How 100% bonus depreciation under OBBBA works, which assets qualify, and how to maximize your first-year deductions
Bonus depreciation is one of the most significant tax incentives available to rental property investors, and the landscape in 2026 looks dramatically different than it did just a year ago. The passage of the One Big Beautiful Bill Act (OBBBA) restored 100% bonus depreciation on a permanent basis, eliminating the phase-down schedule that had been reducing the allowable percentage each year since 2023. For real estate investors, this is a game-changing development that makes accelerated depreciation strategies more powerful and more predictable than ever before.
Bonus depreciation, codified under IRC Section 168(k), allows taxpayers to deduct a specified percentage of the cost of qualifying assets in the year they are placed in service, rather than spreading the deduction over the asset's entire recovery period. Under OBBBA, that percentage is 100% -- meaning you can deduct the full cost of qualifying property in Year One.
To understand why this matters, consider the alternative. Without bonus depreciation, a $50,000 piece of 5-year MACRS property would be depreciated over five years using the applicable percentage tables -- roughly $10,000 per year in deductions. With 100% bonus depreciation, you deduct the entire $50,000 in the year the asset is placed in service. The total deduction over the life of the asset is the same, but the timing is radically different -- and in tax planning, timing is everything.
Under the original Tax Cuts and Jobs Act (TCJA) of 2017, 100% bonus depreciation was available for property placed in service after September 27, 2017. However, the TCJA included a built-in phase-down: bonus depreciation dropped to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and would have disappeared entirely in 2027.
OBBBA reversed this phase-down retroactively, restoring 100% bonus depreciation for all qualifying property and making it permanent. This means investors no longer need to worry about timing their acquisitions to maximize bonus depreciation before it phases out. The 100% rate is here to stay, which provides certainty for long-term investment planning and removes the urgency that had been driving year-end acquisition decisions.
Not all property qualifies for bonus depreciation. The key requirements under IRC Section 168(k) are:
MACRS property with a recovery period of 20 years or less. This includes 5-year property (appliances, carpeting, removable fixtures), 7-year property (furniture, specialized equipment), and 15-year property (land improvements, driveways, landscaping, fencing). Importantly, the structural components of a building that are depreciated over 27.5 years (residential rental) or 39 years (commercial/nonresidential) do not qualify for bonus depreciation on their own.
Qualified Improvement Property (QIP). After the CARES Act corrected the "retail glitch," qualified improvement property -- interior improvements to nonresidential buildings placed in service after the building was originally placed in service -- has a 15-year recovery period and qualifies for bonus depreciation. This is particularly relevant for STR investors whose properties are classified as nonresidential (39-year) property because their average rental period is 7 days or less.
Used property qualifies. One of the significant changes from the TCJA that OBBBA preserved is that bonus depreciation applies to both new and used property. Previously, bonus depreciation was limited to new (original-use) property. Now, when you acquire an existing rental property, the assets identified through a cost segregation study qualify for bonus depreciation even though they are not new.
Bonus depreciation by itself does not help much with a rental property if you are depreciating the entire building over 27.5 or 39 years. That is because the building structure -- the walls, roof, foundation, and major systems -- falls into the 27.5-year or 39-year recovery period and does not qualify for bonus depreciation.
This is precisely where cost segregation becomes essential. A cost segregation study identifies and reclassifies components of the building that qualify for shorter recovery periods. Without cost segregation, those components are lumped into the 27.5-year or 39-year class by default. With cost segregation, they are properly assigned to 5-year, 7-year, or 15-year property -- and once reclassified, they become eligible for 100% bonus depreciation.
The combination of cost segregation and bonus depreciation is what creates the massive first-year deductions that real estate investors use to offset significant amounts of income. Neither strategy alone produces the same result -- they are designed to work together.
Bonus depreciation is claimed in the year the property is "placed in service," which is defined as the year the property is ready and available for its intended use. For a rental property, this means the year you make it available for rent -- not necessarily the year you close on the purchase.
