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Congress rewrote a big piece of the tax code in July 2025, and a lot of Louisville rental owners still haven't heard what it did for them. If you own a furnished rental, an Airbnb or a midterm rental, or you're thinking about buying one, this is the page to send your accountant.

One thing first. I'm a Realtor, not a CPA (certified public accountant, the person who signs your tax return). What follows is what the IRS rules say and what I've watched investors do in Louisville since 2013. Your own CPA has to confirm any of it fits you.

What changed in the 2025 tax law, in plain English

Eight changes matter most to rental owners:

• Bonus depreciation is back at 100%, and it's permanent. Depreciation lets you deduct the cost of a building a little at a time, usually over 27.5 years for a regular rental house. Bonus depreciation lets you deduct the full cost of certain parts in year one. It was set to shrink to 20%; the new law locked 100% back in for property acquired after January 19, 2025. It covers property with a tax life of 20 years or less, and that generally includes used property, which matters because most Louisville homes are used.
• Section 179 got bigger. The limit went from $1 million to $2.5 million, phasing out at $4 million. It can't create a loss by itself, which is why most rental owners lean on bonus depreciation instead.
• The 20% pass-through deduction (QBI, qualified business income) is permanent. If your rental counts as a business, you may be able to deduct up to 20% of the profit. The IRS safe harbor uses 250 hours of work a year.
• The cap on business losses is permanent. For a married couple it's roughly $600,000 a year, adjusted annually; anything over carries forward.
• The 1099-K threshold went back to $20,000 and 200 transactions. Fewer forms for small hosts. The income is still taxable.
• Contractor forms (1099-NEC and 1099-MISC) start at $2,000, up from $600, for payments after December 31, 2025.
• The state and local tax deduction cap rose to $40,000 for 2025 for households under $500,000 of income, rising 1% a year and returning to $10,000 in 2030.
• The estate tax exemption is $15 million per person starting in 2026, and it's permanent.

Short-term vs. midterm rentals: the IRS treats them differently

Short-term rentals (the Airbnb)

If your average guest stays seven days or fewer, the IRS stops treating the property as a regular rental for the passive loss rules. If you also materially participate (in plain terms, you're hands-on), the loss can offset your W-2 paycheck. The most common way to qualify: more than 100 hours a year, and at least as many hours as anyone else working on it, cleaners and property managers included. The average is total nights divided by number of bookings, so one 30-day stay can wreck it. Keep a time log; if you're audited, the log is your whole case.

Short stays also change the depreciation clock. When most guests stay 30 days or less, the building depreciates over 39 years instead of 27.5, which makes a cost segregation study (below) matter even more on an Airbnb.

Midterm rentals (30 days or longer)

Travel nurses, people relocating, families between houses, insurance stays. The seven-day rule does not apply, so midterm losses are passive: they offset passive income, or they carry forward to future passive income or the profit when you sell. The big exception is real estate professional status. If one spouse works 750+ hours a year in real estate, and that's more than half of that spouse's working time, rental losses on a joint return can offset the other spouse's W-2. The hours are tested one spouse at a time; you can't add them together. The small $25,000 allowance for hands-on landlords phases out between $100,000 and $150,000 of income.

Cost segregation: what makes the first-year deduction show up

By default, a building is depreciated as one lump over 27.5 or 39 years. A cost segregation study is an engineer's report that breaks the purchase into parts (flooring, cabinets, fixtures, appliances, furniture, fencing, the parking pad) and sorts them into 5, 7 and 15-year buckets. Anything with a life of 20 years or less qualifies for bonus depreciation, so those buckets can come off in year one. Furnished rentals have a lot more to sort, and studies commonly move somewhere around a quarter of the building's value into those short buckets.

An illustration, not a promise: buy a $300,000 furnished rental where $40,000 is land (land never depreciates). That leaves $260,000. If the study moves 25%, that's $65,000 deducted in year one, or about $20,800 less federal tax at a 32% bracket, if the loss can be used under the rules above. Without the study, the same building depreciates about $6,700 a year over 39 years. Run your own numbers in our cost segregation and bonus depreciation calculator.

