[Bonus Depreciation](/blog/depreciation-rental-property-guide) for Real Estate in 2026: What's Changed

Bonus depreciation has been one of the most powerful tax tools for real estate investors since the Tax Cuts and Jobs Act of 2017 dramatically expanded its scope. However, this benefit is now phasing out on a predetermined schedule, making 2026 a critical year for investors who want to capture substantial tax savings.

Understanding how bonus depreciation works in 2026, what's changed from previous years, and how to maximize this diminishing benefit is essential for effective tax planning. This comprehensive guide breaks down everything you need to know about bonus depreciation in the current tax environment.

What Is Bonus Depreciation?

Bonus depreciation allows you to immediately deduct a percentage of the cost of qualifying property in the year it's placed in service, rather than depreciating it over its normal recovery period. This accelerates tax deductions, reducing your current-year tax liability significantly.

For real estate investors, bonus depreciation applies to certain property components identified through cost segregation studies, not to the building structure itself. This creates a powerful synergy: cost segregation identifies short-life property, and bonus depreciation allows you to deduct a large percentage immediately.

How It Works: A Simple Example

Without bonus depreciation:

• You buy a rental property for $500,000
• After allocating land value, the building value is $400,000
• You depreciate $400,000 over 27.5 years = approximately $14,545 annually

With cost segregation and bonus depreciation:

• Cost segregation identifies $100,000 in 5, 7, and 15-year property
• You take 40% bonus depreciation (2026 rate) on $100,000 = $40,000 immediate deduction
• Plus regular depreciation on remaining property
• First-year depreciation could exceed $50,000 instead of $14,545

This acceleration creates immediate tax savings, improving cash flow and ROI.

The Phase-Out Schedule

The Tax Cuts and Jobs Act provided 100% bonus depreciation from September 27, 2017, through December 31, 2022. The benefit is now phasing out on this schedule:

• 2023: 80% bonus depreciation
• 2024: 60% bonus depreciation
• 2025: 40% bonus depreciation
• 2026: 20% bonus depreciation (current year)
• 2027: 0% bonus depreciation

Each year, the benefit diminishes by 20 percentage points. In 2026, you can only deduct 40% of qualifying property immediately, compared to 100% just a few years ago.

What This Means for 2026

If you place a property in service in 2026 and cost segregation identifies $100,000 in qualifying assets:

• 2022: You could have deducted $100,000 (100%)
• 2026: You can deduct $40,000 (40%)
• 2027: You will deduct $0 immediately (0%)

The remaining $60,000 in 2026 is depreciated normally over the asset's recovery period (5, 7, or 15 years). Starting in 2027, all $100,000 would be depreciated normally with no bonus.

What Qualifies for Bonus Depreciation

Property Types

Bonus depreciation applies to "qualified property," which includes:

Tangible Personal Property: Assets with recovery periods of 20 years or less, such as:

• Appliances (refrigerators, stoves, washers, dryers)
• Carpeting and flooring
• Window treatments
• Furniture (if included with rental)
• Certain landscaping and site improvements
• Parking lots and sidewalks
• Fencing

Qualified Improvement Property (QIP): Interior improvements to nonresidential buildings made after the building was placed in service, excluding:

• Elevators or escalators
• Internal structural framework
• Enlargement of the building

Computer Software: Off-the-shelf software purchased for business use

What Doesn't Qualify

Bonus depreciation does NOT apply to:

• Building structures: The residential rental building itself (27.5-year property) or commercial building (39-year property)
• Land and land improvements in certain cases
• Property you owned previously and are now converting to rental use
• Inherited property
• Used property that you or a related party owned previously (new-to-you can qualify)

The "Original Use" Requirement Explained

For property acquired after September 27, 2017, the original use requirement was liberalized. Property qualifies if:

• You're the first to use it (brand new), OR
• It's used property that neither you nor a related party owned previously

This means you can buy a property that someone else used, complete a cost segregation study, and claim bonus depreciation on the identified components—even though the overall property is used.

Example: You buy a 10-year-old rental property. The building itself is used, but the short-life components identified in the cost segregation (appliances, carpeting, etc.) qualify for bonus depreciation because you didn't previously own them.

