Real Estate Tax Calc
How regular MACRS depreciation works
Under MACRS, a residential rental building is depreciated straight-line over 27.5 years (or 39 for commercial). The annual deduction is the same each full year — building basis divided by the recovery period. Shorter-life components (5-, 7-, 15-year) also follow MACRS, depreciating over their respective schedules without any bonus.
What bonus depreciation adds
Bonus depreciation lets you deduct a large percentage of qualifying shorter-life assets in year one rather than spreading the cost over years. The building structure itself doesn't qualify, but components identified through a cost segregation study can. The bonus rate has been phasing down: 100% through 2022, stepping down each subsequent year — confirm the current-year rate before planning a purchase.
Which approach makes sense for you
Bonus depreciation is most valuable when you have taxable income to shelter now, you're in a higher bracket, and you don't plan to sell imminently. In a low-income year or when passive activity limits prevent you from using the loss, spreading deductions over regular MACRS may be more practical.
The 2025 update: 100% bonus was restored permanently
The phase-down mentioned above — 100% through 2022, then 80%, 60%, 40%, and 20% in the following years — came from the 2017 Tax Cuts and Jobs Act. That schedule was reversed by the One Big Beautiful Bill Act (OBBBA), which permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. For most investors buying today, bonus depreciation is once again a full first-year write-off on eligible components.
This changes the calculus between the two methods. When bonus was stepping down to 20%, the gap between bonus and regular MACRS on a component was modest; at 100%, the entire cost of a qualifying 5-, 7-, or 15-year asset can be deducted immediately instead of over its recovery period. Always confirm the rate for your exact acquisition date, since property placed in service before the cutoff still follows the older percentages.
A side-by-side worked example
Take a $500,000 residential rental, $400,000 of it depreciable building basis. Under regular MACRS alone, your deduction is $400,000 ÷ 27.5 ≈ $14,545 every full year, steady and predictable, for 27.5 years. There is no year-one spike.
Now run a cost segregation study that reclassifies $100,000 into shorter-life classes (appliances, flooring, land improvements) and leaves $300,000 in the 27.5-year shell. With 100% bonus depreciation, the $100,000 is fully deductible in year one, and the $300,000 shell adds about $10,909. Year-one depreciation jumps from roughly $14,545 to about $110,909. The total lifetime depreciation is the same either way — bonus simply front-loads it, capturing the time value of money.
The two methods work together, not against each other
Bonus and regular MACRS are not an either/or choice for the whole property — they apply to different assets. The building shell (27.5 or 39 years) must always use regular straight-line MACRS; it can never receive bonus depreciation. The shorter-life components a cost segregation study identifies can receive bonus depreciation. So a typical rental uses both: regular MACRS on the structure and bonus on the reclassified components.
Even the components can use regular MACRS if you elect out of bonus. Absent an election, bonus applies automatically to eligible property. This is why the practical question is rarely "bonus or regular?" for the entire building, but rather "should I elect out of bonus for a given class of components this year?"
Section 179: a third acceleration tool
Section 179 expensing is a close cousin of bonus depreciation and can also deduct qualifying property immediately. The differences matter: Section 179 has an annual dollar cap (indexed each year) and a taxable-income limitation — it cannot create a net loss — and it phases out once total qualifying purchases exceed a threshold. Bonus depreciation has no dollar cap, no income limit, and can create a loss.
For real estate, Section 179 reaches a few things bonus on the building does not — certain improvements to nonresidential property such as roofs, HVAC, fire protection, and security systems. Many owners apply Section 179 to those items first, then let bonus depreciation handle the rest. For most rental investors, bonus is the primary engine and Section 179 fills specific gaps.
When to elect out of bonus depreciation
More deductions now is not always better. You can elect out of bonus depreciation by asset class under IRC § 168(k)(7), applying regular MACRS instead. Investors elect out when: they expect to be in a much higher bracket in future years (making later deductions more valuable), they cannot currently use a large passive loss and would rather spread the deduction, or they want steady deductions to offset ongoing rental income rather than one big spike that mostly carries forward.
The election is made on a timely filed return and applies to an entire class (for example, all 5-year property placed in service that year), not to individual assets. Because it is generally irrevocable, model both paths before deciding — the biggest year-one number is not automatically the best outcome.
