Cash-on-Cash Returns vs. Tax Benefits: What Matters More in Today’s STR Market?

In 2025, the best short-term rental (STR) deals still start with strong, pre-tax cash-on-cash (CoC) returns. But with 100% bonus depreciation restored for qualifying property placed in service after Jan 19, 2025, the right tax strategy can materially boost after-tax resultsif you actually qualify under the STR participation rules and your deal pencils before taxes. IRS+1

Why cash-on-cash is your first “go/no-go” filter

Cash-on-cash is the simplest sanity check for STRs:

CoC = (Annual cash flow before taxes) ÷ (Total cash invested)

It forces discipline on income, expenses, and debt service. CoC keeps you from “buying a tax deduction” on a weak propertybecause if the asset can’t carry itself before taxes, bonus depreciation is just lipstick.

Use a conservative underwrite: seasonality, cleaning/turn costs, utilities, insurance, platform fees, HOA/condo rules, and a realistic occupancy/ADR curve. Chalet’s market dashboards make that easy by surfacing occupancy, ADR, booking lead times, and regulation context for specific marketsfor example, Panama City Beach, FL (drive-to demand, 2-BR sweet spot) and Myrtle Beach, SC (family summer peaks, long booking windows). Chalet+1

The 2025 tax landscape (what changed and why it matters)

100% bonus depreciation is back (for qualifying property)

The One Big Beautiful Bill (Public Law 119-21) brought back 100% bonus depreciation permanently for qualifying property placed in service after Jan 19, 2025. Think furniture, appliances, select land improvements, and personal-property components identified in a cost-segregation study (buildings still depreciate over 27.5 years). This can front-load deductions in year one, materially improving after-tax returns. IRS+2KBKG+2

How STRs can become “non-passive”

If you materially participate in an STR and your average guest stay is 7 days or fewer (or meets other short-term tests), your STR activity may be treated as non-passivemeaning losses (often from bonus depreciation) can offset W-2/active income. Getting this wrong can backfire, so involve an STR-savvy CPA and review the passive-activity rules. IRS+2Hall CPA+2

Important: This article is informational only. Tax situations vary; consult your CPA/attorney.

Market reality check: revenue is healthy, but selection matters

U.S. STR revenue metrics are solid in 2025: RevPAR hit all-time highs on strong nightly rates even as occupancy softened from supply growth. That means deals still workbut the winners are market- and property-specific (right size, right location, right amenities).Airdna

This is where secondary/drive-to markets often shine. For instance, Panama City Beach and Myrtle Beach show durable leisure demand with clear permitting pathsuse these dashboards to anchor assumptions on ADR, occupancy, and booking lead time before you model debt. Chalet

A simple framework: CoC first, taxes second

1. Underwrite pre-tax CoC
   
   • If < 8% (conservative underwriting): probably pass.
     
   • 8–12%: borderline; lean on operations (dynamic pricing, amenity upgrades) to lift.
     
   • 12%+: strongnow layer taxes.
     
2. Layer the tax strategy
   
   • Confirm with your CPA whether you can qualify the STR as non-passive.
     
   • Map eligible property for 100% bonus depreciation (post-Jan 19, 2025 in-service).
     
   • Consider a cost-segregation study on improvements/personal-property components.
     
3. Re-score on an after-tax basis
   
   • Keep your hurdle: a tax benefit should enhance, not rescue, a deal.
     

Worked example (illustrative only)

Scenario (secondary coastal market):

• Purchase price: $450,000
  
• Down payment (20%): $90,000; closing ~3%: $13,500; FF&E: $45,000
  
• Loan: $360,000 @ 7% (30-yr P&I ≈ $28,741/year)
  
• Gross revenue (conservative): $80,000
  
• Operating expenses (cleaning, utilities, supplies, management, platform fees, reserves): 40% of revenue = $32,000
  
• NOI = $48,000 – Cash flow before taxes (CFBT) ≈ $19,259
  
• Cash invested ≈ $148,500 – Pre-tax CoC ≈ 13.0%
  

Tax layer A  FF&E only

• 100% bonus depreciation on $45,000 FF&E – potential deduction $45,000
  
• If STR is non-passive, and marginal tax rate ~32% – tax savings ≈ $14,400
  
• Year-1 after-tax ROI ≈ (19,259 + 14,400) / 148,500 = ~22.7%
  

Tax layer B  add cost seg personal-property components (illustrative)

• Suppose a study identifies $72,000 of eligible components in addition to FF&E – total year-one deduction $117,000
  
• At 32% – tax savings ≈ $37,440
  
• Year-1 after-tax ROI ≈ (19,259 + 37,440) / 148,500 = ~38.2%
  

Again: your facts will differ. The idea is that you buy the yield and let the tax code amplify itnot the other way around. KBKG

When the tax tail wags the dog (and why that’s risky)

• Material participation pitfalls: If you don’t meet the tests, losses may be passive and won’t offset W-2 income. IRS 
• Recapture on exit: Depreciation reduces basis; expect depreciation recapture when you sell (plan 1031/hold horizon accordingly).
  
• Regulatory shifts: Some primaries are tightening (e.g., NYC Local Law 18), pushing investors to secondary markets with clearer rules. Underwrite regulations and HOA bylaws upfront. NYC.gov 

Putting it into practice (with Chalet assets)

1. Start with a market reality pass
   
   • Pull the Chalet dashboard for a candidate market (e.g., Panama City Beach or Myrtle Beach) and note occupancy, ADR, lead times, and seasonality.
     
2. Model pre-tax CoC
   
   • Use your calculator assumptions; pressure-test ADR/occ (-10%/-10%), add realistic ops costs, and plug in today’s debt.
     
3. Layer taxes only after CoC clears your hurdle
   
   • Confirm 100% bonus depreciation eligibility (post-Jan 19, 2025 in-service).
     
   • Discuss STR non-passive qualification with your CPA (average stay ≤7 days, material participation). KBKG
4. Decide
   
   • If the deal works pre-tax, the tax benefits are the cherry on top.
     
   • If the deal only works because of tax write-offs, rethink it.
     

Bottom line

In 2025, the best STR investments are the ones that pencil on pre-tax cash-on-cash and happen to unlock powerful first-year deductions when executed correctly. Lead with CoC to avoid overpaying in a euphoric market; then let 100% bonus depreciation and the STR non-passive pathway (when you qualify) enhance your after-tax outcome. That’s how you build durable returns regardless of market noise. KBKG