Cost Segregation: The Key to Maximizing Bonus Depreciation

Cost segregation studies are essential for real estate investors wanting to benefit from bonus depreciation. Here's why:

What Cost Segregation Does

A cost segregation study analyzes your property's components and reclassifies them from 27.5-year (residential) or 39-year (commercial) property into shorter recovery periods:

• 5-year property: Carpeting, appliances, decorative items
• 7-year property: Furniture, office equipment
• 15-year property: Landscaping, fencing, sidewalks, parking lots
• Land improvements: Some may qualify for bonus depreciation

By identifying these shorter-life assets, cost segregation creates the opportunity to apply bonus depreciation.

When Cost Segregation Makes Sense

Cost segregation typically makes sense when:

• Property value exceeds $500,000 (though smaller properties can benefit if you have multiple)
• You're in a high tax bracket and need current-year deductions
• You've recently acquired or substantially improved a property
• You plan to hold the property for several years
• You have sufficient passive income or qualify as a real estate professional

The Process

1. Hire a qualified professional (typically engineering-based firms with tax expertise)
2. [Property analysis](/blog/rental-property-analysis) (detailed examination of construction costs, blueprints, site visits)
3. Component classification (allocating costs to appropriate categories)
4. Report preparation (detailed documentation supporting reclassifications)
5. Tax filing (claiming accelerated depreciation on your return)

Costs typically range from $5,000 to $15,000+ depending on property complexity and value. The tax savings usually far exceed the study cost.

2026 Considerations

With only 40% bonus depreciation available in 2026, the value proposition of cost segregation has diminished compared to years with 100% bonus. However, it still provides significant benefits:

• Immediate 40% deduction on identified property
• Accelerated depreciation on the remaining 60% over shorter periods than 27.5/39 years
• Improved cash flow through front-loaded deductions
• Ability to carry forward losses if current-year income is insufficient

If you've been considering cost segregation, 2026 is the last year with meaningful bonus depreciation. After 2026, the benefit drops to 20%, and in 2027, it disappears entirely.

Strategic Timing for 2026

Accelerate Property Acquisitions

If you're planning to buy rental property in the next 18 months, accelerating the purchase into 2026 allows you to capture 40% bonus depreciation. Waiting until 2027 means you'll get only regular depreciation.

Analysis:

• Property acquired in December 2026: 40% bonus depreciation
• Same property acquired in January 2027: 0% bonus depreciation
• Potential first-year deduction difference: $40,000+ on a $500,000 property

Complete Improvements Before Year-End

If you're renovating or improving properties, completing the work and placing the improvements in service before December 31, 2026, maximizes bonus depreciation.

Example: You're planning a $50,000 kitchen [renovation](/blog/bathroom-renovation-cost-guide) on a rental property. Completing it in 2026 could provide a $20,000 first-year deduction (assuming all components qualify for bonus). Completing it in 2027 provides much smaller first-year deductions.

Consider Cost Segregation Studies Now

If you've acquired properties in recent years but haven't completed cost segregation studies, 2026 is an excellent time to catch up. The IRS allows you to "look back" and claim missed depreciation through:

Form 3115 (Change in Accounting Method): File this form with your 2026 return to claim previously unclaimed depreciation without amending prior returns. You'll receive a "catch-up" deduction for all years you should have claimed higher depreciation.

This strategy works whether you bought properties in 2020, 2023, or 2026—you can still accelerate depreciation and claim bonus (at the applicable year's rate) retroactively.

Evaluate Sale Timing

If you're considering selling a property, timing matters:

Hold through 2026: Allows you to maximize depreciation deductions with remaining bonus Sell in 2027+: [Depreciation recapture](/blog/depreciation-real-estate-guide) will be lower if you've claimed less depreciation

Consider your overall tax situation and investment goals when timing sales.

