Bonus Depreciation for Rental Property: Rules, Examples & Eligibility 2026

Can you take bonus depreciation on a rental property in 2026? The short answer is yes, and recent legislative changes have made it significantly more attractive for investors. The enactment of the One Big Beautiful Bill Act (OBBBA) in January 2025 permanently reinstated 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. This reinstatement removes the previous phase-out schedule, offering real estate investors a powerful tool to accelerate deductions and reduce taxable income immediately.

However, navigating these new rules requires precision. You need to know exactly what qualifies for bonus depreciation, how to calculate it, and how to track your assets to withstand IRS scrutiny. This guide will walk you through the specifics of the 2025 and 2026 tax landscape, helping you move from general curiosity to a confident, tax-saving strategy.

Key takeaways

• For assets placed in service after January 19, 2025, you can deduct the full cost immediately.
• If you placed property in service between Jan 1 and Jan 19, 2025, you’re stuck with a 40% rate.
• You cannot take bonus depreciation on the building structure itself (the 27.5-year stuff), only the components and improvements.
• Unlike Section 179, bonus depreciation can create a Net Operating Loss (NOL) to offset future income.

What is bonus depreciation?

Bonus depreciation is a tax incentive that allows businesses, including rental property owners, to deduct a large percentage of the purchase price of eligible assets in the very first year they are placed in service.

Rather than spreading the deduction over the asset's useful life—which could be 5, 7, or 15 years—you take the hit upfront. This accelerated depreciation can significantly lower your taxable income in the year of purchase, freeing up cash flow for reinvestment or operational expenses.

Understanding exactly how bonus depreciation works requires contrasting it with standard depreciation. Standard methods (such as MACRS) require you to gradually deduct the cost of an asset over many years. Bonus depreciation accelerates this timeline, treating the expense as an immediate deduction. For landlords managing cash flow, this timing difference is more than just accounting; it is liquid capital you can use today rather than waiting for tomorrow.

Bonus depreciation applies only to assets with a useful life of 20 years or less under the Modified Accelerated Cost Recovery System (MACRS). This distinction is vital because it separates the "building" from the "stuff inside and around the building." For a deeper dive into standard schedules, you can review the basics of depreciation on rental property.

The One Big Beautiful Bill Act (OBBBA) & bonus depreciation

The tax landscape shifted dramatically with the passing of the One Big Beautiful Bill Act (OBBBA) in January 2025. Prior to this, bonus depreciation was scheduled to phase out, dropping by 20% each year until it vanished. The OBBBA reversed this course, permanently reinstating 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025.

This reinstatement provides stability for investors planning for 2026 and beyond. You no longer need to race against a phase-out clock. However, there is a critical transitional rule you must follow if you were active early in the year. For qualified property placed in service between January 1, 2025, and January 19, 2025, the bonus depreciation percentage remains at 40%.

This split year means record-keeping is more important than ever. You must accurately track the "placed in service" date for every asset to apply the correct percentage. Tools that help automate expense tracking can prevent costly errors here. Using a comprehensive landlord tax deduction strategy ensures you capture these nuances correctly.

What property qualifies for bonus depreciation?

This is where many investors get tripped up. What property qualifies for bonus depreciation? The golden rule is that the asset must have a recovery period of 20 years or less.

Non-qualifying assets

You generally cannot apply bonus depreciation to real property in its entirety.

• The building: Residential structures are 27.5-year assets.
• The land: Land never depreciates.
• Common repairs: If you’re asking, does a new roof qualify for bonus depreciation? The answer is usually no. A roof is a structural component with a 27.5-year life. The same applies to HVAC—does HVAC qualify for bonus depreciation? Generally, no, unless it’s part of a specific cost segregation carve-out.

Eligible assets

To apply bonus depreciation to rental property effectively, look at the "stuff" inside and around the building:

1. Tangible personal property (5-7 year life): Appliances (washers/dryers), furniture for short-term rentals, carpeting, and window treatments.
2. Land improvements (15-year life): This includes paving (driveways/parking lots), fencing, and even irrigation systems.

Qualified Improvement Property (QIP)

Qualified Improvement Property (QIP) generally refers to improvements made to the interior of a non-residential building after it was placed in service. While this primarily benefits commercial investors, mixed-use property owners should be aware of it. Does HVAC qualify for bonus depreciation? Generally, HVAC systems are considered building components (27.5 years) and do not qualify as QIP for residential rentals. However, specific components might qualify depending on how they are classified in a cost segregation study.

The critical role of a cost segregation study

To separate the 5, 7, and 15-year assets from the 27.5-year building, most investors need a cost segregation study. Do I need a cost segregation study for bonus depreciation? If you want to maximize the deduction on a property purchase (as opposed to just buying a new fridge), the answer is usually yes.