The Kentucky wrinkle

Kentucky doesn't follow federal bonus depreciation. The big first-year write-off lands on your federal return while your Kentucky return uses a slower schedule, so your CPA has to track two sets of depreciation. Kentucky's income tax rate is 3.5% in 2026, so the state difference is much smaller than the federal benefit.

Already own one?

A look-back study can catch up depreciation you never took. Your CPA files Form 3115 and the catch-up lands on this year's return, with no amended returns. The bonus rate is set by the date the property was placed in service, not the date of the study.

The catch: it's timing, not free money

When you sell, the IRS takes some of it back. The furniture and equipment portion is taxed as ordinary income (up to 37%); the building portion up to 25%. Owners manage that by holding long-term, doing a 1031 exchange, or taking the deduction in a high-income year. Our capital gains and 1031 exchange estimator shows what you'd owe at sale. Plan the exit before you buy.

Why furnished rentals work in Louisville

Kentucky had a record 2025 for tourism: 81.1 million visitors who spent $10.4 billion, the fourth straight record year (Spectrum News, June 2026), and the Kentucky Bourbon Trail drew 2.7 million visits (WDRB). AirDNA counted 3,215 active short-term rental listings in Louisville as of August 2026, down about 20% from a year earlier, with the average listing earning about $40,000 a year at $218 a night and 56% occupancy (AirDNA). Another tracker, AirROI, shows about $30,700 and 38% occupancy. Underwrite the low end.

On the midterm side, Louisville's hospital systems are the demand: Norton Healthcare (more than 18,600 employees), UofL Health and Baptist Health. Kentucky is in the Nurse Licensure Compact, so travel nurses with a multistate license can start here without a separate Kentucky license, and travel contracts commonly run 13 to 14 weeks. See our guides to midterm rentals in Louisville and travel nurse housing near Norton Healthcare.

Permits come before taxes

Louisville Metro has allowed short-term rentals since 2015, but each one must be registered ($250 a year), and a home you don't live in, in most residential zones, also needs a conditional use permit. Old Louisville has its own carve-out, some small cities inside Jefferson County ban them, and condo boards and HOAs add their own rules. Stays of 30 days or longer fall outside Louisville's short-term rental ordinance, which is a big reason midterms appeal to owners who want to skip the permit process. Start with our Louisville short-term rental rules checker and the step-by-step short-term rental guide.

Frequently asked questions

Is 100% bonus depreciation permanent for rental property?

Yes. The July 2025 law made 100% bonus depreciation permanent for qualifying property acquired after January 19, 2025. It applies to property with a tax life of 20 years or less, which a cost segregation study can carve out of a rental.

Can an Airbnb loss offset my W-2 income?

It can, if the average guest stay is seven days or fewer and you materially participate (commonly 100+ hours a year and more than anyone else). Keep a detailed time log, and confirm with your CPA.

Do midterm rentals get the same tax treatment as Airbnbs?

No. Stays of 30 days or longer follow the regular rental rules, so losses are passive unless a spouse qualifies as a real estate professional (750+ hours and more than half of their working time).

Does Kentucky follow federal bonus depreciation?

No. Kentucky uses a slower depreciation schedule, so your CPA tracks federal and Kentucky depreciation separately. Kentucky's income tax rate is 3.5% in 2026.

Do I need a permit for a short-term rental in Louisville?

Every short-term rental in Louisville Metro must be registered, and a non-owner-occupied home in most residential zones also needs a conditional use permit. Stays of 30 days or longer fall outside the short-term rental ordinance.

Want help finding one that fits?

Tell us your price range and what you're after, and matching Louisville listings come to your inbox: set your buy box (free). Already own a rental and wondering what it's worth? Get a free home value. Or text or email Rob at Winner Realty, (502) 305-8915, and I'll introduce you to the CPA I trust.

This is general information, not tax, legal or financial advice. Tax results depend on your income, hours, how the property is used and the rules in effect for you. Talk to your own CPA before acting. Equal Housing Opportunity.