Interaction with Other Tax Provisions

[Passive Activity Loss Rules](/blog/rental-property-tax-guide-2026)

Bonus depreciation can create or increase passive losses, which may be limited:

If you're a passive investor:

• Losses exceeding $25,000 (assuming you qualify for the special allowance) are suspended
• Suspended losses carry forward to future years
• You can use them when you have passive income or sell the property

If you're a real estate professional:

• Losses aren't subject to passive activity limitations
• You can deduct them against ordinary income
• Bonus depreciation provides immediate tax benefit

Section 179 Expensing

Section 179 allows immediate expensing of qualifying property up to a limit ($1,220,000 for 2026, estimated). However:

• Section 179 has income limitations and phase-outs
• It can only be claimed up to your taxable income
• Bonus depreciation has no income limitation
• You can't claim both Section 179 and bonus on the same property

Most real estate investors find bonus depreciation more beneficial due to its lack of income limitations.

Qualified Business Income (QBI) Deduction

The 20% QBI deduction for pass-through businesses interacts with depreciation in complex ways:

• Higher depreciation reduces qualified business income
• Lower QBI can reduce the QBI deduction
• However, rental real estate qualifies for safe harbor treatment
• The interplay requires careful planning

Consult a tax professional to optimize the interaction between bonus depreciation and QBI deductions.

State Tax Considerations

Not all states conform to federal bonus depreciation rules. Many states have:

Full Conformity: State bonus depreciation matches federal (less common) Partial Conformity: State allows bonus but at different percentages or with different rules No Conformity: State doesn't allow bonus depreciation at all

This creates federal-state differences requiring careful record-keeping. States with no conformity require you to add back bonus depreciation for state tax purposes, potentially creating state tax liabilities even when you have federal deductions.

Common Non-Conforming States:

• California (has its own phase-out schedule)
• New York (different conformity rules)
• Illinois (various limitations)

Check with a tax professional familiar with your state's rules.

Alternatives as Bonus Phases Out

With bonus depreciation disappearing, what strategies replace it?

Regular Depreciation Remains

Even without bonus, cost segregation still provides value by accelerating depreciation through shorter recovery periods. Instead of deducting over 27.5 years, you'll deduct over 5, 7, or 15 years for qualifying components.

Section 179 Expensing

While limited in real estate applications, Section 179 may work for:

• Tangible personal property used in rental businesses
• Certain improvements to nonresidential real property
• Equipment and vehicles used in real estate businesses

The dollar limits and income restrictions make it less flexible than bonus depreciation was.

[Opportunity Zone](/blog/1031-exchange-vs-opportunity-zones) Investments

Opportunity Zones offer different tax benefits:

• Deferral of capital gains until 2026 (or earlier sale)
• Tax-free appreciation if held 10+ years

While not a depreciation replacement, they provide alternative tax-advantaged [real estate investing](/blog/brrrr-strategy-guide).

Energy Efficiency Incentives

The Inflation Reduction Act created and expanded energy-related tax credits:

• 30% credit for solar, geothermal, and wind systems
• Credits for energy-efficient improvements
• Commercial building energy efficiency deductions (179D)

These don't replace depreciation but provide additional tax benefits.

Record-Keeping Requirements

Claiming bonus depreciation requires meticulous documentation:

Cost Segregation Reports

Maintain detailed cost segregation studies showing:

• Methodology used
• Component-by-component allocation
• Supporting documentation (blueprints, construction costs, photographs)
• Engineer and tax professional credentials

Property Acquisition Documents

Keep records of:

• Purchase agreements and closing statements
• Settlement documents showing cost allocation
• Property inspection reports
• Appraisals

Improvement Documentation

For property improvements:

• Contractor invoices with detailed descriptions
• Before and after photographs
• Placed-in-service dates
• Cost breakdowns by component

Depreciation Schedules

Maintain detailed depreciation schedules tracking:

• Original basis by asset category
• Bonus depreciation claimed by year
• Regular depreciation claimed
• Adjusted basis of each asset
• Accumulated depreciation

These records are essential for calculating gain when you sell and defending deductions if audited.

Common Mistakes to Avoid

❌ Waiting until 2027: The last meaningful bonus depreciation is in 2026 (40%). After that, it drops to 20% then zero.

