Bonus Depreciation for Real Estate: What Investors Need to Know

For 2026, bonus depreciation lets you deduct 100% of the cost of qualifying rental property assets in the year you place them in service (make them ready and available for use in the rental) if you acquired them after January 19, 2025, a rate the 2025 tax law known as the One Big Beautiful Bill Act made permanent. Only assets with a recovery period (the number of years the tax code spreads their cost over) of 20 years or less qualify, such as appliances, carpet, furniture, fences, and parking areas; the building itself never does, and neither do the structural parts of a residential rental. Assets acquired before January 20, 2025, and placed in service in 2026 get 20% under the old phase-down schedule. For most landlords, the passive loss rules then decide whether the deduction lowers this year's tax or carries forward to a later year.

Which rental property assets qualify?

Bonus depreciation, which the IRS calls the special depreciation allowance, applies to property with a recovery period of 20 years or less under the general depreciation rules. New and used assets both qualify, but a used asset qualifies only if you bought it, had not used it before, and did not buy it from a related party such as your spouse, parent, or child; inherited and gifted property does not qualify. A residential rental building is depreciated over 27.5 years and a commercial building over 39 years, so neither qualifies. In a residential rental, structural parts such as the roof, windows, wiring, plumbing, and central HVAC share the building's 27.5-year recovery period, so they do not qualify either.

The table follows IRS Publication 527 and the residential rental asset table in the IRS Cost Segregation Audit Technique Guide. Commercial landlords have one more category: an interior improvement you make to a nonresidential building after the building was first placed in service is 15-year qualified improvement property and qualifies, unless it enlarges the building or covers an elevator, an escalator, or the internal structural framework. Improvements a seller made before you bought the building do not count, and interior improvements to a residential rental do not get that treatment.

When you buy a building, these short-lived assets are included in one purchase price. A cost segregation study identifies and values them so bonus depreciation can apply.

What is the bonus rate in 2026?

The rate depends on when you acquired the asset and when you placed it in service:

For a purchase made under a written binding contract, the closing date does not control. The IRS treats the asset as acquired on the date you signed the contract or, if later, the date its cancellation periods ended and its contingencies were satisfied. If you signed a purchase contract before January 20, 2025, give your tax preparer the contract so they can confirm whether the 20% or 100% rate applies to assets you place in service in 2026.

Example: during 2026 you buy and install $8,000 of new appliances and $6,000 of new carpet in May, and a $16,000 fence and driveway in July, all for an existing rental.

• With 100% bonus: $30,000 of depreciation in 2026.
• Without bonus: IRS Publication 946's half-year table gives first-year rates of 20% for 5-year property and 5% for 15-year property, so 2026 depreciation is $14,000 x 20% plus $16,000 x 5%, or $3,600, with the rest spread over later years.

How do you claim bonus depreciation or elect out?

You do not need to choose bonus depreciation: it applies automatically to qualifying assets, and you claim it on Form 4562 for the year you place them in service (line 14 on the 2025 form). To skip it, attach a statement to your timely filed return, including extensions, naming the class of property, such as all 5-year property, that you are not claiming it for. The choice covers every asset in that class for that year and cannot be revoked without IRS consent. If you filed on time without the statement, you can still elect out on an amended return filed within 6 months of the original due date, marked "Filed pursuant to section 301.9100-2."

Electing out spreads the deduction over each asset's recovery period, which can be worth more if you expect a higher tax rate in later years. If you skipped bonus depreciation on a past return without electing out, you can generally still claim it with an amended return or an accounting method change on Form 3115, the same fixes used for missed rental depreciation.

Section 179 expensing is a separate first-year write-off with tighter rules. IRS Publication 946 allows it for rental property only when renting is your trade or business, caps it at your taxable income from businesses you actively conduct for the year (wages from a job count), and adds a lease-term test and a first-year expense test for individuals who buy property and lease it to others. Bonus depreciation has none of these limits, so it can create a rental loss.

Does your state allow bonus depreciation?

Not every state follows the federal rule. New York does not allow the federal bonus deduction: on Form IT-398, you add back the federal depreciation and claim New York depreciation figured without the bonus, which leaves the rest of the cost to deduct in later years. California does not conform to the 100% bonus either, so California filers figure state depreciation without it on form FTB 3885A. Before you count on a state tax saving, check your state's depreciation rules, and keep a separate state depreciation schedule if they differ from federal law.

Why do passive loss rules often delay the benefit?

A large bonus deduction can turn a profitable rental into a tax loss. Rental losses are passive for most owners, even very involved ones, and passive losses can offset only passive income, such as profit from your other rentals. Unused losses carry forward each year until passive income absorbs them or you sell the whole property to an unrelated buyer in a taxable sale, when the rest becomes deductible. Three exceptions let you use the loss sooner:

1. The $25,000 allowance. If you own at least 10% of the property and actively participate, for example by approving tenants, deciding rental terms, and approving expenses, you can deduct up to $25,000 of rental loss against wages and other income. It shrinks by $1 for every $2 of modified adjusted gross income (MAGI) above $100,000, so it reaches zero at $150,000. Married couples filing separately get no allowance if they lived together at any time during the year, and $12,500 (phased out between $50,000 and $75,000 of MAGI) if they lived apart all year.
2. Real estate professional status. You qualify if more than half of the hours you work in all businesses, and more than 750 hours, go to real property businesses in which you materially participate. A rental you also materially participate in is then not passive. Real estate professional status covers the tests.
3. Short-term rentals. A property with an average guest stay of 7 days or less is not a rental activity under the passive rules; in a year you materially participate, for example by working on it more than 500 hours, its loss is nonpassive.

Example: suppose the $30,000 of bonus depreciation above turns $8,000 of rental profit into a $22,000 loss. With MAGI of $95,000 and active participation, you deduct the full $22,000 against other income. At $130,000 of MAGI, the allowance is $25,000 minus half of the $30,000 excess, or $10,000, and $12,000 carries forward. At $150,000 or more, all $22,000 carries forward. How the passive loss rules work explains how carried-forward losses are tracked and released.

What happens to bonus depreciation when you sell?

The deduction is a timing benefit. When you sell, gain on bonus-depreciated appliances, carpet, and furniture, up to the depreciation you took, is taxed as ordinary income, and so is gain on land improvements to the extent your depreciation exceeded straight-line amounts (equal yearly deductions), which bonus depreciation does. How depreciation recapture works shows how to figure it.

For how bonus depreciation fits into a full-year tax plan, see tax planning strategies for rental property income.