Cost Segregation and Bonus Depreciation (2026 Guide)

The tax rules for real estate investors changed dramatically on July 4, 2025, with the One Big Beautiful Bill Act (OBBBA). For landlords worried about shrinking tax benefits, the good news is that 100% cost segregation and bonus depreciation are now permanently restored for certain assets. But there’s a catch—this doesn’t apply to your entire property. Misunderstanding the rules can lead to costly mistakes.

In this guide, we break down how cost segregation and bonus depreciation work in 2026, which assets qualify, and how landlords can maximize their cash flow while staying compliant.

Key takeaway

• Qualified property placed in service after January 19, 2025, can now take a full first-year deduction.
• Only assets with a recovery period of 20 years or less qualify (appliances, land improvements, etc.), not the building itself.
• A proper cost segregation study is required to identify these assets.
• Depreciation recapture and state-specific rules can impact your tax planning. States like CA, NY, and NJ don’t follow federal bonus depreciation rules.
• Assets placed in service between January 1 and January 19, 2025, are limited to 40% bonus depreciation. Only post-Jan 19 assets get 100%.

What is bonus depreciation?

The IRS acknowledges that buildings and improvements wear out over time, allowing investors to deduct a portion of the property's cost each year. For most real estate investors, this means depreciating residential rental property over 27.5 years and commercial property over 39 years.

While this standard deduction lowers taxable income, the annual amount is relatively small compared to the initial investment. This slow recovery period is why savvy investors turn to accelerated methods. By utilizing depreciation on rental property, you can significantly increase your upfront tax savings, but doing so requires moving beyond the standard straight-line method.

What is cost segregation?

A cost segregation study is an engineering-based analysis that identifies components of a property that are not part of the building's core structure. Instead of depreciating a fence or specialized lighting over 27.5 years, a cost segregation study reclassifies these as 5, 7, or 15-year properties.

By isolating these assets, you unlock the ability to accelerate their depreciation. This reclassification is the "key" that opens the door to cost segregation study and bonus depreciation benefits. According to recent data from IEQ Capital and MGO CPA, these studies typically identify 25-35% of a residential property’s basis and 30-45% of a commercial property’s basis for acceleration.

Managing the detailed financial records required for these studies can be complex. Baselane simplifies this by offering automated bookkeeping that tags transactions by property, ensuring you have the granular data needed when your tax professional performs the study.

Bonus depreciation in 2026: The OBBBA Impact

Before OBBBA, bonus depreciation was set to phase out by 2027: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. OBBBA changed that:

• 100% permanency: Qualified property placed in service after January 19, 2025, can now be fully deducted in year one.
• Key dates:
  
  • Jan 1–Jan 19, 2025: Only 40% bonus depreciation.
  • Post-Jan 19, 2025: Full 100% bonus depreciation.

Which real estate assets qualify for 100% bonus depreciation

A common misconception is that the OBBBA makes the entire building tax-deductible in year one. This is incorrect. The cost segregation real estate bonus depreciation benefit applies strictly to "qualified property," defined generally as tangible property with a recovery period of 20 years or less. The building structure itself (walls, roof, foundation) remains on the 27.5 or 39-year schedule.

Understanding which assets qualify is vital for accurate tax planning. The following table breaks down the specific asset classes identified by cost segregation that are eligible for the new 100% rate.

Qualifying real estate assets for 100% bonus depreciation

Only tangible assets with a recovery period of 20 years or less qualify. The building itself does not. Here’s a breakdown:

Tracking tip: Baselane’s banking and bookkeeping help you separate property funds and track all renovations, and oversee eligible rental property tax deductions at a glance.

Maximizing your tax savings with cost segregation and bonus depreciation

The true power of the OBBBA lies in the synergy between the study and the tax provision. Cost segregation identifies the assets, and bonus depreciation accelerates their deduction. Without the study, you cannot separate the 5-year carpet from the 27.5-year building, meaning you lose the 100% write-off opportunity.

Real-world scenarios

Let's look at a cost segregation bonus depreciation example to illustrate the financial impact.

Example 1: The commercial center

According to IEQ Capital, a $36 million shopping center with a $29 million depreciable basis could see first-year tax benefits of approximately $2.24 million under the new OBBBA rules. Compare this to roughly $1.07 million under the prior 40% rate. This massive increase in upfront liquidity can be reinvested immediately.

