Real Estate Tax Calc
What changed
Treasury and the IRS released the initial 2026-2027 Priority Guidance Plan on September 29, 2026. The plan lists 121 guidance projects for the plan year running October 1, 2026 through September 30, 2027 — the first Priority Guidance Plan to align with the federal fiscal year rather than the prior July-to-June cycle. Projects may be added throughout the year as priorities evolve. The plan is available at irs.gov.
The overarching theme is implementing the One Big Beautiful Bill Act (OBBBA, P.L. 119-21, signed July 4, 2025), the law that permanently restored 100% bonus depreciation, raised the Section 199A pass-through deduction, and made other changes affecting real estate investors. Two items in the plan are directly relevant: proposed regulations under § 168(k) (the permanent additional first-year depreciation allowance) and proposed regulations under § 168(n) (the new qualified production property deduction). Both will formalize interim guidance the IRS issued earlier in 2026.
Why it matters to investors
Permanent 100% bonus depreciation (§ 168(k)) — formal rules are coming: The OBBBA permanently restored the 100% additional first-year depreciation deduction for qualifying property acquired and placed in service after January 19, 2025. IRS Notice 2026-11 (January 14, 2026) provided interim guidance and authorized taxpayers to rely on the existing TCJA-era regulation (Treas. Reg. § 1.168(k)-2) with updated effective dates and percentages. The 2026-2027 Priority Guidance Plan confirms Treasury will now formalize these rules through a notice-and-comment rulemaking. Multiple accounting firms (EY, PwC, BDO) summarize Notice 2026-11 as signaling proposed regulations that will largely carry over the current regulatory framework. Until those proposed regulations appear in the Federal Register, Notice 2026-11 continues to govern; taxpayers can rely on it for property placed in service before the proposed regulations are published, provided they follow the notice in its entirety.
The § 163(j) election and its depreciation cost: The plan highlights a trade-off that applies to leveraged real estate. A real property trade or business that elects out of the Section 163(j) interest-deduction limitation must use the Alternative Depreciation System (ADS) under § 168(g) for residential rental property (40-year), nonresidential real property (40-year), and qualified improvement property (20-year). ADS property does not qualify for bonus depreciation. Investors who elected out of § 163(j) to preserve full interest deductions give up access to 100% bonus depreciation on those asset classes in return. Modeling this trade-off before year-end is worthwhile for highly leveraged portfolios.
Qualified production property (§ 168(n)) — industrial and owner-user commercial investors: The OBBBA added a new 100% expensing provision for nonresidential real property a taxpayer uses directly in a qualified production activity (manufacturing, refining, and similar uses), with property placed in service before January 1, 2031. IRS Notice 2026-16 (February 2026) provided interim guidance. The proposed § 168(n) regulations will clarify who qualifies as the “taxpayer” (passive landlords generally do not, unless the lessee is under common control per the notice), how mixed-use buildings are treated, and the election mechanics. Investors in industrial or owner-user commercial real estate should monitor this guidance closely.
1031 exchanges: Section 1031 like-kind exchanges are not among the 121 listed projects in available summaries of the plan, signaling that no IRS-initiated regulatory changes to the core exchange rules — the 45-day identification period, 180-day closing deadline, qualified intermediary requirement, and real-property-only limitation — are on the immediate agenda. Source: IRS/Treasury 2026-2027 Priority Guidance Plan, September 29, 2026; IRS Notice 2026-11, January 14, 2026; secondary analysis from EY Tax News and PwC.
A worked example: 100% bonus depreciation on a 2026 purchase
Numbers make the opportunity concrete. Suppose you buy a small apartment building in 2026 for $1,000,000, with $200,000 allocated to land and $800,000 to the depreciable building. Under straight-line MACRS alone, a residential building depreciates over 27.5 years — roughly $29,000 a year. A cost segregation study instead reclassifies part of that $800,000 into shorter-lived property: say $120,000 of five-year personal property (appliances, carpeting, certain fixtures) and $80,000 of fifteen-year land improvements (parking, sidewalks, landscaping), leaving $600,000 as the 27.5-year building shell.
