Taxes
Bonus Depreciation for Rental Property: 100% Is Back
Bonus depreciation is back to 100% permanently under the 2025 law. What qualifies in a rental (not the building), the cost seg math, and the passive-loss catch.
Bonus depreciation for rental property just did something tax provisions rarely do: it stopped being a moving target. The One Big Beautiful Bill Act, signed July 4, 2025, set first-year bonus depreciation back to 100% permanently for qualifying property acquired after January 19, 2025. No more phase-down math, no more racing an in-service deadline. But most of what landlords read about it skips the three facts that decide whether it matters to you: the building itself never qualifies, the deduction often lands in passive-loss jail, and California ignores the whole thing. Here is the full picture, with the numbers.
What changed, exactly
Under the old law (the TCJA schedule), bonus depreciation was phasing out from under you:
| Year placed in service | Old law | Now (acquired after Jan 19, 2025) |
|---|---|---|
| 2023 | 80% | n/a |
| 2024 | 60% | n/a |
| 2025 | 40% | 100% |
| 2026 | 20% | 100% |
| 2027 and later | 0% | 100% |
The catch in the fine print is the acquisition date. Property acquired under a binding written contract before January 20, 2025 stays on the old phase-down column even if you place it in service now: 40% in 2025, 20% in 2026. Everything you buy from here on gets the permanent 100%. The statute is Section 168(k), and the deduction is claimed on Form 4562, line 14.
What qualifies in a rental (not the building)
Bonus depreciation covers property with a MACRS recovery period of 20 years or less. A residential rental building is 27.5-year property, so the big asset never qualifies. What does qualify maps exactly to the fast depreciation clocks:
- 5-year property: appliances, carpet, furniture, window AC units.
- 7-year property: office furniture and equipment used for the rental.
- 15-year property: land improvements: driveways, fences, patios, landscaping, sprinkler systems.
- Not eligible: the building, its structural components (roof, central HVAC, water heater, plumbing), and land.
So the question "can I bonus-depreciate my rental?" really means "how much of what I spent is on the fast clocks?" For a landlord replacing appliances and redoing a driveway, the answer is: all of it.
The math: one year instead of the tables
Say you close on a rental this year and spend $12,000 on appliances and carpet (5-year property) and $18,000 on a new driveway and fencing (15-year property). Here is year one, first under normal MACRS, then with 100% bonus:
| Normal MACRS, year 1 | 100% bonus, year 1 | |
|---|---|---|
| $12,000 of 5-year property | $2,400 (20%) | $12,000 |
| $18,000 of 15-year property | $900 (5%) | $18,000 |
| Year-1 deduction | $3,300 | $30,000 |
| Tax saved at 24% | $792 | $7,200 |
Same assets, same total deduction over their lives. Bonus just moves $26,700 of it into year one. Whether that timing is worth anything to you depends on the section most articles skip, two headings down.
Cost segregation is the multiplier
Buying assets one at a time caps how much 5- and 15-year property you ever own. A cost segregation study applies the same logic to a property you bought whole: engineers carve the purchase into components, and typically 20 to 30% of the improvement basis lands on the fast clocks, all of it now eligible for 100% bonus in the year the property is placed in service.
On a $400,000 purchase with $100,000 of land, that is roughly $60,000 to $90,000 of basis moved from the 27.5-year drip to an immediate deduction. This combination (cost seg plus bonus plus material participation) is the entire engine behind the short-term rental tax loophole, and it is why cost seg firms are busy again. Benchmark what straight-line depreciation alone saves at your bracket in our depreciation savings tables before paying for a study; the study has to beat that baseline, not zero.
The catch: passive-loss jail
Here is the catch. A $30,000 bonus deduction on a rental that nets $10,000 of income creates a $20,000 paper loss, and for most W-2 landlords that loss does not reduce this year's tax bill. Rental losses are passive: the $25,000 allowance phases out between $100,000 and $150,000 of modified AGI, and above that the loss goes onto Form 8582 and waits.
We have watched this compound in a real set of books: a two-property portfolio we keep carried $206,589 in suspended passive losses, years of paper losses that saved zero tax as they accrued. They are not gone (they released at scale when a property sells, which changed the sell-versus-1031 answer entirely), but "100% deduction in year one" quietly becomes "100% suspended in year one" for a high-income landlord who cannot use the short-term-rental route or real estate professional status. If that is you, permanent bonus mostly means you no longer need to rush purchases to beat a phase-down, because the deduction will wait either way.
