# Cost segregation for hotels and motels What a study examines at a hotel or motel: guest-room furnishings, kitchens, laundry, pools, parking and renovations, with the evidence needed and common traps. ## Short answer A hotel or motel is not residential rental property. The Code excludes from the definition of a dwelling unit any unit in a hotel, motel or other establishment where more than half the units are used on a transient basis, so a lodging building is generally nonresidential real property with a 39-year recovery period. That long life is why hotel cost segregation receives so much attention: a hotel contains a great deal of property that is not the building. Guest-room furniture and fixtures, televisions, window treatments, removable floor coverings, laundry and kitchen equipment, fitness equipment, signs, and site work such as parking, lighting and an outdoor pool may each have a shorter life on their facts. Hotels are also renovated on a cycle, which creates new assets and disposals of old ones. This article covers what is examined, the asset-class questions specific to lodging, the evidence that matters, common pitfalls, and how a study fits with your tax adviser's work. It is general education, not tax advice. ## What a study examines at a hotel or motel | Component group | Typical treatment to examine | Examples | |---|---|---| | Land | Not depreciable | The site | | Building shell and systems | 39-year nonresidential real property | Structure, roof, exterior, corridors, general electrical and lighting, central HVAC, plumbing and bathroom fixtures, elevators, fire protection | | Furniture, fixtures and equipment (FF&E) | 5- or 7-year depending on asset class | Beds, case goods, seating, televisions, lamps, window treatments, removable carpet, artwork | | Operating equipment | Often 5-year on its facts | Laundry machines, kitchen and breakfast-area equipment, housekeeping carts, fitness equipment, property-management and key systems | | Site improvements | Generally 15-year land improvements | Surface parking, drives, curbs, sidewalks, site lighting, landscaping, outdoor pool and deck, fencing | | Interior improvements after the building was placed in service | May be 15-year qualified improvement property | Room renovations, lobby refreshes, reconfigured meeting space | The rows show where questions usually land, not answers for a particular property. Each line should carry the reason for its classification. ## The asset-class question for hotel FF&E Owners often hear that hotel furniture is 5-year property. The rule is more specific, and a good study shows its work. The IRS guide states that assets used in hotel operations fall in asset class 57.0, Distributive Trades and Services, which has a 5-year recovery period. It also explains that when an item is described in both a general asset category, such as office furniture, fixtures and equipment in asset class 00.11 (7-year), and an activity category such as 57.0, the item goes to the asset category unless that category specifically excludes it or the activity category specifically includes it. The guide cites Norwest Corp. v. Commissioner and Rev. Rul. 2003-81 for that rule. For a hotel owner the practical point is that each type of FF&E should be matched to its asset class, with the reasoning written down. Some items, such as laundry machines or kitchen equipment, are not described in the general asset categories and fall to the activity class; furniture is the item where the asset-category rule needs to be addressed directly. Both are short-life property and qualified property for bonus depreciation, but the recovery period matters for owners who elect out of bonus depreciation, for the alternative depreciation system, and for consistency on examination. ## Food service, meeting space and parking Full-service hotels add components that limited-service properties may not have: - **Restaurants and bars.** The IRS guide includes a restaurant industry matrix, which is examiner guidance rather than law, addressing items such as dedicated kitchen equipment hook-ups, exhaust hoods and walk-in refrigeration. A hotel restaurant is examined with that matrix in view. - **Meeting and ballroom space.** Movable partitions, audio-visual equipment and decorative finishes need item-by-item analysis; permanent walls and ceilings are part of the building. - **Parking structures.** The IRS guide sets out its position that parking structures are buildings with a 39-year life, not land improvements. Surface parking is generally a land improvement. A study that classifies a parking garage as 15-year property is taking a position the IRS disputes and should say so. - **Pools and recreation.** An outdoor pool, its deck and surrounding fencing are commonly treated as land improvements; an indoor pool inside the building raises different questions. ## Renovations and brand-required improvements Hotels are renovated on a schedule, often under a franchise property improvement plan. Each renovation is a new set of assets with its own placed-in-service date. Interior improvements made by the taxpayer to a nonresidential building after it was first placed in service may be qualified improvement property, which is 15-year property and eligible for bonus depreciation, unless the cost is for an enlargement, an elevator or escalator, or the internal structural framework. New FF&E bought in a renovation is its own short-life property. The other side of each renovation is what was removed. Carpet, case goods and televisions that are replaced are retired assets. Removed interior finishes and building components may be written off through the partial disposition election. A detailed asset list from the acquisition study makes those later dispositions possible; a study that lumps the building into one line makes them difficult. ## Limited-service, extended-stay and conversions Lodging formats differ, and the study should reflect the format in front of it. - **Limited-service and select-service hotels** usually have a breakfast area rather than a full kitchen, little meeting space and more surface parking relative to their size. The study's weight shifts toward FF&E and site work. - **Extended-stay properties** may have in-room kitchens, which add appliances and cabinetry to each unit. Whether units are used on a transient basis is still the question that decides residential or nonresidential treatment for the building; an extended-stay property where most stays are long is a fact pattern for