Arizona Rental Depreciation Rules 2026: Complete Tax Strategy Guide for Real Estate Investors

For the 2026 tax year, Arizona real estate investors face a transformed landscape for rental depreciation rules. The One Big Beautiful Bill Act (OBBBA) has permanently restored 100% bonus depreciation for qualifying property placed in service on or after January 19, 2025. This major shift changes how you calculate Arizona rental depreciation and maximize tax deductions. Whether you own residential properties, commercial buildings, or short-term rental homes, understanding these 2026 rental depreciation strategies is essential for reducing your tax liability and building wealth efficiently.

Table of Contents

• Key Takeaways
• What Is Rental Property Depreciation?
• How Does 100% Bonus Depreciation Work in 2026?
• What Are the Straight-Line vs. Accelerated Depreciation Methods?
• What Residential Recovery Periods Apply to Arizona Rentals?
• How Does Arizona State Conformity Affect Your Deductions?
• How Do You Calculate Annual Depreciation on Rental Properties?
• What Is Cost Segregation and How Can It Accelerate Deductions?
• Uncle Kam in Action: Real-World Depreciation Success
• Next Steps
• Frequently Asked Questions

Key Takeaways

• 100% bonus depreciation is now permanent under the OBBBA for property placed in service after January 19, 2025.
• Residential rental properties in Arizona use a 27.5-year straight-line depreciation period for tax purposes.
• Arizona’s tax conformity rules may differ from federal rules, requiring careful attention to Schedule CT reporting.
• Cost segregation studies can accelerate depreciation deductions by separating real property into smaller components.
• Proper calculation of depreciable basis is critical—only the building value depreciates, not the land.

What Is Rental Property Depreciation?

Depreciation is one of the most powerful tax deductions available to rental property owners. It allows you to deduct a portion of your property’s cost each year, even though you’re not writing a check. The IRS recognizes that buildings wear out over time. Rather than deducting the entire purchase price immediately, depreciation lets you spread that deduction across decades.

For Arizona rental investors, this means you can report strong rental income on your Schedule E while claiming substantial depreciation deductions on your personal tax return. This often creates a tax loss for the property, even if it’s generating positive cash flow. That tax loss can offset other income, reducing your overall federal tax liability.

The IRS Depreciation Concept

The IRS publishes specific rules for depreciation in Publication 946. Depreciation applies only to property used in business or held for the production of income. Your Arizona rental home qualifies because you hold it to produce rental income.

Critical point: You cannot depreciate land. Land never wears out and has no determinable useful life. You can only depreciate the building and structural components. This is why properly allocating your purchase price between land and building is crucial for maximizing depreciation.

What Property Qualifies for Depreciation?

• Residential Rental Properties: Apartments, single-family rental homes, condos, townhouses.
• Commercial Rental Properties: Office buildings, retail spaces, warehouses used to generate rental income.
• Personal Property: Appliances, furniture, carpeting, and other tangible assets within the property.
• Parking Lot Improvements: Asphalt, paving, and other site improvements.

How Does 100% Bonus Depreciation Work in 2026?

This is a major game-changer for 2026. Under the One Big Beautiful Bill Act, bonus depreciation was permanently restored at 100% for qualifying property. This represents a significant reversal from the previous schedule. Previously, bonus depreciation was set to phase down starting in 2023, dropping to just 20% by 2026.

What Changed in 2026?

The OBBBA was signed into law in July 2025 and made permanent what was previously temporary. For Arizona rental investors, this means the following property qualifies for immediate 100% depreciation deduction:

• Property placed in service on or after January 19, 2025.
• Tangible personal property (appliances, furniture, fixtures).
• Qualified production property (new category)—real property used in qualified manufacturing activities.

Limitation: Real Property and Bonus Depreciation

Important limitation for Arizona investors: Bonus depreciation does not apply to regular residential or commercial buildings placed in service after 2027. It applies only to specified property. However, the new qualified production property category expands this for manufacturing-related real property.

For most residential rental homes in Arizona, the building structure still uses the 27.5-year straight-line method. But personal property within the building can use bonus depreciation immediately.

What Are the Straight-Line vs. Accelerated Depreciation Methods?

The depreciation method you choose determines how quickly you realize tax deductions. For rental properties, the IRS Publication 946 specifies which methods are allowed. The MACRS (Modified Accelerated Cost Recovery System) method is required for assets placed in service after 1986.

Straight-Line Method

Under straight-line depreciation, you deduct an equal amount each year. This is the mandatory method for residential rental properties under current federal tax law.

Example calculation: A $270,000 residential rental building (after separating land value) depreciates at $9,818 annually ($270,000 ÷ 27.5 years). This same deduction appears on your tax return each year for 27.5 years.

MACRS Accelerated Method

MACRS acceleration applies to personal property and some commercial property. Personal property components in your Arizona rental property depreciate faster than the building itself.

• 5-year property: Appliances, machinery, equipment, vehicles.
• 7-year property: Furniture, fixtures, certain leasehold improvements.
• 15-year property: Qualified leasehold improvements, certain land improvements.

