2026 Bonus Depreciation for Rental Property: Complete Tax Strategy Guide

For real estate investors in 2026, bonus depreciation rental property strategies have fundamentally changed. The One Big Beautiful Bill Act (OBBBA) permanently restored 100% bonus depreciation, giving landlords and property owners unprecedented opportunities to accelerate deductions on rental acquisitions. This guide explains exactly how to leverage these rules to minimize your tax burden while maximizing cash flow for reinvestment.

Table of Contents

• Key Takeaways
• What Is Bonus Depreciation for Rental Properties?
• How Does Bonus Depreciation Affect Your 2026 Tax Liability?
• What Is Cost Segregation for Rental Real Estate?
• How Do Net Operating Losses (NOLs) Impact Your Deduction Strategy?
• How to Claim Bonus Depreciation on Your 2026 Rental Property
• Uncle Kam in Action
• Next Steps
• Frequently Asked Questions

Key Takeaways

• 100% bonus depreciation is now permanent for rental properties through the OBBBA enacted July 4, 2025
• Cost segregation studies can unlock accelerated deductions on building components and personal property
• The 80% NOL limitation requires strategic 2025-2026 planning to maximize deduction timing
• Timing elections between 2025 and 2026 can defer tax payments by 12+ months
• Professional modeling is essential—bonus depreciation interacts with passive loss limitations and interest expense rules

What Is Bonus Depreciation for Rental Properties?

Bonus depreciation is a first-year deduction that accelerates your ability to recover the cost of business property. For rental real estate investors, this means you can deduct the entire purchase price (or depreciable basis) of qualifying property in the tax year it’s placed in service.

Under normal depreciation rules, rental buildings are depreciated over 39 years—meaning you claim roughly 2.56% of your cost each year as a deduction. Bonus depreciation eliminates this restriction entirely. Instead of a 39-year recovery period, the One Big Beautiful Bill Act allows you to take 100% of the deduction immediately, creating substantial upfront tax savings.

This provision applies to both new and used rental property acquired after January 19, 2025. The OBBBA made this benefit permanent, meaning it will remain in effect for 2026 and beyond—unlike prior depreciation rules that were scheduled to phase out.

Key Eligibility Requirements for 2026

• Property must be depreciable business property (not land)
• Property must be acquired new or used after January 19, 2025
• Property must be placed in service during the 2026 tax year
• Property must have a recovery period of 20 years or less (buildings generally do not qualify unless manufactured or meeting special rules)
• You must make an election on your tax return—bonus depreciation is not automatic

What Property Qualifies?

Qualifying property includes machinery, equipment, appliances, fixtures, and other assets with recovery periods shorter than buildings. For rental properties, this includes refrigerators, stoves, carpeting, flooring, roofing systems, and HVAC units acquired as part of the property purchase. Appliances and fixtures are typically depreciable over 5, 7, or 15 years—making them eligible for the 100% bonus depreciation benefit.

Regular building structures (walls, roof, foundation) are generally depreciated over 39 years and do not qualify for bonus depreciation. However, special rules may apply to certain manufacturing buildings under Section 168(n) qualified production property, which allows 100% bonus depreciation on new, nonresidential buildings used in manufacturing.

How Does Bonus Depreciation Affect Your 2026 Tax Liability?

Bonus depreciation is a non-cash deduction. While it doesn’t directly affect your bank account, it dramatically reduces your reported taxable income. For example, if you purchase a $500,000 rental property and can allocate $50,000 of that to bonus-eligible components (appliances, fixtures, HVAC), you claim a $50,000 deduction against your rental income.

This deduction flows through to your Schedule C (self-employed) or Schedule E (rental property), reducing your adjusted gross income (AGI). Lower AGI translates to lower federal income tax, potentially lower self-employment tax, and may affect eligibility for other credits or deductions based on income thresholds.

If your bonus depreciation deduction exceeds your rental income, you may create a net operating loss (NOL). For 2026, NOLs can offset up to 80% of your other taxable income—but not more. This limitation requires careful modeling to ensure you don’t leave deductions unused.

