What Is Bonus Depreciation? How Real Estate Investors Can Save Thousands in Taxes
What if you could deduct tens of thousands of dollars from your rental property's taxable income in a single year instead of spreading those deductions over decades?
That's exactly what bonus depreciation can help real estate investors accomplish.
And thanks to recent changes in federal tax law, 100% bonus depreciation is back—and it's permanent under current law.
When combined with a cost segregation study, bonus depreciation can become one of the most powerful tax-saving strategies available to rental property owners.
Here's how it works.
What Is Bonus Depreciation?
Bonus depreciation is a federal tax provision that allows businesses and real estate investors to deduct the cost of certain qualifying assets in the year those assets are placed in service, rather than depreciating them gradually over several years.
Normally, residential rental buildings are depreciated over 27.5 years.
For example, if you purchase a rental property for $500,000 and allocate $100,000 to land, the remaining $400,000 building basis would generally be depreciated over 27.5 years.
That works out to approximately $14,545 in annual depreciation before considering first-year conventions.
But not every component of a rental property must be depreciated over 27.5 years.
Certain components may qualify for shorter depreciation periods of 5, 7, or 15 years.
And that's where bonus depreciation becomes especially valuable.
Is 100% Bonus Depreciation Available in 2026?
Yes!
The One Big Beautiful Bill Act, signed into law on July 4, 2025, permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.
This means qualifying assets can generally be deducted entirely in the first year instead of being depreciated over their normal recovery periods.
Here's a look at how bonus depreciation has changed:
Year | Bonus Depreciation |
2022 | 100% |
2023 | 80% |
2024 | 60% |
Early 2025 | 40% generally |
After January 19, 2025 | 100% for qualifying acquisitions |
2026 and beyond | 100% under current law |
Important: Acquisition dates, binding contracts, placed-in-service dates, and other eligibility requirements matter. Not every property placed in service during 2025 automatically qualifies for 100% bonus depreciation.
How Does Bonus Depreciation Work for Rental Properties?
Let's say you purchased a rental property for $600,000.
After allocating $120,000 to land, you have $480,000 of depreciable basis.
Under traditional depreciation rules, most of that basis would be depreciated over 27.5 years.
However, a cost segregation study may identify components that qualify for accelerated depreciation.
These can include:
Appliances and certain removable fixtures
Qualifying carpeting and flooring
Certain cabinetry and decorative components
Landscaping and irrigation systems
Fences and driveways
Certain outdoor improvements
Depending on their characteristics and use, these assets may qualify for 5-year, 7-year, or 15-year depreciation.
When eligible for 100% bonus depreciation, their entire allocated tax basis can potentially be deducted in the first year.
Real Example: How Bonus Depreciation Could Save $42,000 in Taxes
Let's look at a hypothetical $600,000 rental property.
Property purchase price: $600,000
Land allocation: $120,000
Depreciable basis: $480,000
Suppose a cost segregation study identifies 25% of the depreciable basis as qualifying shorter-life assets.
Asset Classification | Allocated Basis |
5-year property | $72,000 |
15-year property | $48,000 |
27.5-year building | $360,000 |
Total | $480,000 |
With 100% bonus depreciation, the investor could potentially deduct the entire $120,000 allocated to the eligible shorter-life assets in the first year.
Assuming a 35% marginal tax rate:
$120,000 × 35% = $42,000 in potential tax savings.
That's $42,000 in potential first-year tax savings on a single property.
And the remaining $360,000 of building basis would continue to be depreciated over 27.5 years.
Keep in mind that $42,000 is an illustrative tax benefit, not a guaranteed refund. Actual tax savings depend on the investor's tax situation, the deductibility of rental losses, and other factors. Bonus depreciation generally accelerates deductions rather than creating additional total depreciation.
What Is the Difference Between Bonus Depreciation and Cost Segregation?
Many property owners confuse bonus depreciation with cost segregation.
While the two strategies work together, they serve different purposes.
Cost segregation identifies qualifying assets.
A cost segregation study analyzes a property and separates eligible components into shorter depreciation categories, generally including 5-year, 7-year, and 15-year property.
Bonus depreciation accelerates the deductions.
Once qualifying assets are identified, bonus depreciation may allow their entire cost to be deducted in the first year.
Think of it this way:
Cost segregation finds the deductions. Bonus depreciation allows you to take them faster.
Without a cost segregation study, rental property owners may overlook significant opportunities to accelerate depreciation.
Does Bonus Depreciation Apply to Short-Term Rentals and Airbnb Properties?
