Bonus Depreciation in 2026: Rules, Rates, and What Changed

Bonus depreciation in 2026 is 100 percent. The One Big Beautiful Bill Act, signed in July 2025, repealed the scheduled phase down and made full first year expensing permanent for qualified property acquired and placed in service after January 19, 2025. That means a business or real estate investor can deduct the entire cost of qualifying assets in the year they are placed in service, with no cap on the deduction amount.

This changed the planning picture significantly. Under prior law, bonus depreciation was stepping down toward zero: 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, 20 percent in 2026, and nothing after 2027. Investors were racing to place property in service before the rate dropped further. That pressure is gone, but the rules around which property qualifies are the same as they have always been, and they are where most deductions are won or lost.

Bonus Depreciation Rates by Year

The rate that applies depends on when the property was acquired, not only when it was placed in service. This distinction matters for anything bought under a binding contract signed in late 2024 or early 2025.

Placed in service	Acquired before Jan 20, 2025	Acquired on or after Jan 20, 2025
2023	80%	n/a
2024	60%	n/a
2025	40%	100%
2026	20%	100%
2027 and later	0%	100%

For most investors buying property today, the right column is the one that applies. The left column still matters if you are amending a prior year, catching up missed depreciation, or working with a long term construction contract.

What Property Qualifies for Bonus Depreciation

Section 168(k) allows bonus depreciation on property with a MACRS recovery period of 20 years or less. In practice, that covers:

• 5 year property: appliances, carpeting, decorative lighting, removable flooring, furniture, computers, and dedicated equipment. See our breakdown of 5 year property in a cost segregation study.
• 7 year property: office furniture and fixtures, and certain machinery.
• 15 year property: land improvements such as paving, sidewalks, fencing, and site landscaping, plus qualified improvement property. See 15 year land improvements.
• Used property: assets that are new to you qualify, even if a previous owner used them. This is what makes bonus depreciation so powerful on an acquisition.

The building itself does not qualify. Residential rental structures depreciate over 27.5 years and nonresidential structures over 39 years, both well beyond the 20 year ceiling. This is precisely why cost segregation exists: it identifies the components inside a building that are properly classified as 5, 7, or 15 year property so they can absorb bonus depreciation.

What Does Not Qualify

• Land, which is never depreciable
• The building shell and structural components
• Property acquired from a related party
• Property used predominantly outside the United States
• Certain regulated utility property and floor plan financing businesses

How Bonus Depreciation and Cost Segregation Work Together

Bonus depreciation is the multiplier. Cost segregation is what gives it something to multiply. Without a study, a $2,000,000 residential rental building produces roughly $58,000 of depreciation in a full first year. With a study reclassifying 25 percent of basis into short life property, the picture changes materially.

Component	Allocation	Life	Year 1 deduction
Land (not depreciable)	$400,000	n/a	$0
5 year personal property	$240,000	5 yr	$240,000
15 year land improvements	$160,000	15 yr	$160,000
Building structure	$1,200,000	27.5 yr	~$35,000
Total	$2,000,000		~$435,000

At a 37 percent marginal federal rate, that first year deduction is worth roughly $161,000 in deferred tax, before state effects. Allocations vary by property type, age, and condition, so treat this as an illustration rather than a promise. Our cost segregation calculator gives a property specific estimate.

The Catch: Deductions Are Useless Without Somewhere to Put Them

This is the step most people skip. A large depreciation deduction from a rental property is generally a passive loss under IRC Section 469, and passive losses cannot offset wages or business income. They suspend and carry forward until you have passive income or dispose of the property.

There are three common ways to make the deduction usable in the current year:

• The short term rental exception. If average guest stay is 7 days or less and you materially participate, the activity is not a rental activity at all. See the 7 day rule and how STR losses offset W-2 income.
• Real estate professional status. More than 750 hours and more than half of personal services in real property trades or businesses under IRC 469(c)(7). See how to qualify for REPS.
• Passive income elsewhere. Other profitable rentals or passive K-1 income can absorb the loss.

If none of these apply, the deduction still has value, it simply arrives later. That is a timing question worth modeling before you spend money on a study.

Section 179 Versus Bonus Depreciation in 2026

With bonus at 100 percent, Section 179 is less essential than it was, but it still has uses. The OBBBA raised the Section 179 expensing cap to $2.5 million with a $4 million phaseout threshold beginning in 2025, indexed for inflation after that.

	Section 179	Bonus depreciation
Annual dollar cap	Yes, with phaseout	No cap
Can create a loss	No, limited to taxable income	Yes
Asset by asset election	Yes	All or nothing per class
Qualified improvement property	Yes	Yes
Roofs, HVAC, alarm systems on nonresidential	Yes	No
Residential rental property owners	Generally unavailable	Available

The practical rule: use bonus depreciation as the default, and reach for Section 179 when you need surgical control over which assets get expensed, or for nonresidential building systems that bonus cannot touch. Full comparison in Section 179 vs bonus depreciation.

Electing Out of Bonus Depreciation

Bonus depreciation is automatic. If you do not want it, you must affirmatively elect out under Section 168(k)(7), and the election applies to an entire asset class for the year, not to individual assets. Reasons to elect out include:

• You are in an unusually low bracket this year and expect higher rates later
• You need taxable income to use expiring credits or charitable carryforwards
• Large losses would be trapped by the excess business loss limitation under Section 461(l)
• You want to preserve QBI deduction capacity, since depreciation reduces qualified business income

Property Placed in Service in a Prior Year

If you bought a property in an earlier year and never ran a cost segregation study, you have not lost the deduction. A Form 3115 change in accounting method lets you claim the entire cumulative missed depreciation as a Section 481(a) adjustment in the current year, without amending old returns. The bonus rate that applies is the rate in effect for the year the property was placed in service, not today's rate.

Recapture When You Sell

Accelerated depreciation is a deferral, not forgiveness. On sale, gain attributable to 5, 7, and 15 year property is recaptured as ordinary income under Section 1245, and gain on the building is unrecaptured Section 1250 gain taxed at up to 25 percent. Planning for the exit matters as much as the entry. See depreciation recapture planning and how cost segregation interacts with a 1031 exchange.

Frequently Asked Questions

Related Reading

• Section 179 vs Bonus Depreciation: Which One to Use
• OBBBA Made 100 Percent Bonus Depreciation Permanent
• Cost Segregation Studies for Real Estate Investors (Pillar Guide)
• MACRS Depreciation Schedules Explained
• 5 Year Property: What Cost Segregation Reclassifies
• Form 3115: Catch Up on Missed Depreciation
• Depreciation Recapture Planning Before You Sell
• How Short Term Rental Losses Offset W-2 Income