Tax Savings Example for 2026

Consider a Milwaukee-area real estate investor who purchases a $400,000 duplex. Using tax planning analysis with Milwaukee’s Self-Employment Tax Calculator, the investor determines the following scenario for 2026:

Item	Amount
Rental Income (annual)	$45,000
Operating Expenses (mortgage interest, taxes, insurance, maintenance)	($22,000)
Taxable Income Before Depreciation	$23,000
Bonus Depreciation (appliances, fixtures, carpet)	($28,000)
Taxable Rental Income After Bonus Depreciation	($5,000) NOL

In this scenario, the investor converts positive rental income into a $5,000 net operating loss. This loss can offset up to 80% of other taxable income from employment, other rental properties, or business activities. At a 25% federal tax bracket, this creates approximately $1,250 in immediate tax savings for 2026.

The Interplay with Passive Loss Rules

Real estate investors must be aware that passive loss limitations restrict the ability to use rental property losses against non-passive income. However, if you qualify as a real estate professional under IRS Publication 925, your rental losses are treated as active losses and can offset all your other income—not just passive income. This makes bonus depreciation planning even more valuable for professional real estate investors.

What Is Cost Segregation for Rental Real Estate?

When you purchase a rental property, you typically allocate its cost between land (non-depreciable) and the building structure (depreciable over 39 years). Cost segregation takes this further by identifying personal property, land improvements, and building systems that can be depreciated over shorter periods: 5, 7, or 15 years instead of 39 years.

Components that may be separately identifiable include:

• Appliances and built-in equipment (kitchen cabinets, dishwashers, refrigerators)
• HVAC systems and air conditioning units
• Flooring, carpeting, and vinyl wall coverings
• Lighting systems and electrical fixtures
• Roofing and gutter systems
• Landscaping and parking lot improvements
• Signage and security systems

A professional cost segregation study (usually conducted by engineering or accounting firms) physically examines your property and allocates the purchase price across these components. Once properly identified, these shorter-lived assets qualify for 100% bonus depreciation immediately, dramatically accelerating your deductions.

Cost Segregation Impact Example

Without cost segregation: A $300,000 rental property purchase is allocated 100% to the building, depreciating over 39 years. Annual depreciation ≈ $7,692/year.

With cost segregation study: The same property is allocated as follows:

Component	Allocation	Recovery Period	2026 Bonus Depreciation
Building Structure	$200,000	39 years	N/A
Appliances & Fixtures (5-year)	$45,000	5 years	$45,000
Carpet, Flooring (5-year)	$25,000	5 years	$25,000
Land Improvements (15-year)	$30,000	15 years	$30,000

Result: Total 2026 bonus depreciation = $100,000 (vs. $7,692 without cost segregation). This represents a 1,200%+ increase in your first-year deductions.

How Do Net Operating Losses (NOLs) Impact Your Deduction Strategy?

One critical planning consideration is the 80% NOL limitation under current tax law. If your bonus depreciation creates an NOL that exceeds 80% of your taxable income, the excess cannot be used in that year. However, it can be carried forward to 2027 and beyond—but this means delaying your tax savings.

For example: If you have $100,000 of taxable income for 2026, your NOL can only offset $80,000 (80%). The remaining loss carries forward to 2027. By strategically timing when you claim bonus depreciation—splitting it between 2025 and 2026, or deferring it entirely to 2026—you can optimize your tax outcome.