❌ Not completing cost segregation: You can't claim bonus without identifying qualifying property.

❌ Claiming bonus on the building structure: Only personal property and qualified improvement property qualify, not the building itself.

❌ Ignoring passive loss limitations: Bonus creates deductions, but you may not be able to use them currently if you're a passive investor.

❌ Poor documentation: Cost segregation studies must be detailed and defensible. Cheap or inadequate studies may not survive IRS scrutiny.

❌ Forgetting depreciation recapture: Bonus depreciation claimed now will be recaptured (taxed) when you sell. Plan accordingly.

❌ Not considering state tax implications: States that don't conform to federal bonus rules can create unexpected state tax liabilities.

FAQ

Can I still claim bonus depreciation in 2027?

Yes, but only 20%. In 2028 and beyond, bonus depreciation will be 0% unless Congress extends or revives it.

Does bonus depreciation apply to used properties?

Yes, as long as you didn't previously own the property (or a related party didn't). The property must be "new to you," but it doesn't have to be brand new.

Can I claim bonus depreciation without a cost segregation study?

Technically yes, if you can identify qualifying components yourself. However, professional cost segregation studies typically identify significantly more qualifying property and provide the documentation needed to defend the deduction.

What if I completed a cost segregation study in 2023?

You claimed bonus depreciation at 2023's rate (80%). You can't go back and reclaim it at a different rate, but you can complete studies on properties acquired in 2026 to claim the current 40% rate.

Can I elect out of bonus depreciation?

Yes, you can elect out for any class of property. This might make sense if you want to preserve depreciation deductions for future years or if taking bonus would create unusable passive losses.

How does bonus depreciation affect my taxes when I sell?

Depreciation claimed (including bonus) is recaptured when you sell, taxed at up to 25%. This applies whether you claimed it or not (the IRS assumes you did). A [1031 exchange](/blog/1031-exchange-guide) defers this recapture.

Should I rush to buy property before 2027 to get bonus depreciation?

Maybe. Bonus depreciation is valuable, but don't let the tax tail wag the investment dog. Buy properties that make sense fundamentally, but if you're on the fence and timing is flexible, accelerating into 2026 captures more benefit than waiting.

Can I claim bonus depreciation on my primary residence?

No, bonus depreciation only applies to property used in business, not personal-use property. If you convert your primary residence to a rental, only improvements made after the conversion may qualify.

Conclusion

Bonus depreciation in 2026 represents the last significant opportunity to capture this powerful tax benefit before it phases out entirely. At 40%, it still provides substantial immediate deductions for real estate investors who act strategically.

The key strategies for 2026 include:

1. Accelerate acquisitions: Buy properties in 2026 rather than waiting until 2027 or later
2. Complete improvements: Finish renovation projects before year-end to maximize bonus
3. Invest in cost segregation: Professional studies identify qualifying property and create defendable documentation
4. Catch up on prior properties: Use Form 3115 to claim previously missed depreciation
5. Plan for the future: Understand alternative strategies as bonus disappears

While the phase-out reduces bonus depreciation's value, 40% immediate deduction still significantly exceeds the alternative of depreciating over 27.5 years. For a $500,000 property with $100,000 in qualifying components, the difference between 40% bonus in 2026 and 0% bonus in 2027 could be $40,000 in first-year deductions—potentially worth $10,000-$15,000 in tax savings.

As we move toward a post-bonus-depreciation world, real estate investors should maximize this benefit while it lasts and prepare alternative strategies for future years. Cost segregation will remain valuable for accelerating depreciation through shorter recovery periods, but the dramatic first-year deductions provided by 100% bonus are ending.

Work with qualified tax professionals and cost segregation specialists to develop a comprehensive strategy that maximizes your 2026 deductions while positioning you for success in the years ahead. The time to act is now—2026 is the last year with meaningful bonus depreciation benefits.

Related Articles

• 1031 Exchange for Beginners: Complete Guide to Deferring Capital Gains Taxes
• 1031 Exchange: Defer Taxes, Build Wealth Faster
• Cost Segregation Study Guide: How Real Estate Investors Accelerate Depreciation to Save Thousands