100% Bonus Depreciation Restored for 2026: What Real Estate Investors Need to Know

What changed: phase-down ended, 100% restored

Bonus depreciation under Section 168(k) had been phasing down since 2023 — falling to 80% in 2023, 60% in 2024, and 40% in 2025 under prior law. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, permanently restored 100% bonus depreciation for qualifying property placed in service on or after January 20, 2025. For investors who placed property in service after that date, the full first-year expensing rules are back.

The restoration is permanent under current law, not subject to a future phase-down under current legislation (though Congress can always change it again). This is a significant shift from the prior-law schedule, which would have reduced bonus depreciation to 20% in 2026 and phased it out entirely by 2027. Investors can now plan cost segregation studies with confidence that the accelerated deductions will be 100%, not a sliding percentage.

What property qualifies for bonus depreciation

Bonus depreciation under Section 168(k) applies to qualified property, which includes: tangible personal property with a recovery period of 20 years or less (5-year, 7-year, 15-year assets), computer software, and qualified improvement property (QIP — improvements to the interior of nonresidential buildings placed in service after the building was first placed in service).

What does NOT qualify for bonus depreciation: the building itself (residential rental property depreciated over 27.5 years and commercial real estate over 39 years), land, and property used in certain regulated utility industries. Land improvements are 15-year property and do qualify. Qualified improvement property (interior commercial improvements) is 15-year property and also qualifies.

For real estate investors, the practical effect of the qualifying rules is that bonus depreciation applies almost exclusively to property identified in a cost segregation study — the components reclassified as 5-, 7-, or 15-year personal property and land improvements. The building shell itself remains a long-term 27.5- or 39-year depreciable asset.

How bonus depreciation works with cost segregation

The combination of a cost segregation study and 100% bonus depreciation is the most powerful first-year depreciation strategy available to real estate investors. The cost segregation study identifies the components of a building that qualify for shorter depreciation lives; bonus depreciation then allows those components to be fully deducted in the first year the property is placed in service.

A worked example: you purchase a $2,000,000 residential rental property. A cost segregation study identifies $300,000 of 5-year personal property (appliances, carpeting, fixtures) and $150,000 of 15-year land improvements (paving, fencing, landscaping). With 100% bonus depreciation, you deduct $300,000 in year one for the personal property and $150,000 for the land improvements — $450,000 in bonus depreciation plus approximately $56,000 of regular 27.5-year depreciation on the remaining $1,550,000, for a first-year deduction of approximately $506,000 on a $2,000,000 property.

For a passive investor in the 37% federal bracket without real estate professional status, these losses are passive and can only offset passive income from other sources. For a real estate professional who materially participates, the losses are non-passive and can directly offset W-2 income or business income — potentially saving $187,000 or more in federal income tax in year one.

The recapture trade-off: what you'll owe when you sell

The first-year deduction benefit of bonus depreciation creates a deferred recapture obligation. When you sell the property, all depreciation claimed on the short-life components is subject to Section 1245 recapture as ordinary income — taxed at your full marginal rate, not capped at 25%.

The time-value-of-money analysis still typically favors bonus depreciation: you deducted $450,000 at your current rate (say 37%, saving $166,500) and will eventually pay recapture at your then-current rate (if rates stay at 37%, you'll owe $166,500, but the time value of having $166,500 now rather than paying it years later has real economic value). The math works better when hold periods are longer and when marginal rates are expected to stay flat or fall.

A 1031 exchange can defer the recapture indefinitely. If you plan to exchange rather than sell outright, the recapture is carried forward into the replacement property and never becomes due during your lifetime if you keep exchanging — making the bonus depreciation a pure timing benefit.

Passive activity loss limitations and the REPS exception

For most passive investors, bonus depreciation creates passive losses that cannot offset wages or active income. The deduction is still valuable — passive losses carry forward indefinitely and release in full when the activity is sold in a fully taxable disposition — but it does not produce an immediate cash benefit against a W-2 salary for a passive investor.

Real estate professional status (REPS) is the primary exception. An investor who qualifies under IRC Section 469(c)(7) — spending more than 750 hours per year in real property trades or businesses and more than any other profession — and who materially participates in each rental activity (or makes a grouping election) can treat rental losses as non-passive. Combined with bonus depreciation and cost segregation, REPS can produce a large ordinary-income deduction against W-2 wages or business income in the same year.