Recapture: bonus creates more ordinary-rate recapture
Front-loading through bonus depreciation has a back-end cost. The reclassified 5- and 7-year components are Section 1245 personal property, and the depreciation taken on them — accelerated by bonus — is recaptured at ordinary income rates (up to 37%) at sale, with no 25% cap. Regular MACRS on the building shell, by contrast, produces unrecaptured Section 1250 gain capped at 25%.
So heavy bonus depreciation converts some future recapture into the higher-taxed 1245 category. For most investors the time-value benefit of deducting years earlier still wins, and a 1031 exchange can defer both types of recapture entirely. But it is a genuine trade-off worth modeling — especially if you plan to sell within a few years, before the time-value advantage compounds.
State conformity and the passive-loss trap
Two practical cautions. First, many states decouple from federal bonus depreciation — California does not allow it at all, and others conform only partially — so you may keep a separate, slower state depreciation schedule even while taking 100% federally. Second, the passive activity loss rules often limit who can use a large bonus deduction: for most rental owners, the resulting loss is passive and offsets only passive income, carrying forward until sale.
Two groups escape that trap: real estate professionals (more than 750 hours and more than half their working time in real property trades, with material participation) and short-term-rental operators with average stays of seven days or less who materially participate. If you fall outside both, a huge bonus deduction may simply pile up as suspended losses — in which case regular MACRS, or electing out, may serve you just as well while keeping your books simpler.
A quick decision framework
Put the pieces together and a simple framework emerges. Lean toward bonus depreciation (do not elect out) when: you can currently use the loss (you are a real estate professional, run short-term rentals, have passive income, or are under the $25,000 active-participation allowance), you are in a high current bracket, and you plan to hold the property long enough for the time-value benefit to compound. Lean toward regular MACRS (elect out of bonus) when: the loss would be suspended anyway, you expect materially higher income and higher brackets in future years, or you value steady deductions and simpler books over a one-time spike.
In every case, remember these choices interact with your exit plan. If you intend to sell soon, the recapture arrives before the acceleration pays off, tilting toward regular MACRS; if you intend to 1031-exchange or hold until a step-up at death, aggressive bonus depreciation is far more attractive because the recapture may be deferred or eliminated. Model your specific numbers rather than defaulting to the biggest first-year deduction.
Frequently asked questions
Does the building itself qualify for bonus depreciation?
No — the 27.5- and 39-year building structure must use straight-line MACRS. Cost segregation unlocks bonus depreciation for shorter-life components.
What is the current bonus depreciation rate?
For property acquired and placed in service after January 19, 2025, the One Big Beautiful Bill Act permanently restored the rate to 100%. Property placed in service earlier follows the old TCJA phase-out (e.g., 40%, then 20%). Confirm the rate for your specific placed-in-service date.
Is bonus or regular MACRS better?
Neither is universally better — they apply to different assets and can be combined. Bonus front-loads deductions on qualifying shorter-life components (best when you can use the loss now and are in a high bracket); regular MACRS spreads deductions evenly and can be chosen by electing out of bonus (useful in low-income years or when passive losses would otherwise pile up).
Can I choose regular depreciation even if bonus is available?
Yes. Bonus depreciation applies automatically unless you elect out under Section 168(k)(7). The election is made by asset class on a timely filed return and is generally irrevocable, so weigh current versus future tax value before choosing.
Does bonus depreciation increase my tax when I sell?
It can. The accelerated components are Section 1245 property, recaptured at ordinary income rates (up to 37%, no 25% cap) at sale, versus the 25%-capped Section 1250 recapture on the building shell. The earlier deductions usually still win on a time-value basis, and a 1031 exchange can defer the recapture.
If I can't use the loss now, is bonus depreciation wasted?
Not wasted, but delayed. A bonus deduction that creates a passive loss you can't currently use is suspended and carries forward, releasing against future passive income or in full when you sell. In that situation, electing out of bonus and using regular MACRS can give steadier, more usable deductions and simpler books — weigh both paths against your income picture.
Does a cost segregation study change the bonus-vs-regular decision?
It's what makes bonus depreciation possible. The study identifies the shorter-life 5-, 7-, and 15-year components that qualify for bonus; without it, everything defaults to the slow 27.5- or 39-year straight-line shell. Once components are separated, you still choose whether to take bonus or elect out for each class.
Sources
- IRS Publication 946 — How to Depreciate Property
- IRS — Cost Segregation Audit Techniques Guide
- IRS Publication 527 — Residential Rental Property
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.