Depreciation refers to the reduction in value of a physical asset over time due to wear and tear, age, or obsolescence. For tax purposes, this is highly significant.

It allows businesses and rental property owners to deduct a portion of the asset's cost each year — and in some cases, all of it in the first year.

Depreciation Recapture

Assets must be held for at least 5 years after depreciation is applied. Selling prior triggers "recapture," where the IRS may require you to repay a portion of the tax savings.

Mitigation: 1031 exchange to defer indefinitely, or hold until death for a stepped-up basis that eliminates all recapture.

Active Participation Required

To offset active income (W-2, retirement, etc.) you must demonstrate material participation — typically at least 100 hours per year.

Shortcut: Average stay of 7 days or less = active business classification — bypassing passive activity rules entirely.

You own the asset; we handle the rest.

IRS Section 168 allows you to deduct the full cost of your tiny home in the acquisition year — bypassing 27.5-year depreciation entirely.