Because permanent 100% bonus depreciation under § 168(k) applies to property with a recovery period of 20 years or less, the full $200,000 of reclassified five- and fifteen-year property can be expensed in year one — on top of the normal first-year depreciation on the $600,000 shell. For an investor in the 37% bracket, that $200,000 first-year deduction is worth roughly $74,000 in federal tax deferral, cash that would otherwise trickle out over decades. The building shell still depreciates on its ordinary 27.5-year schedule. This is the mechanic the Priority Guidance Plan’s § 168(k) project will formalize, and it is available today under Notice 2026-11.
How to claim it: Form 4562 and the Form 3115 catch-up
Bonus depreciation is reported on Form 4562, Depreciation and Amortization, which flows to Schedule E for most rental owners or to the relevant business return. The special depreciation allowance is entered in Part II; the reclassified asset classes from a cost segregation study are listed with their MACRS lives in Part III. Keep the cost segregation report itself with your records — it is the engineering-based support for the allocation if the IRS ever asks how you split the purchase price.
You are not limited to properties bought this year. If you placed a property in service in a prior year and never did a cost segregation study, you can generally capture the missed accelerated and bonus depreciation as a one-time catch-up by filing Form 3115, Application for Change in Accounting Method, and taking a § 481(a) adjustment in the current year — without amending prior returns. This “look-back” cost segregation is a common year-end planning move, but because bonus percentages have changed over the years, the catch-up amount depends on each asset’s original placed-in-service date. Work the numbers with a CPA before filing.
The § 163(j) trade-off, with numbers
The interest-limitation election is where many leveraged investors trip. § 163(j) caps a business’s net interest deduction at 30% of adjusted taxable income, but a real property trade or business can elect out and deduct all of its interest. The price of that election is mandatory use of the Alternative Depreciation System on the real property — longer recovery periods and, critically, no bonus depreciation on those assets.
Consider a highly leveraged investor weighing the two. Suppose electing out preserves $90,000 of otherwise-limited interest deductions this year — worth about $33,000 at a 37% rate. But electing out also forfeits a $200,000 first-year bonus deduction from a cost segregation study, worth about $74,000 up front. In that case, staying subject to § 163(j) and keeping bonus depreciation is the stronger first-year move, even though some interest is deferred. Change the leverage or the asset mix and the answer can flip. The real-property-trade-or-business election is generally irrevocable, so model both paths over several years before you commit.
The passive-loss rules and the short-term-rental angle
A large first-year deduction only helps if you can actually use the loss. Under the passive activity loss rules of § 469, rental real estate is presumptively passive, and passive losses offset only passive income — the rest is suspended until you have passive income or sell the property in a fully taxable disposition. For most W-2 earners, a six-figure bonus-depreciation loss from a long-term rental simply carries forward.
Two exceptions unlock it. First, qualifying as a real estate professional — more than 750 hours and more than half your working time in real property trades, plus material participation in the rental — makes rental losses non-passive. Second, and this is why cost segregation is so often paired with short-term rentals, a property with an average guest stay of seven days or less is not a “rental activity” under the § 469 regulations at all. If you materially participate in that short-term rental, the loss is non-passive and can offset W-2 or business income in the year you place the property in service. This combination is powerful but fact-intensive; document your participation hours contemporaneously, because it is a frequent audit target.
State conformity: your state may not follow the federal rules
Bonus depreciation is a federal benefit, and states do not automatically follow it. Many states decouple from § 168(k): they require you to add the bonus deduction back to state taxable income and then depreciate the asset over its normal life on a separate state schedule, so the deduction is spread out rather than front-loaded for state purposes. California, for example, has long declined to conform to bonus depreciation, and several other states require addbacks or only partial conformity.
The practical effect is two depreciation schedules — one federal, one state — and a smaller state-level benefit than the headline federal number suggests. It also means your true combined first-year tax saving is lower than simply applying your federal rate to the deduction. Check your state’s conformity before you count on the full cash-flow benefit, and remember that a decoupled state will compute its own basis and its own gain when you eventually sell.