Example 2: The residential rental

Consider a smaller investor buying a $1 million apartment complex. A cost segregation study might reclassify 25% ($250,000) of the purchase price into 5 and 15-year buckets. Under OBBBA, the investor can deduct that entire $250,000 in the first year against their rental income. Investors looking to pay no taxes on rental income often use this strategy to create a "paper loss" that offsets positive cash flow.

Example 3: Short-term rentals

Operators of Airbnbs often have high furniture and improvement costs, which are prime targets for 5-year and QIP treatment. If you actively participate, the short-term rental cost segregation bonus depreciation 2025 rules may allow you to use these losses to offset W-2 income. Tracking these specific expenses is critical; utilizing a Rental Property Expenses Spreadsheet or automated software helps ensure no deduction is missed.

Baselane’s platform integrates banking and rent collection, providing a clear view of your rental property operating expenses. This clarity is essential when justifying large upfront deductions to the IRS.

Who benefits most from cost segregation & bonus depreciation?

Not every investor needs a full cost segregation study. The strategy is most effective for specific profiles and property types.

• High-income earners: Investors in high tax brackets benefit most from the cost segregation study bonus depreciation benefits because the deduction offsets income taxed at higher rates.
• Real estate professionals (REPS): If you qualify as a Real Estate Professional for tax purposes, you can use these accelerated losses to offset non-passive income, such as W-2 wages.
• Short-term rental owners: Even without REPS status, the "loophole" for short-term rentals (average stay of 7 days or less) allows material participants to offset active income. This makes Airbnb accounting and tracking Airbnb expenses vital for maximizing returns.
• Properties with high basis: Generally, properties with a depreciable basis of over $500,000 to $1 million see the best ROI on the cost of the study.
• Recent acquisitions: The OBBBA rules specifically target properties placed in service after Jan 19, 2025.

If you are just starting, ensure you understand the fundamentals by reviewing a real estate investing guide to determine if your portfolio is ready for this advanced strategy.

Important considerations & pitfalls

While the cost segregation vs bonus depreciation conversation often focuses on savings, investors must be aware of the risks.

Depreciation recapture

This is the "clawback." When you sell a property, the IRS wants a portion of those accelerated deductions back. Gain attributable to depreciation is taxed as ordinary income (up to 25%), not the lower capital gains rate. Investors planning to sell quickly might find that the recapture tax negates the initial benefit. Long-term holds or 1031 exchanges, are common mitigation strategies.

State non-conformity

Not all states follow federal rules. California, New York, and New Jersey "decouple" from federal bonus depreciation. This means you might take a huge deduction on your federal return, but still owe significant state taxes. Always consult a CPA familiar with taxes on vacation rental income in your specific jurisdiction.

Audit risk

Large deductions can trigger scrutiny. You must substantiate every asset reclassification. This is where maintaining separate business banking accounts becomes non-negotiable. Commingling funds makes audits a nightmare. Baselane offers unlimited accounts to keep your security deposits, mortgage interest deduction on rental property, and renovation budgets distinct and audit-ready.

Strategic planning for 2026: Your action checklist

To leverage the OBBBA effectively, follow this strategic checklist:

• Verify dates: Confirm your property was placed in service after Jan 19, 2025, to qualify for the 100% rate.
• Calculate ROI: Use a cost segregation bonus depreciation calculator or consult a firm to see if the tax savings exceed the cost of the study (typically $5k-$15k for commercial).
• Decide on study type: For smaller residential properties, a lower-cost "desktop" study might suffice; larger commercial assets require a full engineering field study.
• Organize finances: Centralize your income and expenses. Use real estate accounting software to ensure every 5-year asset (like appliances) is tracked separately from the building.
• Plan the exit: Discuss depreciation recapture with your tax advisor before claiming the deduction.

Conclusion

The OBBBA’s permanent restoration of 100% bonus depreciation presents a massive opportunity for real estate investors in 2026. By utilizing cost segregation, you can reclassify building components into eligible categories, drastically reducing your taxable income and freeing up cash for reinvestment. However, the distinction between "qualified property" and the building structure is strict, and the risks of recapture and state non-conformity are real.

Success requires more than just buying property; it requires professional financial management. Whether you are using cost segregation plus bonus depreciation for a single Airbnb or a multifamily portfolio, clarity is your best asset. Baselane provides the integrated banking and bookkeeping tools necessary to maintain that clarity, helping you capture every deduction you deserve.

Ready to streamline your rental finances? Sign up for Baselane today to simplify your rent collection, banking, and bookkeeping in one free platform.