Yes, qualifying assets in short-term rental properties can be eligible for bonus depreciation.
This can be especially valuable for owners of Airbnb, VRBO, vacation rentals, and other short-term rental properties.
Certain short-term rental activities may also receive different treatment under the passive activity loss rules.
For example, when the average guest stay is seven days or less, the rental activity generally is not treated as a rental activity for purposes of those rules.
If the owner materially participates, losses may be nonpassive and could potentially offset other income, including W-2 income, subject to applicable tax limitations.
However, owning an Airbnb does not automatically mean you can use depreciation losses against your salary. Average stay duration, material participation, personal use, and other rules must be considered.
For qualifying investors, combining short-term rental ownership, material participation, cost segregation, and bonus depreciation can create substantial tax-planning opportunities.
Can You Claim Bonus Depreciation on an Existing Rental Property?
Potentially, yes.
You don't necessarily need to purchase a new property in 2026 to benefit from cost segregation.
If you purchased a rental property in a previous year and never completed a cost segregation study, you may be able to perform one now.
A properly prepared study can identify previously unclaimed accelerated depreciation.
Depending on your circumstances, your CPA may be able to claim a depreciation catch-up adjustment using IRS Form 3115, Application for Change in Accounting Method, rather than amending prior returns.
However, the bonus depreciation percentage applicable to previously acquired property generally depends on the property's original acquisition and placed-in-service dates and the applicable tax rules.
A study completed in 2026 does not automatically make an older property's components eligible for 100% bonus depreciation.
Is There a Downside to Bonus Depreciation?
While bonus depreciation offers substantial benefits, it's important to understand a few considerations.
1. You're accelerating future deductions. Taking more depreciation today generally means fewer depreciation deductions in later years.
2. Depreciation recapture may apply when you sell. Some of the tax savings realized today could result in additional taxable gain upon sale.
3. Rental losses aren't always immediately deductible. Passive activity limitations and other tax rules may restrict when deductions can be used.
4. State tax rules may differ. Not every state follows federal bonus depreciation rules.
For these reasons, investors should coordinate with their CPA to determine whether accelerated depreciation fits their long-term tax strategy.
How Much Does a Cost Segregation Study Cost?
Historically, cost segregation studies could cost thousands of dollars, making them difficult to justify for smaller residential investment properties.
At 24 Hour Cost Seg, we believe accelerated depreciation shouldn't be reserved for investors with multimillion-dollar portfolios.
That's why we offer residential rental property cost segregation studies for just $499.
Our service includes:
A cost segregation study for qualifying residential rental properties under $2 million
Asset classifications and depreciation schedules
A report designed to support IRS depreciation requirements
CPA-prepared analysis
A 24-hour turnaround
Whether you own an Airbnb, vacation rental, or traditional long-term rental property, a cost segregation study could help identify depreciation deductions you're currently missing.
Frequently Asked Questions About Bonus Depreciation
Is bonus depreciation really 100% in 2026?
Yes. Under current federal tax law, qualifying property acquired after January 19, 2025, and placed in service after that date is generally eligible for 100% bonus depreciation.
Can I use bonus depreciation on a used rental property?
Yes. Certain used assets can qualify, provided the applicable acquisition and eligibility requirements are satisfied. The building itself generally remains subject to its regular depreciation period.
Does bonus depreciation apply to the entire purchase price?
Generally, no. Land isn't depreciable, and the residential rental building itself generally doesn't qualify for bonus depreciation. Qualifying shorter-life components identified through cost segregation may be eligible.
Can bonus depreciation create a tax loss?
Yes. Bonus depreciation can create or increase a tax loss. Whether that loss can immediately offset other income depends on applicable tax rules.
Do I need a cost segregation study to claim bonus depreciation?
Not for every asset. But a properly prepared cost segregation study can help identify and substantiate shorter-life components that might otherwise remain classified as part of the building.
Start Saving on Your Rental Property Taxes Today
If you own a rental property, there's a good chance you're missing opportunities to accelerate depreciation.
With 100% bonus depreciation available under current law, now is a great time to evaluate whether a cost segregation study makes sense for your investment.
At 24 Hour Cost Seg, we make the process simple, affordable, and fast.
Get your cost segregation study for just $499, with a 24-hour turnaround.
Visit www.24hourcostseg.com to get started.
24 Hour Cost Seg — Smarter Depreciation. Bigger Tax Savings.
Disclaimer: This article is provided for general educational purposes and does not constitute individualized tax advice. Tax savings depend on each taxpayer's circumstances. Consult with your CPA or tax advisor before implementing a depreciation strategy.
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