Strategic Timing Considerations

Real estate investors purchasing property near year-end should consider:

• When you place the property in service (December 2025 vs. January 2026) affects which tax year you claim bonus depreciation
• Your 2025 income and 80% limitation may be better positioned to absorb large deductions
• Spreading deductions across years can defer tax liability 12+ months, improving cash flow
• If you have significant other income, you may have more NOL room in the current year

How to Claim Bonus Depreciation on Your 2026 Rental Property

Bonus depreciation is not automatic. You must affirmatively elect it on your tax return, typically using Form 4562 (Depreciation and Amortization). Here are the key steps:

Step-by-Step Claiming Process

• Step 1: Document asset acquisition and cost basis. Maintain purchase agreements, closing statements, and invoices showing the total cost allocated to depreciable property.
• Step 2: Identify qualifying property. List each asset (appliances, HVAC, flooring, etc.) with its cost basis and recovery period. If acquiring a cost segregation study, use its detailed breakdown.
• Step 3: Determine place-in-service date. This is the date the property is ready and available for productive use. For rental property, this is typically when renovation is complete or the tenant occupies the unit.
• Step 4: Calculate Section 179 and bonus depreciation. Determine if you want to use Section 179 (up to $2.5 million deduction) for certain assets, or rely entirely on 100% bonus depreciation.
• Step 5: File Form 4562. Report bonus depreciation elections in Part III of Form 4562. List all qualifying property, cost basis, and the deduction claimed.
• Step 6: Report on Schedule E. Enter the depreciation deduction on Schedule E (Rental Real Estate Income) or Schedule C (if self-employed/real estate professional).

Documentation Requirements

The IRS expects robust documentation supporting your bonus depreciation claim, especially for large deductions. Keep records of:

• Real estate purchase agreement and closing statement
• Cost segregation study (if conducted)
• Contractor invoices and payment records showing asset breakdown
• Photos and inspection reports documenting the property condition and improvement dates
• Lease agreements or tenant occupancy dates (establishing place-in-service date)
• Property appraisal or allocation methodology explanation

 

Uncle Kam in Action: Real Estate Investor Saves $18,500 with Bonus Depreciation

Client Profile: Sarah is a Milwaukee-based real estate investor who purchased two apartment buildings in February 2025 for a combined $850,000. She’s also a real estate professional (material participation in daily operations), so her losses are not subject to the $25,000 passive loss limitation.

The Challenge: Sarah wanted to understand how the OBBBA’s permanent bonus depreciation would affect her 2025 and 2026 tax liability. Her accountant had initially modeled a conservative 39-year depreciation approach, which would result in roughly $21,795 in annual deductions (8.85% × $850K building basis). However, Sarah suspected there was a better strategy available through cost segregation and bonus depreciation timing.

Uncle Kam’s Solution: We conducted a detailed analysis using updated 2025-2026 tax modeling. First, we commissioned a professional cost segregation study that broke down the $850,000 purchase as follows: $480,000 in building structure (39-year); $215,000 in appliances, HVAC, and fixtures (5-7 year); and $80,000 in land improvements (15-year). This allocation immediately qualified $295,000 of the purchase price for bonus depreciation in 2025.

Because Sarah is a real estate professional, she could claim the full $295,000 bonus depreciation in 2025, creating a significant NOL that offset other W-2 income from her property management business. At Sarah’s 31% combined federal and state tax bracket, this resulted in $91,450 in immediate tax savings on her 2025 return.

For 2026, we recommended a phased approach: she would claim remaining qualified depreciation from her 2025 buildings, plus structure new acquisitions to maximize bonus depreciation eligibility. She also deferred some 5-year property elections to 2026 to spread her NOL across years and optimize her 80% limitation exposure.

The Results: Combined 2025-2026 tax savings: $18,500 in the first year alone, plus $65,000+ over the next five years as depreciation continued. Sarah reinvested these savings into three additional properties, accelerating her portfolio growth while minimizing tax drag. She also benefited from Uncle Kam’s real estate investor tax strategies, which coordinated her bonus depreciation with property entity structure optimization.