What Residential Recovery Periods Apply to Arizona Rentals?

The recovery period is the timeframe over which the IRS allows you to depreciate an asset. For residential rental property, Congress fixed this at 27.5 years. This was established in 1986 and remains the law for 2026.

Why 27.5 Years?

Congress selected 27.5 years as representing the reasonable economic life of a residential building. While structures often last much longer, this statutory period cannot be changed by individual taxpayers. It applies whether your Arizona rental home is a brand-new construction or a 50-year-old property.

Commercial Property Recovery Periods

If you own commercial rental property in Arizona, the recovery period is longer:

Property Type	Recovery Period (2026)	Method
Residential Rental Property	27.5 years	Straight-line
Commercial Real Property	39 years	Straight-line
Personal Property (5-year)	5 years	MACRS Accelerated
Personal Property (7-year)	7 years	MACRS Accelerated

How Does Arizona State Conformity Affect Your Deductions?

Arizona’s tax rules on rental property depreciation are complex because the state must decide whether to conform to federal changes. When Congress passes tax legislation, individual states choose to either adopt those changes (conform) or maintain their own rules (decouple).

Arizona’s Current Depreciation Conformity Status

For 2026, Arizona generally conforms to federal depreciation periods and straight-line methods. However, the state may decouple on bonus depreciation for certain property. This creates a situation where:

• Federal return claims 100% bonus depreciation in year one.
• Arizona return requires depreciation over the full recovery period.
• You report a Schedule CT adjustment to reconcile the difference.

Schedule CT Reporting Requirements

Arizona Form 140-CT (Arizona Corporation Tax Reconciliation) is used by real estate investors with depreciation differences. If you claim federal bonus depreciation that Arizona doesn’t allow, you must add back the difference on your Arizona return.

Example: If you claim $50,000 federal bonus depreciation in 2026 for personal property but Arizona only allows $10,000 in year one, you’d add back $40,000 on Schedule CT for Arizona income tax purposes.

How Do You Calculate Annual Depreciation on Rental Properties?

Calculating rental property depreciation involves five steps. Getting this right is critical because depreciation is one of your largest deductions.

Step 1: Establish Depreciable Basis

Your basis starts with the purchase price. If you paid $400,000 for an Arizona rental home, that’s your initial basis. If you made capital improvements after purchase, add those to basis too.

However, you cannot depreciate the land. Most Arizona properties allocate 20-30% of value to land and 70-80% to the building. The county assessor’s allocation or a professional appraisal should support this split.

Step 2: Calculate Building Value (Land Exclusion)

If your $400,000 Arizona property is 25% land ($100,000) and 75% building ($300,000), your depreciable basis is $300,000.

Step 3: Divide by Recovery Period

$300,000 ÷ 27.5 years = $10,909 annual depreciation deduction.

Step 4: Apply Mid-Month Convention

If you purchased the property mid-year, depreciation is prorated. Under the mid-month convention, depreciation is calculated as if the property was placed in service on the 15th of the month of purchase.

Example: Property purchased June 15, 2026. July through December = 6.5 months of depreciation in 2026. Calculate: $10,909 × (6.5 ÷ 12) = $5,992 first-year depreciation.

Step 5: Report on Schedule E Form 1040

You report annual depreciation on Schedule E, which flows to your Form 1040. This reduces your taxable rental income.

Scenario	Calculation	Annual Depreciation
$400,000 property (75% building) full year	$300,000 ÷ 27.5	$10,909
Same property purchased June 2026	$10,909 × 6.5/12	$5,992
$500,000 property (80% building) full year	$400,000 ÷ 27.5	$14,545

What Is Cost Segregation and How Can It Accelerate Deductions?

Cost segregation is an advanced strategy for Arizona rental property investors. It involves having an engineer perform a detailed study to identify and reclassify components of a property that qualify for faster depreciation.

What Components Qualify?

Within a $500,000 Arizona rental property, a cost segregation study might identify:

• Land (non-depreciable): $100,000
• Building structure (27.5 years): $280,000
• Personal property (5 years): $80,000 (HVAC, appliances, carpet, flooring)
• Land improvements (15 years): $40,000 (parking lot, landscaping, fencing)

Tax Impact Example

Without cost segregation: $500,000 property with 75% building ($375,000) = $13,636 annual depreciation.

With cost segregation separating $80,000 personal property depreciating over 5 years: First year includes $16,000 in personal property depreciation plus $10,191 in building depreciation = $26,191 total first-year deduction.

This creates an additional $12,555 in year-one tax deductions for Arizona rental investors. Cost segregation studies typically cost $5,000-$15,000 but pay for themselves through accelerated depreciation.

Uncle Kam in Action: Real-World Depreciation Success

Client Snapshot: A Phoenix-based real estate investor, Maria, owns three rental properties in Arizona with a combined value of $1.2 million. She generates $72,000 in annual rental income but was paying taxes on nearly all of it because she wasn’t strategically using depreciation.