What it costs you later: recapture at sale
Accelerating depreciation is a timing play, not free money. The five- and seven-year personal-property components a cost segregation study carves out are § 1245 property, and the depreciation you claimed on them — including the bonus portion — is recaptured as ordinary income at your full marginal rate when you sell, up to the gain on those assets. Fifteen-year land improvements are technically § 1250 property, but bonus depreciation on them is depreciation in excess of straight-line, which is itself recaptured as ordinary income. Either way, the accelerated deductions come back at ordinary rates rather than the 25%-capped rate that applies to the building shell.
So the real benefit of 100% bonus depreciation is the time value of deducting now at your top rate and paying later — plus the chance to erase the deferred tax entirely with a § 1031 exchange or a step-up in basis at death. The common mistakes investors make all flow from forgetting this: assuming the deduction is permanent rather than deferred; overlooking that a loss may be suspended under § 469; electing out of § 163(j) without modeling the lost bonus depreciation; and ignoring state decoupling. Each turns a sound strategy into a disappointing one if left unexamined.
What to do
2026 acquisitions: Bonus depreciation at 100% is in effect now under Notice 2026-11. A cost segregation study identifies the personal-property components and land improvements that qualify for immediate first-year expensing on properties placed in service in 2026. There is no reason to wait for the proposed § 168(k) regulations before acting.
Highly leveraged properties: If your real estate operation has made or is considering a § 163(j) election to deduct full interest expense, compare the tax value of full interest deductibility against the loss of bonus depreciation on the ADS-required property classes. Model this with a CPA before year-end.
Industrial or owner-user commercial deals: Track the forthcoming § 168(n) proposed regulations for final clarity on lessor rules and mixed-use treatment. Interim Notice 2026-16 is available and can be relied on now for deals structured under that framework.
Educational context only — not tax advice. Primary sources: IRS 2026-2027 Priority Guidance Plan (September 29, 2026); IRS Notice 2026-11 (January 14, 2026); IRS Notice 2026-16 (February 2026). Consult a qualified tax professional before making investment or tax decisions.
Frequently asked questions
Does the 2026-2027 Priority Guidance Plan change the current bonus depreciation rules?
No. The plan signals that proposed regulations formalizing the permanent 100% bonus depreciation rules are on the IRS agenda. Until those proposed regulations appear in the Federal Register, IRS Notice 2026-11 continues to apply, allowing 100% first-year depreciation on qualifying property acquired and placed in service after January 19, 2025. Taxpayers can rely on Notice 2026-11 for property placed in service before the proposed regulations are published, provided they follow the notice in its entirety.
Are 1031 exchange rules in the IRS 2026-2027 guidance plan?
Based on available summaries of the plan, Section 1031 like-kind exchanges are not among the 121 listed projects. That signals no IRS-initiated regulatory changes to the core exchange rules are expected in the near term. Investors should continue following the standard 45-day identification and 180-day closing deadlines and use a qualified intermediary as usual.
Can I take bonus depreciation on a property I bought in a prior year?
Often yes. A cost segregation study can be applied retroactively by filing Form 3115 to change your accounting method and claiming the missed depreciation as a § 481(a) catch-up adjustment in the current year, without amending prior returns. The catch-up amount depends on each component's original placed-in-service date and the bonus percentage in effect then, so work it through with a CPA.
Does bonus depreciation let me offset my W-2 salary?
Not automatically. Long-term rental losses are passive under § 469 and generally offset only passive income unless you qualify as a real estate professional. A short-term rental with an average guest stay of seven days or less is not a rental activity under the § 469 regulations, so if you materially participate the loss can be non-passive and offset ordinary income. Document your participation hours carefully.
Will I pay the bonus depreciation back when I sell?
Partly. The personal-property components expensed through cost segregation are § 1245 property, and that depreciation is recaptured as ordinary income on sale, up to the gain on those assets. Bonus depreciation is therefore a deferral, not a permanent exclusion — though a 1031 exchange or a step-up in basis at death can defer or eliminate the eventual recapture.
Do all states allow 100% bonus depreciation?
No. Many states decouple from the federal rules and require you to add the bonus deduction back and depreciate the asset over its normal life for state purposes. California, for instance, does not conform to bonus depreciation. Check your state's conformity before relying on the full first-year benefit.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.