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

The “One Big Beautiful Bill” (OBBBA) permanently enshrined bonus depreciation in the tax code, allowing property owners to deduct 100% of qualifying assets with a useful life of 20 years or less. This removes uncertainty and offers a permanent strategy to lower taxable income, improve cash flow, and strategically reinvest in properties.

This guide breaks down how it works, what qualifies, and how to maximize its benefits.

Key takeaways

• Qualifying assets include furniture, appliances, flooring, window treatments, electronics, tools, and 15-year land improvements like fencing, paving, and landscaping; buildings and land do not qualify.
• Cost segregation studies are essential to maximize bonus depreciation, breaking a property into 5-, 7-, or 15-year assets so 20–30% of a property’s value can be accelerated.
• Bonus depreciation can create a Net operating loss (NOL) if deductions exceed income, which can be carried forward to offset future taxable income.
• Follow state-specific rules, maintain clean, property-level bookkeeping, work with experienced tax professionals, and plan for depreciation recapture.

What is bonus depreciation?

Bonus depreciation is a tax incentive that allows rental property owners to deduct a large portion of eligible asset costs in the first year they’re placed in service, rather than spreading deductions over 5, 7, or 15 years. This front-loads depreciation, lowers taxable income early, and improves near-term cash flow.

However, bonus depreciation only applies to assets with a useful life of 20 years or less under the Modified Accelerated Cost Recovery System (MACRS). The building itself—depreciated over 27.5 years for residential property—doesn’t qualify. 

Bonus depreciation is based on a cost segregation study, which breaks a property into components and reclassifies qualifying items, such as interior finishes, wiring, plumbing, and certain exterior improvements, into 5-, 7-, or 15-year assets that are eligible for bonus depreciation.

Without cost segregation, most of the purchase price remains locked into long-term depreciation and misses the bonus opportunity. With a study, typically 20% to 30% of the property’s value can be accelerated, reducing—or even eliminating—current-year taxes on rental income.

What properties qualify for bonus depreciation?

This is where many investors get tripped up. The golden rule is that any asset that has a recovery period of 20 years or less qualifies for bonus depreciation.

Eligible assets

• Appliances: Stoves, refrigerators, washers, and dryers.
• Furniture: Essential for short-term rentals or furnished units.
• Floor coverings: Carpeting and removable flooring.
• Window treatments: Blinds and curtains.
• Electronics: Security systems and smart home devices.
• Tools: Maintenance equipment used for the property.

To claim these, the assets must be "new to you." You can learn more about categorizing these items in our guide to rental property deductions.

Land improvements (15-year property)

Land improvements are eligible for bonus depreciation because they typically have a 15-year recovery period. Qualifying examples include:

• Fencing: Privacy fences and retaining walls.
• Paving: Driveways, parking lots, and walkways (addressing the question "does paving qualify for bonus depreciation​").
• Landscaping: Shrubbery and irrigation/sprinkler systems.
• Amenities: Non-structural swimming pools and exterior lighting.

Tracking these costs separately from the building is critical. You can manage these categories using a free rental property Excel spreadsheet.

Non-qualifying assets

Residential rental buildings have a recovery period of 27.5 years, and commercial buildings have 39 years. Therefore, the purchase price allocated to the building structure does not qualify. Additionally, land is never depreciable.

If you ask, "Does a new roof qualify for bonus depreciation?", the answer is generally no, as a roof is typically considered a structural component with a 27.5-year life, unless specific exceptions apply.

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.

Example 1: New appliances in a rental unit

Imagine you purchase a new washer and dryer set for your rental property in March 2025. The total cost, including installation, is $2,000.

• Standard depreciation: You would deduct roughly $400 per year over 5 years.
• Bonus depreciation: You deduct the full $2,000 in 2025. This immediate deduction reduces your taxable income dollar-for-dollar in the first year.

Example 2: Landscaping improvements

You spend $15,000 on new landscaping and a fence in June 2025. These are 15-year land improvements.

• Standard Depreciation: You would deduct approximately $1,000 per year for 15 years.
• Bonus Depreciation: You deduct the entire $15,000 in 2025.

Can bonus depreciation create a loss?

Suppose your rental income for the year is $20,000, and your operating expenses are $10,000, leaving you with $10,000 in profit. If you apply $15,000 in bonus depreciation from Example 2, your calculation looks like this:

• Net income: $10,000
• Bonus depreciation: -$15,000
• Taxable income: -$5,000

You now have a $5,000 Net Operating Loss (NOL). You can carry forward this loss to offset future income, giving tax relief for years to come.

Bonus depreciation vs. Section 179: Which is right for your rental property?

For most property owners, especially those with long-term or multi-tenant properties, bonus depreciation is the more relevant strategy, while Section 179 is a niche option primarily for actively managed or short-term rental businesses.

Here’s a detailed breakdown of each of these works and which is a better option for your portfolio.

Comparison table: Bonus Depreciation vs. Section 179 for real estate investors

Bonus depreciation misconceptions & objections debunked

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

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.
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%).
3. Passive investors can easily use bonus depreciation to offset W-2 income. When you invest passively, your rental losses can only offset passive rental income, not your active W-2 wages. To offset W-2 income, you need to qualify as a Real Estate Professional (REPS) or use the "short-term rental loophole" involving material participation. Use our free REPS time sheet template to track your hours.

Best practices to take advantage of bonus depreciation

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. For example, California doesn’t conform to federal bonus depreciation, while Colorado and Kansas follow the federal rules.

Consult official sources, including your state’s department of revenue or tax code and the NCSL’s Tax Conformity Updates. 

Maintain clean, property-level bookkeeping

As bonus depreciation creates large, front-loaded deductions, it might increase IRS scrutiny. To survive such an audit, track assets, depreciation, expenses on rental property, and depreciation by property and entity, and clearly document when assets are placed in service.

Mixing personal and property expenses or using vague categories can weaken the deduction if questioned. Use an AI-based accounting software or a rental software with integrated accounting.

Baselane is one of the best banking and bookkeeping platforms. It automates the entire process, enabling you to manage multiple properties without manual intervention. You can use Schedule E categories or create custom categories to keep clean records of each transaction, whether it’s an operating expense or a miscellaneous income.

Work with professionals who understand depreciation

Bonus depreciation, combined with cost segregation, is technical, and errors in asset classification, recovery periods, or placed-in-service dates can trigger audits or require forced recapture later. So, work with a reliable and experienced CPA or tax professional.

Plan for depreciation recapture on exit

Bonus depreciation defers taxes; it doesn’t eliminate them. Understanding how recapture works at sale—and how it differs between accelerated assets and the building itself—will help you avoid surprises and make better hold vs. sell decisions. Learn how a 1031 exchange works to defer this tax.

Keep depreciation aligned with your portfolio strategy

Separate LLCs, ownership percentages, passive activity rules, and real estate professional status all affect the usability of bonus depreciation. Treating depreciation as a standalone tactic, rather than part of a broader tax structure, is one of the most common (and costly) mistakes.

Successfully claim bonus depreciation

Much of the success in claiming bonus depreciation depends on how well you maintain your property accounts, especially asset values and timelines. Baselane integrates banking and bookkeeping into a centralized system, allowing you to record asset details, automate transaction categorization, and get CPA-ready financials. Open your account today!