equipment, market pantry coolers, the property management system and its servers, point-of-sale, the keycard head-end, telecom and Wi-Fi infrastructure, the surveillance system, and guest-facing AV.
Everything outside the front door. The porte-cochere, monument and building signage, the parking field with striping, curbing, and sidewalks, site lighting, landscaping and irrigation, and patios. One caution: a stand-alone open-air parking structure is 39-year property under the current ATG. Surface paving is 15-year; a parking deck is not.
Why Your Hotel Is Probably Not a Rental Activity Under §469
This surprises owners who assume hotel losses behave like apartment losses.
Under Treas. Reg. §1.469-1T(e)(3)(ii)(A), an activity is not a rental activity if the average period of customer use is seven days or less, calculated as total rental days divided by total rentals. Almost every hotel clears that easily.
So Real Estate Professional Status is not your test. What matters is material participation, most commonly the 500-hour test, the "substantially all" test, or the 100-hour-and-more-than-anyone-else test. An owner-operator generally clears it; a passive investor in a hotel LP generally does not, and the loss stays suspended. The mechanics mirror the short-term rental rules, and contemporaneous time logs matter just as much.
Four Ways a Hotel Study Underdelivers
Your purchase price allocation is unsettled. If the split among real property, personal property, and intangibles is unresolved, the engineering has nothing firm to reconcile to, and reconciliation of allocated costs to actual costs is one of the thirteen elements of a quality study.
You cannot reach the loss. Passive LP investors, or owners past the excess business loss limitation under §461(l) (2026: $256,000 single, $512,000 married filing jointly), may find the deduction lands in a carryforward rather than a refund.
A sale is close. That 5-year property returns as §1245 ordinary income recapture at rates up to 37%, against a 25% cap on unrecaptured §1250 gain. A §1031 exchange defers it; a step-up under §1014 removes it for heirs.
You run limited-service with no food and beverage. Still a good result, just not top-of-range.
Frequently Asked Questions
Can I do a study on a hotel I bought six years ago and already renovated?
Yes, and that is often the best case. A look-back study catches up missed depreciation through a Form 3115 method change with a §481(a) adjustment taken entirely in the year of change when taxpayer-favorable, with no amended returns. It also establishes the asset detail that makes future partial dispositions possible.
Is guest room furniture 5-year or 7-year property?
Guest room casegoods and soft goods are typically 5-year, while general office furniture in administrative areas is typically 7-year. Class assignments vary by asset and by activity, which is why a study should state its rationale for each grouping rather than applying one rule to everything.
How does a management agreement affect the analysis?
It does not change the engineering, but it can change material participation. Hours worked by a third-party manager count toward the "more than anyone else" comparison, and heavy delegation makes the 100-hour test harder to win. Review the arrangement with your CPA before the year closes.
Find Out in 24 Hours Whether a Study Pays for Itself
Not every property justifies a study, and we will tell you when yours doesn't. Send Precision Cost Segregation the address, purchase price, closing date, and your rough tax rate, and we will come back with a modeled reclassification range and an estimated first-year benefit at no cost.
This article is provided by Precision Cost Segregation for general educational purposes and does not constitute tax, legal, or accounting advice. Tax outcomes depend on your specific facts, your tax rate, your passive activity position, and your entity structure. Figures shown are illustrative. Consult your CPA or tax advisor before acting, and engage a qualified professional to perform any cost segregation study. Information is current as of publication.
This article is general information, not tax or legal advice. Depreciation outcomes depend on your facts, elections, and current law — consult your CPA before acting. © 2026 Precision Cost Segregation.