Real Estate Tax Calc
What changed
The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, raised the base Section 179 expensing limit from $1.22 million to $2.5 million and increased the phaseout threshold from approximately $3.05 million to $4 million. Indexed for inflation, the IRS set the official 2026 figures in Revenue Procedure 2026-1: the maximum deduction is $2,560,000, reduced dollar-for-dollar once the cost of Section 179 property placed in service during the year exceeds $4,090,000 (Internal Revenue Bulletin 2026-01).
The old limit ($1.22 million in 2025) was already a meaningful ceiling for most landlords. The new $2.56 million ceiling roughly doubles it, giving investors who actively improve or expand their portfolios significantly more room to expense eligible property costs immediately rather than depreciating them over multiple years.
Why it matters to investors
Section 179 applies to many of the same assets that benefit from bonus depreciation — 5-year and 7-year personal property identified in a cost segregation study (appliances, carpeting, specialty electrical, cabinetry, furniture), 15-year qualified improvement property (QIP), and HVAC, roofing, fire-protection, alarm, and security systems on nonresidential commercial buildings. For investors who have already exhausted bonus depreciation or elect out of it, the expanded Section 179 limit provides an additional first-year expensing avenue.
There is one key structural difference from bonus depreciation: Section 179 cannot create a loss. The deduction is capped at taxable income from the active trade or business that placed the property in service. Unused Section 179 carries forward to future years — it is not lost — but it does not create a current-year write-off beyond active business income. Bonus depreciation has no such income floor and can generate a net loss (subject to passive activity and at-risk rules). For passive rental investors with limited active income, bonus depreciation typically remains the more powerful tool.
What to do
Investors spending heavily on improvements or additions in 2026 should review whether Section 179, bonus depreciation, or a combination produces the best result for their specific income picture. The $2.56 million ceiling is high enough that most single-property investors will not hit it — but owners of multiple properties making substantial capital investments may want to track aggregate spending against the $4.09 million phaseout threshold.
For commercial landlords improving nonresidential buildings, the HVAC and roofing provisions added to Section 179 under the 2017 TCJA (and preserved by the OBBBA) allow immediate expensing of those major capital items — a practical benefit for mid-size commercial operators who might not fund a full cost segregation study. Consult your tax professional to determine whether a Section 179 election, bonus depreciation, or standard MACRS depreciation is most advantageous given your bracket, passive-loss position, and plans for the property.
A worked example: cost-segregated components in a commercial building
Consider a commercial landlord who buys a small retail strip center and commissions a cost segregation study in 2026. The study reclassifies $180,000 of the purchase into 5- and 7-year personal property (parking-lot fixtures, signage, decorative lighting, cabinetry) and $140,000 into 15-year land improvements (paving, landscaping, site utilities). Separately, the owner replaces the building's HVAC system for $90,000 and installs a $25,000 security and fire-alarm system — both of which the TCJA specifically added to the definition of qualified real property for Section 179 purposes. In total, roughly $435,000 of the outlay is Section 179-eligible, comfortably under the $2,560,000 ceiling and nowhere near the $4,090,000 phaseout.
Now assume the landlord and spouse (filing jointly) have $300,000 of combined active business and wage income for the year. Because Section 179 cannot exceed active business taxable income, they can currently deduct only up to that $300,000, which zeroes out taxable income. They elect the full $435,000 on Form 4562, but $300,000 is allowed this year and the remaining $135,000 carries forward to a future year with sufficient income. Had they instead applied 100% bonus depreciation to the shorter-lived components, there would be no income cap and the balance could have created a deductible loss (subject to the passive-activity and at-risk rules) — which is exactly why many investors combine the two tools rather than relying on Section 179 alone.
How to make the election: Form 4562, Part I
Section 179 is elected on Form 4562, Depreciation and Amortization, Part I. On Line 2 you report the total cost of Section 179 property placed in service during the year; Line 3 shows the phaseout threshold; and Line 5 computes your allowable dollar limit after any phaseout reduction. You then list each asset and the elected amount, apply the taxable income limitation, and carry any disallowed amount forward on the form's carryover line.
The election is made on a property-by-property basis — you can expense some assets fully, expense others partially, and depreciate the rest under normal MACRS. It is generally made on a timely filed original return (including extensions), although you may make the election, or change the amount elected, on an amended return. You can also revoke a Section 179 election without IRS consent, but once revoked it cannot be reinstated for that property, so treat the decision as final.
Section 179 vs. bonus depreciation vs. MACRS: ordering and choice
When a single asset qualifies for more than one method, the deductions apply in a set order: Section 179 first, then bonus depreciation on the remaining basis, then regular MACRS depreciation on whatever is left. Because 100% bonus depreciation was restored by the OBBBA for qualifying property placed in service after January 19, 2025, an investor who simply wants the largest possible first-year write-off on shorter-lived property can usually reach it through bonus depreciation alone.
So when does Section 179 win? Three situations stand out. First, when you want to expense some but not all of an asset class to fine-tune taxable income — bonus depreciation is generally all-or-nothing by recovery-period class, while Section 179 is elected asset by asset. Second, when you are improving a nonresidential building with a new roof, HVAC unit, or security system: those are structural components of 39-year real property that are ineligible for bonus depreciation but specifically eligible for Section 179 as qualified real property. Third, when your state conforms to Section 179 but not bonus depreciation, so the election preserves a state-level deduction that bonus would not. For most passive residential-rental investors chasing a large paper loss, bonus depreciation remains the primary tool.
