Bonus Depreciation for Property Investors: What You Need to Know

Bonus depreciation allows you to deduct a percentage of an asset's cost in the year it is placed in service, rather than spreading the deduction over its normal recovery period. Its effect depends on the qualifying assets, dates, and ability to use the deduction.

How Bonus Depreciation Works

When you place a qualifying asset in service, bonus depreciation lets you deduct a fixed percentage of that asset's cost immediately. The original TCJA phase-down schedule reduced the rate each year from 2023 through 2027. However, recent legislation restored 100% bonus depreciation for qualifying property acquired after January 19, 2025.

Acquisition and service dates both matter. Contract-date rules, elections, and other eligibility requirements can affect the rate; confirm these with your tax advisor.

The Connection to Cost Segregation

Here is where cost segregation becomes especially valuable. Bonus depreciation only applies to assets with a recovery period of 20 years or less. The 27.5-year residential structure itself does not qualify.

But the components identified in a cost segregation study, the 5-year, 7-year, and 15-year assets, do qualify. By separating those components out, you unlock bonus depreciation on the portion of your property that is eligible.

The 20% rate in 2026 generally concerns qualifying property acquired before January 20, 2025 and placed in service in 2026. It is not the general rate for newly acquired qualifying property.

A Practical Example

Consider a $500,000 rental with a $60,000 land value, giving a $440,000 depreciable basis. A cost segregation study identifies $110,000 in 5- and 7-year personal property and $25,000 in 15-year land improvements.

For this illustration, assume the $135,000 of eligible assets qualifies for 100% bonus depreciation, was acquired and placed in service after January 19, 2025, and no election reduces that rate:

• Bonus depreciation on $135,000 in eligible assets: $135,000
• No remaining depreciable basis on those assets after a full $135,000 bonus deduction
• Standard 27.5-year depreciation on remaining $305,000 basis

The illustrative bonus deduction is $135,000. Depreciation on the remaining building is calculated separately using the service date and applicable convention. The tax benefit depends on whether the deductions are usable.

Short-Term Rentals and the Passive Activity Rules

For short-term rentals, the activity’s average stay and material participation determine passive-loss treatment. A 100-hour total alone is insufficient. See the participation guide for the full test.

When the relevant requirements are met, non-passive losses may reduce ordinary income. Other loss limitations still apply. Your tax advisor must determine the amount you can use and the year it applies.

Long-term rental losses generally face passive-activity limits. Real estate professional status alone does not make them non-passive; material participation in the rental activity also matters.

Is It Still Worth It With Lower Bonus Rates?

A lower bonus rate does not eliminate shorter MACRS recovery periods. Whether a study is worthwhile depends on the expected usable deductions, costs, and holding period.

Use the residential calculator as a starting point, then review the result with your tax advisor. Commercial and complex properties need a separately scoped review.