This distinction matters for properties that require renovation before they can be rented. If you purchase a property in November 2026 but it requires three months of renovation before it is rentable, the placed-in-service date would be in 2027 (when the property is ready for tenants), not 2026 (when you closed on the purchase). Planning your renovation timeline to ensure the property is placed in service in the desired tax year is a critical element of bonus depreciation strategy.
For investors who acquire properties through partnerships, the placed-in-service rules apply at the partnership level. The partnership claims the depreciation deduction and it flows through to the partners on Schedule K-1. For a comprehensive discussion of how depreciation is allocated among partners, including special allocation provisions, see The Partnership Tax Book.
To illustrate the practical impact of bonus depreciation combined with cost segregation, consider these two scenarios:
Scenario 1: Long-Term Rental ($600,000 purchase, $480,000 depreciable basis)
After cost segregation, 30% of the depreciable basis ($144,000) is reclassified to accelerated categories. With 100% bonus depreciation, the Year One deduction includes $144,000 in bonus depreciation plus $12,218 in straight-line depreciation on the remaining 27.5-year property ($336,000 / 27.5). Total Year One depreciation: $156,218. Without cost segregation, the deduction would have been $17,455 ($480,000 / 27.5). The acceleration factor: nearly 9x the standard depreciation.
Scenario 2: Short-Term Rental ($750,000 purchase, $600,000 depreciable basis)
STR properties classified as nonresidential (39-year) property often yield higher cost segregation percentages because of extensive furnishings and amenities. After cost segregation, 38% of the depreciable basis ($228,000) is reclassified. With 100% bonus depreciation, Year One deduction includes $228,000 in bonus depreciation plus $9,538 in straight-line depreciation on the remaining 39-year property ($372,000 / 39). Total Year One depreciation: $237,538. Without cost segregation: $15,385 ($600,000 / 39). The acceleration factor: over 15x.
With 100% bonus depreciation now permanent under OBBBA, the strategic calculus for real estate investors has shifted in several important ways:
No more timing pressure. Under the TCJA phase-down, investors were racing to place properties in service before bonus depreciation decreased. That pressure is gone. You can acquire and develop properties on your own timeline without worrying about missing a higher bonus depreciation percentage.
Look-back studies remain valuable. If you acquired rental properties in prior years and never performed a cost segregation study, you can still benefit. A look-back cost segregation study combined with a Form 3115 change in accounting method allows you to catch up on all missed accelerated depreciation in a single year -- with full 100% bonus depreciation on the reclassified amounts.
Depreciation recapture planning matters more. The larger the deduction you take through bonus depreciation, the larger the potential recapture when you eventually sell the property. Bonus depreciation on personal property (5-year and 7-year) is recaptured as ordinary income under IRC Section 1245. Land improvements (15-year property) are subject to Section 1250 recapture at the 25% rate. Understanding the recapture implications before you take the deduction is important for long-term planning -- though in practice, the time value of money and strategies like 1031 exchanges make the upfront deduction almost always worthwhile.
State conformity varies. Not all states conform to the federal bonus depreciation rules. Some states decouple from bonus depreciation entirely, some allow a partial deduction, and others add back the bonus depreciation and allow it as a deduction over the regular recovery period. Check your state's conformity rules before projecting your total tax savings.
The restoration of permanent 100% bonus depreciation under OBBBA is the single most significant tax development for rental property investors in recent years. When combined with a properly executed cost segregation study, bonus depreciation transforms a modest annual depreciation deduction into a powerful first-year tax strategy that can offset significant amounts of income -- rental or otherwise, depending on your passive activity classification.
The key to maximizing this benefit is ensuring that your cost segregation study is performed by qualified professionals, your placed-in-service timing is properly planned, and your overall tax strategy accounts for the interaction between bonus depreciation, passive activity rules, and eventual depreciation recapture.
Ready to implement these strategies? Every rental property is different, and the optimal depreciation strategy depends on your property type, acquisition cost, improvements, and overall tax situation. Schedule a consultation at aetaxadvisors.com to see how much bonus depreciation could save you in 2026.