Real Estate Tax Calc
The step-down
Bonus depreciation lets you deduct a percentage of eligible short-life property in the first year. That percentage has been stepping down (for example 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026), though legislation can change the schedule.
Why it matters for cost segregation
The bonus rate is applied to the assets a cost segregation study reclassifies. A lower bonus rate means a smaller first-year deduction, so timing a study and a purchase around the schedule affects your savings.
Confirm the current rate
Because Congress periodically revises these rules, always confirm the rate for your placed-in-service year. The cost segregation calculator lets you enter the exact bonus percentage.
Important update: the phase-out was reversed
The step-down described above was the law under the 2017 Tax Cuts and Jobs Act, but it no longer governs new purchases. The One Big Beautiful Bill Act (OBBBA), enacted in 2025, permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. In other words, the 20%-for-2026 figure above applies only to property caught in the pre-OBBBA window; qualifying property placed in service after the cutoff is back to a full 100% first-year write-off.
The IRS issued Notice 2026-11 in January 2026 with interim guidance on applying the restored rate. It confirms the full first-year deduction and offers a transition election: for property placed in service during your first tax year ending after January 19, 2025, you may elect the prior 40% rate (60% for certain long-production-period property) instead of 100%. That election can be useful if you cannot currently use a large passive loss.
What the acquisition date requires
The phrase 'acquired and placed in service' does real work. Bonus depreciation has always keyed off both a binding acquisition (generally when you enter a written binding contract or, for self-constructed property, when construction begins) and the placed-in-service date. Property you had under a binding contract before the OBBBA cutoff may fall under the old phase-down schedule even if you finished the work later. When timing is close to the January 19, 2025 line, the paper trail — contract dates, closing statements, and construction records — determines which rate you get.
Why bonus only touches part of your building
Bonus depreciation applies only to property with a MACRS recovery period of 20 years or less. The building shell — 27.5 years for residential rental, 39 years for commercial — is never eligible at any bonus rate. What qualifies are the shorter-life components: appliances, carpeting, cabinetry, and specialty electrical (5-year property); certain fixtures (7-year); and land improvements such as parking lots, fencing, sidewalks, and landscaping (15-year property). On a typical residential rental, these make up roughly 15%–30% of the depreciable basis, which is why a cost segregation study is the tool that unlocks bonus depreciation in the first place.
A dollars-and-cents comparison
Suppose a cost segregation study on a newly acquired rental identifies $250,000 of qualifying short-life components. At the restored 100% rate, the entire $250,000 is deductible in year one. Under the old 40% rate, only $100,000 would come off immediately, with the remaining $150,000 depreciated over 5, 7, and 15 years. Under the scheduled 20% rate, just $50,000 would be first-year. The rate you are entitled to therefore swings a six-figure deduction — and the after-tax cash it frees up — dramatically. The permanent restoration also removes the old pressure to rush a closing before year-end to catch a higher rate.
The catch: passive activity loss rules still apply
A bigger first-year deduction is only useful if you can actually deduct it. For most rental owners, bonus depreciation creates a passive loss that cannot offset wages or other active income. It can be used currently only if you qualify as a Real Estate Professional (more than 750 hours in real property trades and more than half your working time) with material participation, or if the property is a short-term rental with average stays of seven days or less in which you materially participate. Otherwise the loss is suspended and carries forward indefinitely, releasing in full when you sell the property in a fully taxable transaction. And remember: bonus depreciation is still depreciation, so it is recaptured at sale.
The old phase-out schedule, for reference
Even though 100% is restored for new purchases, the pre-OBBBA schedule still matters for property placed in service in the window it governed, and for understanding older returns. Under the Tax Cuts and Jobs Act, bonus depreciation was 100% for 2018 through 2022, then stepped down: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and it was scheduled to reach 0% in 2027. Property acquired under a binding contract before the January 19, 2025 OBBBA cutoff — but placed in service afterward — may still fall on this declining schedule, which is why the acquisition date is worth pinning down precisely.
