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

Michigan's Public Act 24 of 2025 (House Bill 4961), signed by Governor Gretchen Whitmer on October 7, 2025, advanced the state's general Internal Revenue Code conformity date from January 1, 2018 to January 1, 2025 — but lawmakers carved out a specific exception for bonus depreciation. Individual filers and pass-through entities (LLCs, partnerships, S corporations, which is how most rental real estate is held) must compute their Michigan depreciation using the bonus percentage that was in the tax code as of December 31, 2024, before the One Big Beautiful Bill Act existed. That means the old phase-down schedule applies at the state level: 40% for property placed in service in 2025, 20% for 2026, and 0% starting in 2027 — even though the federal return allows 100% bonus depreciation for the same property. C corporation owners get a blunter version of the same rule: Michigan disallows Section 168(k) bonus depreciation for corporate taxpayers entirely and requires straight MACRS as if bonus depreciation never existed.

In practice, this means a Michigan investor who cost-segregates a rental in 2026 still deducts 100% of the reclassified 5-, 7-, and 15-year basis on the federal return in the placed-in-service year. On the Michigan return, the deduction is not simply the phase-down bonus percentage sitting by itself: because only the bonus-eligible slice of basis is capped by the phase-down percentage, the state-level first-year deduction is the phase-down bonus percentage (20% for 2026) plus ordinary first-year MACRS depreciation computed on the remaining, non-bonus portion of that same reclassified basis, in the same year — this is standard mechanics whenever bonus depreciation is phased down rather than 100%, not a special carve-out. So a Michigan owner's actual year-one state deduction on a reclassified asset runs meaningfully higher than the bare 20% bonus figure alone, with whatever basis is still left recovered over the following years through ordinary MACRS. Because Michigan's individual income tax is a flat 4.25%, this state-level timing difference is modest compared with the federal acceleration, which is where the bulk of a Michigan cost segregation study's value shows up, particularly for owners in higher federal brackets.

Michigan's property tax bills also run above the national average — WalletHub's 2026 Property Taxes by State study puts Michigan's effective rate at 1.25%, ranking 38th out of 51 states and D.C. (1 = lowest), which places Michigan among the higher-tax states nationally and above the median. County-level rates vary, and owners in higher-millage urban counties such as Wayne (Detroit) should confirm their specific county's effective rate with a current source such as a county equalization report rather than assume the statewide average applies. That ongoing carrying cost is exactly why owners look to accelerate whatever deductions are available — federal bonus depreciation chief among them — to improve early-year cash flow on a Michigan rental.

The IRS defaults treat a residential rental building as a single asset depreciated straight-line over 27.5 years, and a commercial building over 39 years. A cost segregation study is an engineering-based analysis, typically involving a site visit or detailed plan review, that breaks a property's purchase price and improvement costs down into its individual components — flooring, cabinetry, decking, dock and boathouse structures, specialty electrical, parking, landscaping, and site work — and reclassifies the ones that qualify into 5-, 7-, or 15-year property using methodology consistent with the IRS Cost Segregation Audit Techniques Guide. Those shorter-lived components are exactly the assets eligible for bonus depreciation. Under the One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, federal bonus depreciation was permanently restored to 100% for qualifying property acquired after January 19, 2025, meaning the entire reclassified 5-, 7-, and 15-year portion can typically be deducted federally in the year the property is placed in service, rather than depreciated over decades.

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 $650,000 short-term rental cabin near Traverse City in 2026, allocating roughly $130,000 to land and $520,000 to the depreciable building. A cost segregation study identifies about $130,000 of that basis — decking, a hot tub, furnishings-adjacent wiring, a gravel driveway, dock hardware, and landscaping — as 5-, 7-, or 15-year property rather than 27.5-year residential rental property. On the federal return, 100% bonus depreciation lets the investor deduct the full $130,000 in year one. On the Michigan return, individual bonus depreciation is capped at the 2026 phase-down rate of 20%, so $26,000 of that basis is deductible via bonus. But that is not the whole Michigan year-one figure: ordinary first-year MACRS depreciation also applies to the remaining $104,000 of reclassified basis in the same year, commonly adding somewhere in the range of $15,000 to $20,000 depending on the specific asset mix and depreciation conventions used — bringing the total illustrative Michigan year-one deduction to roughly $41,000 to $46,000, with the remaining basis recovered over the following years through ordinary MACRS. These figures are illustrative only and will vary by property and situation.

Investors who bought or renovated a Michigan rental property in a prior year and never had a cost segregation study performed have not missed the opportunity. A look-back study applies the same engineering-based component analysis retroactively, and the resulting catch-up depreciation is claimed by filing IRS Form 3115, Application for Change in Accounting Method, along with a Section 481(a) adjustment. That adjustment lets the owner claim the entire missed depreciation as a single deduction on the current year's tax return, with no need to amend any prior-year federal or Michigan returns. Because Michigan's PA 24 bonus-percentage rules are tied to the year an asset was originally placed in service, a look-back study on a Michigan property should be coordinated with a CPA who understands how the state's phase-down schedule interacts with the federal catch-up.

• Short-term rental and Airbnb/Vrbo hosts in Traverse City, Petoskey, Charlevoix, Mackinac Island and Mackinaw City, South Haven, Saugatuck, and Harbor Springs
• Long-term rental and multifamily property owners in Detroit, Grand Rapids, Ann Arbor, and Lansing
• Investors who purchased or substantially renovated a Michigan rental property in the last several years and have not yet had a cost segregation study performed
• High-income W-2 earners exploring the short-term rental material participation strategy, where losses from a qualifying STR can offset active income
• Owners actively scaling a Michigan rental portfolio who want to improve near-term cash flow rather than wait decades for standard depreciation