Real Estate Tax Calc
What changed
The One Big Beautiful Bill Act (OBBBA) permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. Under prior law, the bonus rate was 40% in 2025, heading to 20% in 2026 and expiring entirely in 2027.
On January 14, 2026, the IRS issued Notice 2026-11 providing interim guidance on applying the restored 100% rate. The notice confirms the full first-year deduction for qualifying property and includes a transition election: taxpayers may elect the prior 40% rate (or 60% for certain long-production-period property and aircraft) for property placed in service during their first tax year ending after January 19, 2025. The official IRS guidance page is at IRS.gov.
Why it matters to investors
Bonus depreciation applies only to property with a MACRS recovery period of 20 years or less — the building structure (27.5-year residential or 39-year commercial) still does not qualify directly. The beneficiaries are the shorter-life components identified through a cost segregation study: appliances, carpeting, specialty wiring, and fixtures (5-year property), office furniture (7-year), and land improvements such as parking lots, fencing, and landscaping (15-year property).
With a 100% rate, every dollar of qualifying component cost is deductible in year one. On a property where a cost segregation study identifies $300,000 of qualifying components, the entire $300,000 is deductible immediately versus $120,000 under the prior 40% rate — a significant acceleration that improves after-tax cash flow and internal rate of return. The permanent restoration also removes the timing pressure of the phase-down schedule; investors no longer need to rush a purchase to capture a higher rate.
Passive activity loss rules still apply. Most rental investors cannot use bonus depreciation losses against wages or active income unless they qualify as a Real Estate Professional (REPS) — spending more than 750 hours per year in real property trades and more than half their total working hours in real estate — or the property qualifies as a non-passive short-term rental (average stays of 7 days or less with material participation). For passive investors, unused losses carry forward indefinitely and release in full when the property is sold.
What to do
If you placed qualifying property in service after January 19, 2025, confirm with your CPA that you are applying the full 100% bonus rate rather than the prior 40% rate, unless you elected to use the old rate for the transition year.
If you have not had a cost segregation study performed on a recently acquired property, the permanent 100% rate makes the analysis compelling: every dollar of qualifying component is deductible immediately, with no concern about a future rate cut. Estimate your potential first-year savings with the cost segregation calculator before engaging a study firm.
If your property was placed in service during the transition period (the first tax year ending after January 19, 2025), discuss the transition election with your tax advisor — the 40% rate may be preferable if you cannot currently use large passive losses.
Educational context only. Tax rules vary by situation; consult a qualified tax professional before acting. Source: IRS Notice 2026-11 and coverage by BDO Tax.
What 'acquired and placed in service' actually requires
The 100% rate hinges on two dates, and both must fall after January 19, 2025. Acquired generally means the date you entered into a binding written contract to buy the property; placed in service means the date the property was ready and available for its assigned use — for a rental, typically when it is advertised and available to rent, not merely the closing date. A property under a binding contract signed before January 20, 2025 but placed in service afterward may fall under the transition rules rather than the full 100% rate, which is exactly the kind of edge case Notice 2026-11 addresses.
For a cost segregation study, the placed-in-service date of the building controls eligibility of its components, because the short-life assets identified in the study are treated as placed in service when the building is. This matters for a property you bought in 2024 and are studying now: the components generally take the bonus rate in effect for the building's 2024 placed-in-service year, not the current 100% rate. Confirm the controlling dates with your advisor before assuming a study on an older property captures 100%.
A worked example: 100% vs. the old phase-down
Suppose you buy a $1,200,000 residential rental in mid-2025, allocate $200,000 to land, and a cost segregation study identifies $250,000 of 5-, 7-, and 15-year components in the remaining $1,000,000 building basis. Under the restored 100% rate, you deduct the entire $250,000 of components in year one, on top of a partial year of straight-line depreciation on the ~$750,000 of remaining building basis.
Contrast that with the pre-OBBBA schedule. At the 40% rate that would have applied in 2025, only $100,000 of the $250,000 would be bonus-deductible in year one; the other $150,000 would depreciate over 5, 7, or 15 years. The permanent 100% restoration therefore accelerates $150,000 of deductions into year one in this example — worth roughly $55,500 of tax deferral for an investor in the 37% bracket who can use the loss. The keyword is can use: passive-loss rules decide whether that first-year deduction offsets other income now or simply carries forward.
The catch: passive losses and who can actually use the deduction
A 100% first-year deduction is only as valuable as your ability to use the loss it creates, and for most rental owners the passive activity loss rules stand in the way. Rental real estate is passive by default, so a large bonus-depreciation loss generally offsets only other passive income; the excess suspends and carries forward on Form 8582 until you have passive income or sell the property in a fully taxable disposition.