A cost segregation study is an engineering-based analysis that identifies and reclassifies assets. It allows you to accelerate depreciation on 20% to 30% of the building's purchase price. For high-income earners, this strategy is often central to learning how to pay no taxes on rental income legally.

How to calculate bonus depreciation for rental property (with examples)

Calculating bonus depreciation is actually simpler than standard MACRS because, at 100%, the math is: Cost x 1.00 = Your Deduction.

• Scenario A (Appliances): You spend $5,000 on new refrigerators for a duplex in 2026. You deduct $5,000 in 2026.
• Scenario B (Driveway): You spend $10,000 on paving a new parking area. Since paving qualifies, you deduct the full $10,000 immediately.

Can bonus depreciation create a loss?

Yes. This is a huge advantage. If your rental brings in $10,000 in profit, but you have $15,000 in bonus depreciation, you now have a $5,000 Net Operating Loss (NOL). You can carry this loss forward to wipe out taxes in future years.

Bonus depreciation vs. Section 179 for rental property investors

For many landlords, the ability to create a loss makes bonus depreciation the superior choice. However, Section 179 offers flexibility if you want to save some deductions for future years. If you operate as a sole proprietor, understanding sole proprietorship tax deductions helps clarify how these fit into your personal tax return. Proper sole proprietor accounting software can track which method you apply to each asset.

Common misconceptions & objections debunked

Many investors hesitate to use bonus depreciation due to confusing myths. Let's clarify the most common ones.

Misconception 1: "Bonus depreciation is just a timing difference, not real savings."

While strictly true that you are accelerating deductions you would get anyway, the time value of money makes this false in practice. Taking a $50,000 deduction today is worth far more than taking $1,800 a year for 27.5 years. You can reinvest those tax savings immediately to compound your wealth.

Misconception 2: "Depreciation is a freebie from the IRS."

Depreciation is not a gift; it is a deferral. When you sell the property, you may face depreciation recapture, which is taxed at a specific rate (often 25%). Planning for this exit is vital. Many investors use a 1031 exchange to defer this tax further. You can learn how a 1031 exchange works to keep your equity growing.

Misconception 3: "Passive investors can easily use bonus depreciation to offset W-2 income."

This is the most dangerous myth. If you are a passive investor, your rental losses (including those from bonus depreciation) can generally only offset passive rental income, not your active W-2 wages. To offset W-2 income, you generally need to qualify as a Real Estate Professional (REPS) or use the "short-term rental loophole" involving material participation.

Strategic considerations for landlords & property managers

Implementing bonus depreciation effectively requires more than just filling out a tax form. It requires operational discipline throughout the year.

Follow state-specific rules

Not every state conforms to federal bonus depreciation rules. Some states "decouple," meaning you might get the deduction on your federal return but have to add it back for your state return. Researching U.S. state rules on bonus depreciation is mandatory to avoid surprise tax bills.

Keep and maintain clean books

To survive an audit, you must prove the cost and "placed in service" date of every asset. Commingling funds makes this impossible. Baselane’s banking platform allows you to open separate accounts for each property, ensuring a clean separation of finances. Furthermore, using specific operating expenses for rental property categories ensures you don't miss qualifying items like maintenance tools or security systems.

For those managing multiple units, automated tools are essential. Baselane provides integrated banking and bookkeeping that auto-categorizes transactions. This is often a superior, integrated solution compared to generic software. If you are exploring options, you might look into QuickBooks for real estate investing or a free alternative to QuickBooks to see how specialized tools compare.

Specialized management

Different niches have different needs. If you are flipping houses, your depreciation rules differ because inventory is not depreciated. You would need the best accounting software for house flippers to manage COGS. Conversely, if you run an HOA, you need HOA bookkeeping software​ that handles dues differently from rent.

For short-term rentals, where turnover is high and furniture is frequently replaced, using Airbnb-specific accounting can help track the high volume of 5-year assets eligible for bonus depreciation. Additionally, utilizing AI-based accounting software​ can speed up the classification of these numerous small transactions.

Finally, ensure you handle security deposits correctly. They are generally not income (and thus not depreciable or taxable) unless forfeited. Use a security deposit deductions template​ and record the security deposit journal entry accurately to keep these funds distinct from your operating capital.

Conclusion

Bonus depreciation remains one of the most effective tax strategies available to real estate investors, especially with the permanent 100% rate reinstated for 2026 and beyond. By understanding what property qualifies, how to calculate the deduction, and the importance of accurate record-keeping, you can significantly improve your cash flow and portfolio growth.

Don't let the complexity of tax planning paralyze you. Start by organizing your finances today. Baselane offers an all-in-one financial platform designed for landlords, combining high-yield banking, automated bookkeeping, and rent collection. By centralizing your financial data with Baselane, you simplify the tax preparation process, ensuring you and your CPA have the accurate data needed to maximize every available deduction, including bonus depreciation.

‍