The taxable income limitation and carryforward, in depth
The taxable income limitation is the feature that most often surprises investors. Under Section 179(b)(3), your total deduction cannot exceed the aggregate taxable income you derive from the active conduct of any trade or business during the year. For this test 'business income' is broad: on a joint return it includes both spouses' W-2 wages, net Schedule C profit, and — where the rental activity rises to the level of a trade or business — net rental income, all measured before the Section 179 deduction itself.
Any amount disallowed by this limit is not lost. It carries forward indefinitely and can be deducted in a later year when you have enough business income to absorb it, subject again to that year's limit. Passive rental income generally does not count as active-business income for this test, which is one more reason a purely passive landlord with little wage or active income may find bonus depreciation — which has no income floor — the more useful instrument.
Recapture and state conformity: two traps to watch
A Section 179 deduction is not always permanent. If the property's business use falls to 50% or below before the end of its normal recovery period, you must recapture the excess of the amount expensed over the depreciation that would otherwise have been allowed, reporting it as ordinary income on Form 4797. On an eventual sale, amounts expensed under Section 179 are treated like any other depreciation: on personal property they fall under Section 1245 recapture and are taxed as ordinary income to the extent of gain. Accelerating deductions on components you plan to sell soon can therefore pull income forward without a lasting rate benefit.
Federal law sets the $2.56 million ceiling, but state income tax rules frequently decouple from it. A number of states cap Section 179 well below the federal figure or refuse to follow the OBBBA increase, requiring an addback and a separate state depreciation schedule. California, for example, limits Section 179 to just $25,000 with a $200,000 investment phaseout and does not allow bonus depreciation at all — so a California investor's state deduction can be a small fraction of the federal one. Because conformity varies and legislatures update their tie-in dates, confirm your specific state's treatment before assuming a federal election produces an equivalent state benefit; in non-conforming states you may track two sets of basis for the life of the asset.
Common mistakes and planning tips
Several avoidable errors recur. Assuming the building qualifies: the depreciable structure of a rental — the 27.5- or 39-year shell — is never Section 179 property; only shorter-lived components and specified nonresidential improvements are. Overlooking the income cap: electing more than your active business income supports simply defers the excess rather than creating a current loss. Ignoring recapture on quick sales: expensing components you plan to sell within a few years can accelerate ordinary income later. Forgetting state addbacks: a large federal election in a non-conforming state can create an unexpected state tax bill. Missing the more-than-50%-business-use test: property used mainly for personal purposes is ineligible from the start.
On the planning side, coordinate Section 179 with bonus depreciation rather than choosing one blindly — use the election selectively for 39-year nonresidential improvements (roofs, HVAC, security) that bonus depreciation cannot reach, and lean on bonus depreciation for the bulk of shorter-lived cost-segregation components. Model your active taxable income first so the election matches available income and nothing is wasted, and time major improvements into a year when that income is high. Finally, because Section 179 reduces qualified business income, weigh the interaction with your 20% QBI deduction: a large current deduction can shrink a QBI benefit you would otherwise claim. As with any large-capital or year-of-sale decision, have a CPA model the full result before you file.
Frequently asked questions
Does the $2.56 million Section 179 limit apply to rental buildings?
No. Residential rental buildings (27.5-year MACRS) and commercial buildings (39-year) are not eligible for Section 179. The limit covers shorter-lived property: 5-, 7-, and 15-year assets such as personal property cost-segregation components, qualified improvement property (QIP), and qualified real property improvements like HVAC on commercial buildings.
What is the difference between Section 179 and bonus depreciation for a rental investor?
Both can produce large first-year deductions on eligible property. The key difference: bonus depreciation can create a passive loss that carries forward; Section 179 cannot exceed the active-business taxable income of the entity that placed the property in service. Passive rental investors typically get more value from bonus depreciation, while active real estate businesses or commercial operators with strong operating income may benefit from Section 179's flexibility.
Can I use Section 179 on appliances and furniture in a residential rental?
Since the Tax Cuts and Jobs Act removed the longstanding rule that barred Section 179 for property used predominantly to furnish lodging, personal-property components in residential rentals — appliances, carpeting, window treatments, and furniture — can generally qualify, provided they are used more than 50% in your rental business. The building shell and 27.5-year structural components still do not qualify. Because the income limitation and passive-activity rules can blunt the benefit for a passive landlord, compare the result against 100% bonus depreciation before electing.
When must I make the Section 179 election, and can I change it later?
You make the election on Form 4562, Part I, with a timely filed return (including extensions). You may also make or change the elected amount on an amended return, and you can revoke an election without IRS consent — but once revoked, that election cannot be reinstated. Because the choice is made property-by-property, you can expense some assets fully and depreciate others normally.
What happens to my Section 179 deduction when I sell the property?
Amounts you expensed are treated as depreciation for recapture purposes. On personal property they fall under Section 1245 and are recaptured as ordinary income to the extent of gain on the sale. Separately, if business use of the asset drops to 50% or less before the end of its recovery period, you recapture the excess deduction as ordinary income on Form 4797 in that year.
Does my state allow the full $2.56 million Section 179 deduction?
Not necessarily. Many states decouple from the federal limit. California, for instance, caps Section 179 at $25,000 and disallows bonus depreciation entirely, while other states tie to an older version of the Internal Revenue Code or require an addback. Confirm your state's current conformity before assuming the federal election carries over to your state return.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.