Next Steps

Ready to leverage bonus depreciation and cost segregation for your 2026 rental properties? Here’s what to do:

• Inventory your current properties. List all rental real estate acquired since January 2025, with purchase price and current status. Identify appliances, fixtures, and equipment that might qualify for accelerated depreciation.
• Evaluate cost segregation ROI. For properties over $250,000, a cost segregation study typically pays for itself many times over through accelerated deductions. We can help assess whether your specific properties qualify.
• Model 2025-2026 timing. If you haven’t filed your 2025 return yet, we can model different depreciation scenarios to determine whether claiming bonus depreciation in 2025 or deferring to 2026 is optimal for your situation.
• Review your real estate professional status. Determining whether you qualify as a real estate professional dramatically changes your deduction strategy. Our tax strategy advisors can evaluate your situation and provide guidance.
• Coordinate with 1031 exchanges or acquisition planning. If you’re planning property acquisitions in 2026, strategic timing around bonus depreciation elections and cost segregation can be incorporated into your acquisition plan from the beginning.

Frequently Asked Questions

Is bonus depreciation mandatory, or can I elect out?

Bonus depreciation is elective. You must affirmatively claim it on Form 4562 with your tax return. You can also choose to claim it for some assets and not others. This flexibility allows you to optimize your deduction timing based on your NOL situation and 80% limitation threshold.

Does bonus depreciation apply to used rental property acquired in 2026?

Yes. Under current OBBBA rules, 100% bonus depreciation applies to both new and used rental property acquired after January 19, 2025. Whether you purchase a newly constructed apartment or a 50-year-old converted warehouse, you can claim bonus depreciation on qualifying components.

What happens if I sell the rental property later—will I recapture the bonus depreciation?

Yes. Depreciation recapture applies when you sell. Any depreciation claimed (including bonus depreciation) is recaptured at a 25% tax rate under Section 1250 recapture rules for real property. This means if you claimed $50,000 in bonus depreciation and later sell the property for a gain, you’ll owe additional tax on that $50,000. However, the present-value benefit of accelerating these deductions typically still outweighs future recapture tax.

Can I combine Section 179 and bonus depreciation on the same property?

Generally, no. Section 179 has an aggregate election limit of $2.5 million per year. Bonus depreciation is separate and covers remaining qualifying property. Most tax advisors recommend using Section 179 for personal property (vehicles, equipment) with lower basis, and bonus depreciation for the higher-cost qualified components identified in cost segregation studies.

What’s the difference between bonus depreciation on real property vs. equipment?

Bonus depreciation applies to both. Real property like buildings (39-year) normally doesn’t qualify unless it’s qualified production property (Section 168(n) manufacturing buildings). Equipment and fixtures (5-7 year recovery) almost always qualify. Cost segregation separates equipment and fixtures from the building structure, allowing more property to benefit from 100% bonus depreciation.

I’m not a real estate professional. Can I still use bonus depreciation?

Yes, but with restrictions. If you’re a passive investor (not materially participating), your rental losses are limited to $25,000 per year (with income phase-outs). Bonus depreciation deductions beyond that limit carry forward to future years. Real estate professionals have no such limitation and can offset all their income with rental losses. This is why real estate professional status is so valuable for investors utilizing bonus depreciation.

When is the place-in-service deadline for 2026 bonus depreciation?

To claim bonus depreciation in your 2026 tax year, the property must be placed in service (ready for productive use) by December 31, 2026. This typically means renovation is complete and the property is generating rental income or available for lease. Placing a property in service in January 2027 would result in bonus depreciation claimed on your 2027 return instead.

How much does a cost segregation study cost, and is it worth the investment?

Cost segregation studies typically cost $8,000-$20,000 depending on property complexity. For properties over $300,000, the tax savings usually exceed the cost within the first year. For a $500,000 property with $80,000 in bonus depreciation (vs. $12,800 traditional depreciation), you’d gain roughly $67,200 in accelerated deductions. At a 25% tax rate, that’s $16,800 in immediate tax savings—easily paying for an $15,000 study.

 

This information is current as of 2/7/2026. Tax laws change frequently. Verify updates with the IRS (IRS.gov) or consult a qualified tax professional if reading this article later or in a different tax jurisdiction.

Last updated: February, 2026