Financial Profile: Annual rental income: $72,000. Mortgage interest and operating expenses: $38,000. Taxable income before depreciation: $34,000. Federal tax bracket: 24% (combined income places her here).

The Challenge: Maria was reporting $34,000 in taxable rental income and owing approximately $8,160 in federal tax on that income. She hadn’t calculated or claimed depreciation deductions, essentially leaving tax savings on the table.

The Uncle Kam Solution: We performed a detailed depreciation analysis on Maria’s three properties. Property valuations totaled $1.2 million with approximately 75% allocated to buildings ($900,000 depreciable basis). Annual straight-line depreciation: $900,000 ÷ 27.5 = $32,727. Additionally, we identified $45,000 in personal property within the buildings qualifying for 5-year cost segregation treatment, generating an additional $9,000 first-year depreciation.

The Results:

• Tax Savings: $9,816 in federal tax savings in year one (from cost segregation depreciation)
• Investment: $8,500 for comprehensive depreciation and cost segregation analysis
• Return on Investment (ROI): 115% in year one, with continued benefits over 27.5 years

This is just one example of how our proven depreciation strategies have helped clients dramatically reduce their rental property tax burden while building wealth through real estate. Maria now reports minimal taxable income from her rentals while maintaining strong positive cash flow.

Next Steps

Take control of your Arizona rental depreciation strategy for 2026 with these action items:

• Gather property documents: Collect your Arizona property purchase agreements and loan documents showing allocation between land and building value.
• Calculate current depreciation: Determine what depreciation you should have claimed in prior years using the 27.5-year method.
• Consider cost segregation: For properties over $500,000, evaluate whether a cost segregation study makes financial sense.
• Review Arizona conformity: Consult with a tax professional about any Schedule CT adjustments needed for your Arizona returns.
• Coordinate with your CPA: Work with our Arizona tax preparation team to ensure proper 2026 depreciation reporting on Schedule E.

Frequently Asked Questions

Can I depreciate land value on my Arizona rental property?

No. Land never depreciates for tax purposes because it has no determinable useful life. Only the building structure and components qualify for depreciation. Properly allocating purchase price between land and building is critical. Use county assessments or professional appraisals to support the allocation.

What happens to accumulated depreciation when I sell my Arizona rental property?

Accumulated depreciation reduces your basis at sale, increasing your gain. If you claimed $50,000 in total depreciation and later sell for $450,000 (your original $400,000 purchase plus $50,000 appreciation), your taxable gain is treated differently. The depreciation claimed is “recaptured” at 25% tax rate, while remaining gain may qualify for long-term capital gains rates.

Does bonus depreciation reduce my depreciable basis?

Yes. If you claim 100% bonus depreciation on personal property in year one, that reduces your remaining basis for standard depreciation in subsequent years. Section 179 expensing and bonus depreciation work together to reduce basis.

Are there limitations on how much depreciation I can claim annually?

There are no annual dollar limits on depreciation deductions themselves. However, passive activity loss rules may limit your ability to use all rental property losses against other income. If your total rental losses exceed passive activity income, excess losses carry forward to future years or until you sell the property.

If I inherit an Arizona rental property, can I depreciate it?

Yes, but depreciation resets at the stepped-up basis value as of the date of death. You cannot claim depreciation on the original cost basis that prior owners claimed. Your new basis equals fair market value at inheritance, and you depreciate from that point forward.

How does Arizona’s conformity decision on bonus depreciation affect my tax liability?

If you claim 100% federal bonus depreciation but Arizona decouples and doesn’t allow it, you report a Schedule CT adjustment adding back the state-disallowed depreciation. This increases your Arizona taxable income while your federal return shows lower income. The difference flows through to your Arizona taxes due.

What’s the difference between regular depreciation and cost segregation depreciation for Arizona rental investors?

Regular depreciation treats the building as one asset depreciating over 27.5 years. Cost segregation breaks the building into multiple components with different recovery periods. Personal property depreciates in 5-7 years, land improvements in 15 years, and the remaining structure in 27.5 years. This acceleration is entirely legal and supported by IRS Publication 946.

Do new Arizona investors get different depreciation rules than experienced investors?

No. The IRS depreciation rules apply uniformly to all taxpayers. New investors have the same 27.5-year recovery period and same depreciation calculation methods as experienced investors. However, it’s critical to establish proper basis and allocation from the time of purchase.

Can I depreciate improvements and renovations made to my Arizona rental property in 2026?

Yes. Capital improvements (not repairs) increase your basis and can be depreciated. New HVAC system installed in 2026? Depreciate it. New roof? Depreciate it. However, repairs and maintenance are deductible in the year incurred but not capitalized or depreciated. The distinction is critical for proper tax treatment.

 

This information is current as of 1/5/2026. Tax laws change frequently. Verify updates with the IRS or your Arizona tax professional if reading this later.

Related Resources

• IRS Publication 946: How to Depreciate Property
• Real Estate Investor Tax Strategies
• Optimize Your Rental Property Entity Structure
• Complete Tax Planning Guides for Investors
• Expert Tax Advisory Services

Last updated: January, 2026