Bonus Depreciation on Rental Property in 2026: 100% Is Back
Yes, 100% bonus depreciation is back for rental property components acquired after January 19, 2025. P.L. 119-21 (the 2025 tax law) amended §168(k)(1) to allow "100 percent of the adjusted basis of the qualified property," with no phase-down and no placed-in-service deadline in the statute. The catch for landlords: the building shell does not qualify, and for most owners the deduction becomes a passive loss that cannot touch a salary.
Here is what qualifies, who can actually use the loss, and what it costs when you sell.
What changed, and the dates that matter
Before the 2025 law, bonus was phasing down under the 2017 schedule. P.L. 119-21 §70301 restored 100% for property acquired after January 19, 2025 (§70301(c)(1)).
The acquisition date is not the closing date if you signed early. Under §70301(c)(4), "property shall not be treated as acquired after the date on which a written binding contract is entered into for such acquisition." A purchase contract signed in December 2024 and closed in March 2025 is a 2024 acquisition for this purpose.
Two elections sit next to the 100% rule:
- Elect out by class. §168(k)(7) lets you elect out of bonus for all property in a class for the year. Owners who cannot use a passive loss for years sometimes prefer regular depreciation.
- Elect a lower rate for the transition year. §168(k)(10) allows an elective 40% (60% for long-production property) for the first taxable year ending after January 19, 2025.
"Permanent" means only that the statute has no end date. Congress can change it. See what the 2025 law means for sellers.
What qualifies on a rental
Bonus applies to property "which has a recovery period of 20 years or less" (§168(k)(2)(A)(i)).
| Part of a rental | Recovery period | Bonus eligible? |
|---|---|---|
| Residential building shell | 27.5 years | No |
| Commercial building shell | 39 years | No |
| Land improvements (paving, fencing, landscaping) | 15 years | Yes |
| Appliances, carpet, furniture, some fixtures | 5 or 7 years | Yes |
| Land | Not depreciable | No |
A plain purchase allocates everything to land and building, so there is nothing to bonus. A cost segregation study is what moves part of the price into the 5-, 7- and 15-year classes. Studies commonly move a meaningful slice of a building's cost into shorter lives, depending on the property; your study will give the real figure.
A few rules decide edge cases:
- Used property qualifies if you did not use it before and bought it from an unrelated seller (§168(k)(2)(E)(i), which pulls in §179(d)(2)). Purchases from a spouse, parent or child do not count.
- Inherited property does not qualify. A basis determined under §1014 is not a purchase (§179(d)(2)(C)(ii)). The heir still gets a fresh schedule on the stepped-up basis.
- 1031 replacement property: for used replacement property, only the excess basis (basis added with new debt or new cash) is bonus-eligible; the carried-over basis is not (Reg. §1.168(k)-2(g)(5)(iii)). A leveraged trade-up can still produce a sizable bonus.
- Electing real property trades or businesses must use ADS under §168(g)(8), and ADS property cannot take bonus (§168(k)(2)(D)). But §168(g)(8) reaches only nonresidential real property, residential rental property and qualified improvement property, so 5-, 7- and 15-year components stay eligible.
Who can actually use the loss
This is where most rental owners are surprised. Bonus creates a big first-year deduction. Whether it cuts your tax this year depends on the passive activity rules in §469.
| Owner | Is the bonus loss passive? | Offsets wages this year? |
|---|---|---|
| Typical landlord with a job or a manager | Yes (§469(c)(2)) | No. It goes to Form 8582 |
| Limited partner in a syndication | Yes (§469(h)(2)) | No |
| Real estate professional who materially participates | No | Yes, subject to §461(l) |
| Short-term rental, average stay 7 days or less, owner materially participates | No | Yes, subject to §461(l) |
| Active participant with MAGI under $100,000 | Passive, but up to $25,000 allowed (§469(i)) | Partly |
A simple example: A married couple with $400,000 of W-2 income buys a rental in 2026. A cost segregation study moves $250,000 into 5-, 7- and 15-year property, and they take 100% bonus. If they are ordinary passive landlords, their 2026 federal tax does not change: about $73,500 on $367,800 of taxable income after the $32,200 standard deduction, and the $250,000 loss is carried forward on Form 8582. If one spouse qualifies as a real estate professional and they materially participate, the same loss cuts taxable income to $117,800 and tax to about $15,300, a difference of about $58,100 (2026 MFJ brackets, §1(h)(1) worksheet order; state tax ignored).
The passive loss is not wasted. It waits in what the book calls the reservoir, and it comes out when you have passive income, including gain on selling a passive rental. That is the logic of the installment sale waterfall: a bonus loss on a property you buy can meet the gain on a property you sell.
Two limits apply after §469 for owners whose loss is nonpassive. The at-risk rules in §465 come first, and very large nonpassive losses face the excess business loss limitation, $512,000 for a joint return in 2026 (Rev. Proc. 2025-32 §3.31). The short-term rental route is covered in short-term rental tax strategy.
Can bonus depreciation offset capital gains?
Indirectly, yes, in the year you have passive gain. Gain on selling a passive rental is passive income (Temp. Reg. §1.469-2T(c)(2)(i)(A)), and passive losses, including bonus losses, can offset it. Because §1(h) taxes ordinary income first, an allowed loss reduces your ordinary layer before it reaches the capital gain layer. That is the "rate swap" the book describes.
Bonus losses cannot offset gain that is not passive: stock sales, land held for investment, or a rental you materially participated in as a real estate professional.
The bill at sale: recapture in year one
Every bonus dollar on a 5- or 7-year component is §1245 property. When you sell, that depreciation comes back as ordinary income. Bonus on 15-year land improvements is recaptured as ordinary income under §1250(a) to the extent it exceeds straight-line.
Under §453(i), that recapture is recognized in the year of sale, even on an installment sale with no cash in year one. Only the straight-line building depreciation (unrecaptured §1250 gain, taxed at up to 25%) can ride out with the payments (Reg. §1.453-12). The full sale-side analysis is in bonus depreciation recapture and cost segregation before you sell.
Exchanging a bonus-heavy building has its own trap: §1245(b)(4) can trigger recapture even with no boot if the replacement has less §1245 property. See 1031 exchange depreciation recapture.
California does not follow
California does not allow §168(k) (R&TC §17250(a)(11)). Your California return depreciates the same components over regular lives. Two results: the California loss in year one is much smaller, and your California adjusted basis stays higher, so the California gain on sale is smaller than the federal gain. Every projection needs a separate California column.
Bottom line
For property acquired after January 19, 2025, the short-life parts of a rental qualify for 100% bonus depreciation. For most owners the result is a large passive loss that waits on Form 8582, not a W-2 deduction. That can still be valuable, because it is exactly the kind of loss that gain on a future sale can absorb, and an installment note can pace that gain to match. Plan the exit at the same time as the purchase, since every bonus dollar comes back as ordinary recapture in the year of sale. The free book walks through the whole sequence with cases.
Questions to ask your CPA
- When did we sign the binding contract, and does this property qualify for 100% or the transition-year election?
- Is my loss passive, and if so, when do I expect passive income to use it?
- Should we elect out of bonus for any class this year?
- How much excess basis does my 1031 replacement have?
- What will the §1245 recapture be if I sell in five or ten years, and can I pay it in year one?
- What does the California return show without bonus?
Get the full playbook. The Waterfall Strategy, the 20-minute version and the one-page Cliff Notes, free.
Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.