Bonus is automatic — but you can elect out
Bonus depreciation applies automatically to every eligible asset class unless you affirmatively elect out. The election out is made by class of property (for example, all 5-year property or all 15-year property) on a timely filed return, and once made it is generally irrevocable for that year. Why would anyone decline a bigger deduction? Because a loss you cannot use this year is worth less than steady deductions spread across future higher-income years, and because taking a smaller deduction now can preserve income to absorb a Section 179 election or to avoid wasting deductions against income already sheltered. Electing out is a real planning lever, not just a formality.
Used property qualifies, with conditions
A frequently missed point: bonus depreciation is not limited to brand-new assets. Since the TCJA, used property qualifies as long as it was not previously used by you and was not acquired from a related party. This is what makes bonus depreciation so powerful for real estate investors buying existing buildings — the short-life components identified in a cost segregation study on a used building are eligible, not just components in new construction. The property simply has to be new to you and acquired in an arm's-length purchase.
Interaction with the mid-quarter convention and losses
Bonus depreciation is taken before the regular MACRS calculation, which can change how the rest of your depreciation behaves. Because bonus can remove most of an asset's basis in year one, the remaining basis (if any) continues on the normal schedule. If a large share of your assets is placed in service in the last quarter of the year, watch for the mid-quarter convention, which can alter first-year regular depreciation on the non-bonus portion. And because bonus depreciation can create a net operating loss, coordinate it with the passive loss rules and, for larger losses, the excess business loss limitation that caps how much business loss noncorporate taxpayers can use against other income in a year.
Planning around the restored 100% rate
With 100% bonus permanent for qualifying purchases, the planning question shifts from timing the rate to timing the deduction to income you can use. If you expect to qualify as a Real Estate Professional or run a materially participating short-term rental, front-loading deductions with a cost segregation study and full bonus can shelter substantial active income. If you are a passive investor, a giant year-one loss may simply pile up as a carryforward — in which case electing out of bonus for some asset classes, or spreading the study's benefit, may serve you better. Model the after-tax result across several years, not just year one, before committing.
Frequently asked questions
What is the bonus depreciation rate now?
For qualifying property acquired and placed in service after January 19, 2025, the rate is 100% — the One Big Beautiful Bill Act permanently reversed the scheduled phase-down. Property caught before that cutoff may still fall under the old schedule (40% in 2025, 20% in 2026), so confirm your acquisition and placed-in-service dates.
Does bonus depreciation apply to the whole building?
No — only to components with a recovery period of 20 years or less, mainly the shorter-life items a cost segregation study separates out. The 27.5- or 39-year building shell never qualifies.
Was the phase-out cancelled?
For new purchases, yes. The OBBBA restored 100% bonus depreciation permanently for property acquired and placed in service after January 19, 2025, and IRS Notice 2026-11 provides the implementing guidance. The old 80/60/40/20 schedule now applies only to property that missed that window.
Can I use the old lower rate on purpose?
Yes, for the transition year. Notice 2026-11 allows a taxpayer to elect the prior 40% rate for property placed in service during the first tax year ending after January 19, 2025 — sometimes preferable if you cannot currently use a large passive loss.
Do states follow the 100% bonus rate?
Not always. Many states decouple from federal bonus depreciation and require you to add it back and depreciate on a slower schedule for state purposes. Check your state's conformity before relying on the federal number.
Does bonus depreciation apply to used property?
Yes. Since the 2017 law, used property qualifies as long as it was not previously used by you and was not acquired from a related party. This is what lets investors apply bonus depreciation to short-life components in an existing building identified by a cost segregation study, not just new construction.
Can I choose not to take bonus depreciation?
Yes. Bonus is automatic but you can elect out by class of property on a timely filed return, and the election is generally irrevocable for that year. Investors elect out when a large current loss would be wasted or when preserving income helps absorb a Section 179 election.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.