Short-term rental properties (average guest stay of seven days or less) may also escape passive activity classification if the owner materially participates, because they are not treated as rental activities under the passive activity regulations. This makes STR properties another vehicle for immediately using large cost-segregation-driven losses.

Interaction with the qualified business income (QBI) deduction

Bonus depreciation reduces QBI, which in turn reduces the Section 199A QBI deduction (limited to 20% of qualified business income). For a profitable rental operation that qualifies for the QBI deduction, a large bonus depreciation deduction in year one can temporarily eliminate or significantly reduce QBI — and therefore eliminate the QBI deduction for that year.

This is a planning tension: the same deduction that saves 37% in income tax also costs 20% × 37% = 7.4% in foregone QBI savings on the same income. Investors near the threshold where bonus depreciation converts positive QBI to a QBI loss may prefer to use regular MACRS depreciation in some years to preserve QBI — a level of analysis that requires a full tax projection rather than a rule of thumb.

Year-of-sale planning: using cost seg and bonus depreciation strategically

Bonus depreciation decisions are generally made at acquisition — you elect in or out when you file the tax return for the year property is placed in service. You can elect out of bonus depreciation for a specific asset class (e.g., keep 5-year property on regular MACRS and take only 15-year on bonus), giving you flexibility to match deduction timing to income levels.

Investors who expect higher income in years 2–5 after acquisition (a partnership ramping up, growing W-2 income, upcoming large gains) may prefer to elect out of bonus depreciation for 5-year property and instead claim those deductions ratably over 5 years — when they are most needed. Working with a CPA before filing the year-one return is the only opportunity to make this election; you cannot retroactively elect in or out of bonus depreciation after filing.

Section 179 expensing versus bonus depreciation

Section 179 is a separate first-year expensing provision that overlaps with bonus depreciation but works differently. For 2025, a business can elect to expense up to $1,250,000 of qualifying property under Section 179, with the deduction phasing out dollar-for-dollar once total qualifying purchases exceed roughly $3,130,000 (both figures indexed for inflation). Unlike bonus depreciation, Section 179 cannot create or increase a net loss — the deduction is limited to the taxpayer's aggregate business taxable income, with any excess carried forward.

For real estate, Section 179 has a narrower reach. Residential rental property components generally do not qualify, but Section 179(f) specifically allows expensing of certain improvements to nonresidential real property — roofs, HVAC systems, fire protection and alarm systems, and security systems. Because bonus depreciation has no income limit and can generate a deductible loss, most real estate investors rely on bonus depreciation for cost-segregation components and reserve Section 179 for specific situations where bonus does not apply.

State conformity: not every state follows the federal rules

Bonus depreciation is a federal provision, and many states decouple from it. California, for example, does not allow bonus depreciation at all — state depreciation follows regular MACRS, so a large federal first-year deduction produces no corresponding California benefit. New York, New Jersey, and a number of other states require taxpayers to add back federal bonus depreciation and instead compute depreciation under the regular schedule for state purposes.

The practical consequence is that a cost segregation study can produce an enormous federal deduction while the state deduction remains modest and spread over the asset's full recovery period. Investors in decoupled states should model federal and state depreciation separately; the state add-back also creates a future state subtraction as regular depreciation is claimed in later years, so the benefit is deferred rather than lost at the state level.

Placed-in-service timing and common mistakes

Bonus depreciation is available only in the year the property is placed in service — ready and available for its intended use — not simply purchased. For a rental property, placed-in-service generally means the unit is available for rent, not merely acquired or under renovation. A property bought in December but not advertised and available to tenants until the following January is placed in service in the later year, pushing the bonus deduction to that year.

Common mistakes include claiming bonus depreciation on the building shell (which never qualifies), overlooking the Section 1245 recapture consequences at sale, and failing to obtain a cost segregation study to support the reclassification of components — the IRS can disallow accelerated deductions that rest on arbitrary allocations rather than an engineering-based study. Another error is assuming bonus depreciation turns a passive loss into a usable deduction; absent REPS or material participation in a short-term rental, the loss still suspends under the passive activity rules.

Frequently asked questions

Sources

• IRS Publication 946 — How to Depreciate Property
• IRS — Cost Segregation Audit Techniques Guide

Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.

Related

• Cost Segregation and Bonus Depreciation
• Bonus Depreciation Phase-Out Guide
• Cost Segregation Calculator