Three groups escape that limit. Real estate professionals (more than 750 hours in real property trades and more than half of total working hours, with material participation in the rental) can treat rental losses as non-passive and offset wages or business income. Operators of a short-term rental with an average guest stay of seven days or less who materially participate are likewise outside the rental-activity rules. And any investor with passive income from other properties can absorb the loss. If you are none of these, the 100% deduction is still valuable — it just defers rather than eliminates the passive limitation, banking a deduction that releases later.
How to claim it and elect out
Bonus depreciation is automatic: you do not elect into it. It is computed on Form 4562 and flows to Schedule E (or the appropriate business return). If you would rather not take it — because a large first-year loss would suspend uselessly, or you prefer smoother deductions to match income — you must affirmatively elect out, and the election is made on a class-by-class basis (for example, all your 5-year property) on a timely filed return including extensions. The election out is generally irrevocable for that class and year.
The interaction with the Section 163(j) business-interest limitation is worth flagging. A real property trade or business can elect out of the 163(j) interest cap, but doing so forces it onto the Alternative Depreciation System (ADS) for its real property and qualified improvement property — and ADS property is not eligible for bonus depreciation. So the interest election and the bonus-depreciation strategy can be mutually exclusive for future assets; model the interest you would deduct against the bonus depreciation you would forgo before making an irrevocable choice.
Recapture: the deferral comes due at sale
Bonus depreciation is a timing benefit, not a permanent exclusion. Every dollar you deduct reduces your basis, so it enlarges your gain when you sell — and that gain is recaptured. The 5- and 7-year personal-property components a cost segregation study accelerates are Section 1245 property, recaptured as ordinary income at your full marginal rate (no 25% cap), while the building and 15-year land improvements are Section 1250 property recaptured as unrecaptured Section 1250 gain at up to 25%.
This does not make bonus depreciation a bad deal — you deducted at ordinary rates up front and deferred tax for years, and the time value of money usually still favors accelerating. But it does mean the headline first-year savings overstate the lifetime benefit. Two moves can defer or erase the recapture: a 1031 exchange into a replacement property rolls the deferred depreciation forward, and holding until death gives heirs a stepped-up basis that wipes out the accumulated recapture entirely. Plan the exit when you plan the study.
Frequently asked questions
Does the 100% bonus depreciation rate now apply to the rental building structure itself?
No. The building structure — depreciated over 27.5 years for residential rental property or 39 years for commercial — does not qualify for bonus depreciation under any rate. Only property with a MACRS recovery period of 20 years or less is eligible. A cost segregation study identifies the shorter-life components that qualify, typically 15–30% of a residential building's depreciable basis.
Can passive rental investors use the restored 100% bonus depreciation against their W-2 income?
Generally no. Passive activity loss rules still apply in full. Bonus depreciation losses from most rentals are passive and can only offset passive income unless you meet the Real Estate Professional Status test (750+ hours in real property trades, more than half your working hours) or the property qualifies as a non-passive short-term rental. Unused passive losses carry forward indefinitely and release in full in the year of a complete, taxable sale.
What does 'placed in service after January 19, 2025' mean for a rental?
Placed in service means the property was ready and available for its intended use — for a rental, typically when it is advertised and available to rent, not necessarily the closing date. Both the acquisition (binding contract) and placed-in-service dates generally must fall after January 19, 2025 for the full 100% rate; a contract signed earlier may fall under the transition rules in Notice 2026-11.
Do I have to elect into 100% bonus depreciation?
No. Bonus depreciation is automatic on Form 4562. If you would rather not take it — because a large first-year loss would suspend uselessly — you must affirmatively elect out on a class-by-class basis on a timely filed return, and that election is generally irrevocable for the class and year.
How is bonus depreciation recaptured when I sell?
It reduces your basis, so it increases your taxable gain. The 5- and 7-year personal-property components are Section 1245 property recaptured as ordinary income at your marginal rate; the 15-year land improvements and the building are Section 1250 property recaptured at up to 25%. A 1031 exchange defers the recapture, and a step-up in basis at death can eliminate it.
Can I get 100% bonus depreciation on a cost seg study of a property I bought in 2024?
Generally the bonus rate is set by the building's placed-in-service year, so a 2024 property typically takes the 2024 rate (40%) on its components even if you complete the study now. The 100% rate applies to property placed in service after January 19, 2025. Confirm the controlling dates with your advisor.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.