Bonus vs. Section 179
The same law also raised the Section 179 cap to $2.5 million (indexed). For landlords the comparison is short: 179 cannot create a loss (it is limited to business income) and requires the rental activity to rise to a trade or business, while bonus has no dollar cap, no income limit, and happily creates the loss that then meets the passive rules above. Most landlords who qualify for either just take bonus. 179's real niche is asset-by-asset control, since bonus elections apply to an entire class.
California keeps its own books
State conformity is the second catch. California has never conformed to bonus depreciation, and its 179 cap is $25,000. Take 100% bonus federally and your California return still depreciates the same assets on the normal MACRS tables, which means two diverging schedules per asset for years. Several other states limit or decouple from bonus too. This is exactly the kind of bookkeeping that silently breaks in spreadsheets: when we built the importer that reads filed Forms 4562 back into our books, the five-year assets on a real return matched the IRS half-year tables to the cent (a $216 asset showed $153.79 accumulated after three years, 71.2%, exactly what the table says). Schedules this mechanical should never be hand-maintained, and with state decoupling you are maintaining two of them.
When electing out is the right call
You can elect out of bonus by asset class on Form 4562, and it is not a weird choice:
- Low-income year. A deduction against the 12% bracket that could have offset the 32% bracket later is a bad trade.
- The loss would be suspended anyway. If it is going to sit on Form 8582, spreading the deduction into future years you can actually use costs nothing.
- State parity. One schedule instead of two, if the federal timing benefit is small for you.
- Recapture exposure. Personal-property gain at sale is Section 1245 ordinary income, not the 25%-capped rate the building gets. More depreciation now is more ordinary income later.
The election is generally irrevocable for that year and class, so run the numbers first, not after. IRS Publication 946 covers the mechanics.
The bottom line
Permanent 100% bonus depreciation removes the deadline pressure but not the thinking. The building still depreciates over 27.5 years, the fast-clock assets can now be written off immediately forever, the deduction is only as good as your ability to use the loss, and your state may disagree with all of it. If you track which of your assets sit on which clock (a depreciation calculator covers the building; the asset-life table covers the rest), the new law is a straight upgrade: same deductions, sooner, with no expiration date to game.
Frequently asked questions
Is bonus depreciation 100% in 2026?
Yes, for qualifying property you acquired after January 19, 2025. The One Big Beautiful Bill Act made 100% bonus depreciation permanent, so there is no phase-down schedule to race anymore. Property acquired under a binding contract before January 20, 2025 stays on the old phase-down (40% if placed in service in 2025, 20% in 2026), so the acquisition date matters more than the in-service date.
Does bonus depreciation apply to the rental building itself?
No. Bonus depreciation only covers property with a MACRS recovery period of 20 years or less. A residential building is 27.5-year property, so it never qualifies. What qualifies in a rental: 5-year personal property (appliances, carpet, furniture), 7-year property, and 15-year land improvements (driveways, fences, landscaping). That is why cost segregation and bonus depreciation always travel together.
Do I need a cost segregation study to take bonus depreciation?
No. Anything you buy that is already 5-, 7-, or 15-year property qualifies on its own: a $6,000 appliance package, a $18,000 driveway, new carpet. A cost segregation study is how you apply bonus to property you bought whole, by carving the purchase price into components, and that is where the numbers get large, commonly 20 to 30% of the improvement basis.
Does bonus depreciation get recaptured when I sell?
Yes, and at a worse rate than people expect. Gain on 5- and 7-year personal property is Section 1245 recapture, taxed as ordinary income, not the 25% cap that applies to the building's Section 1250 depreciation. Bonus is a timing play: you are trading a big deduction now for a lower basis and ordinary-rate exposure at sale. A 1031 exchange defers it like everything else.
Should I ever elect out of bonus depreciation?
Sometimes. You elect out by asset class on Form 4562, and it makes sense when the deduction would be wasted or worse: your income is unusually low this year, the loss would just get suspended by passive-loss limits anyway, or you file in a state like California that does not conform and you want one set of books. Once made, the election out is generally irrevocable for that year and class.
Does California allow bonus depreciation on rental property?
No. California has never conformed to federal bonus depreciation, and its Section 179 cap is $25,000. A California landlord taking 100% bonus federally keeps a second, slower depreciation schedule for the state return, and the two never reconcile until the asset is fully depreciated or sold. Good software maintains both; a spreadsheet usually maintains neither.
What is the difference between bonus depreciation and Section 179 for a landlord?
Both can write off 100% in year one, but Section 179 is capped ($2.5 million, indexed), cannot create a loss (it is limited to business income), and requires the rental to rise to a trade or business. Bonus depreciation has no dollar cap, no income limit, and can create a loss. For most landlords bonus is the simpler and stronger tool; 179's niche is targeted expensing when you want asset-by-asset control.