the adviser to test, not assume. - **Conversions**, such as a motel converted to apartments or an office building converted to a hotel, change the use and possibly the recovery period, and the conversion work is its own set of assets. - **Closing statement and purchase allocation**, including any separate allocation to FF&E, franchise rights or other intangible assets in the purchase agreement. Basis allocated to intangibles is not part of the building study. - **FF&E inventories** by room type, and invoices for recent FF&E purchases. - **Construction or renovation records:** schedules of values, pay applications and change orders, including property improvement plan scopes. - **Drawings and equipment schedules** for kitchens, laundry and mechanical systems. - **Prior depreciation schedules** from the seller, if available, to avoid double-counting FF&E already on the books. - **A site visit** covering room types, back-of-house areas and site work. The IRS guide lists documentation, site inspection, a legal analysis for classifications, unit costs, an asset list and reconciliation to the total basis among the elements of a quality study. ## Common pitfalls - **Treating all FF&E as 5-year** without addressing the asset-category rule. - **Double-counting FF&E** that the purchase agreement or the seller's schedule already separated. - **Classifying a parking garage as a land improvement** without disclosing the IRS position. - **Ignoring intangible value** in a branded acquisition. - **Missing dispositions** at each renovation. - **Using a percentage from another hotel.** The IRS guide warns examiners about studies based on industry averages. ## How the study fits with your tax adviser's work The study classifies and documents. Your tax adviser decides how the deductions are used. For passive activity purposes, an activity where the average guest stay is seven days or less is not a rental activity; it is treated as a trade or business, and losses are nonpassive only for owners who materially participate under the regulations' tests. Many hotel investors do not materially participate, so the adviser's analysis of each owner's position matters as much as the study. The adviser also handles elections out of bonus depreciation by class, look-back studies through a change in accounting method, and the exit: gain on section 1245 property is recaptured as ordinary income to the extent of depreciation allowed or allowable, and unrecaptured section 1250 gain on the building is taxed at up to 25 percent. State conformity varies. ## Questions to ask a practitioner 1. How will you assign asset classes to each type of FF&E, and will the report explain the Norwest rule? 2. How will you treat the purchase price allocated to FF&E and to intangibles in the purchase agreement? 3. Will you inventory FF&E by room type, and how will you value it? 4. How do you treat parking structures, and will the report disclose the IRS position? 5. How will the study handle the restaurant, meeting space and pool? 6. Will the asset list support future renovations and partial dispositions? 7. Who signs the report, and will you support the study on examination? ## Questions people also ask ### Is a hotel 39-year property? Generally yes. A unit in a hotel or motel where more than half the units are used on a transient basis is not a dwelling unit, so the building is nonresidential real property. ### Is hotel furniture 5-year or 7-year property? It depends on the asset class. The IRS guide places hotel operations in asset class 57.0 (5-year) but applies the rule that items described in an asset category such as office furniture, 00.11 (7-year), stay there unless excluded. Hotel depreciation schedules should show which rule each item follows. ### Is motel cost segregation different from a full-service hotel? The rules are the same. A motel usually has less food service and meeting space and more site work relative to its size, so the study's emphasis shifts. ### Does bonus depreciation apply to hotel renovations? To qualified improvement property and new short-life FF&E, at 100 percent for qualified property acquired after January 19, 2025. Not to enlargements or structural framework. ### Can hotel losses offset other income? Only if the owner materially participates, because a hotel with short average stays is not a rental activity. Your adviser applies the tests to your facts. ## Sources - https://www.law.cornell.edu/uscode/text/26/168 — 26 U.S.C. §168(e)(2)(A), (e)(3)(E)(vii) and (e)(6). - https://www.irs.gov/publications/p946 — IRS Publication 946 (2025), How To Depreciate Property: Chapters 2 and 4; Appendix B, asset classes 00.11, 00.3 and 57.0. - https://www.irs.gov/pub/irs-pdf/p5653.pdf — IRS Publication 5653, Cost Segregation Audit Techniques Guide (Rev. 2-2025): Chapters 3, 4, 6.C, 7.C and 8.B. - https://www.law.cornell.edu/cfr/text/26/1.469-1T — 26 C.F.R. §1.469-1T(e)(3), exceptions to rental activity; §1.469-5T, material participation. - https://www.irs.gov/publications/p925 — IRS Publication 925 (2025), Passive Activity and At-Risk Rules. - https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill — IR-2026-06 (January 14, 2026), bonus depreciation guidance. - https://www.law.cornell.edu/cfr/text/26/1.168%28i%29-8 — 26 C.F.R. §1.168(i)-8, partial disposition election. - https://www.irs.gov/publications/p544 — IRS Publication 544 (2025), Sales and Other Dispositions of Assets: Chapters 3 and 4. ## Related reading - [What a cost segregation study does](/articles/what-a-cost-segregation-study-does) - [Cost segregation after a renovation: improvements and partial dispositions](/articles/renovations-improvements-and-partial-dispositions) - [Qualified improvement property and cost segregation](/articles/qualified-improvement-property) - [Depreciation recapture after cost segregation](/articles/depreciation-recapture-after-cost-segregation) - [How to hire a cost segregation practitioner](/articles/how-to-hire-a-cost-segregation-practitioner) To find a practitioner, search the [NBCSS directory](/directory) or browse [cost segregation specialists by state](/cost-segregation-specialists). --- Canonical: https://nbcss.org/articles/cost-segregation-hotels-and-motels Published: 2026-10-01 · Last content change: 2026-10-01 Not professional advice: general educational information from the National Board of Cost Segregation Specialist (NBCSS); not accounting, tax, legal, financial, investment or engineering advice. 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