Cost Segregation and Bonus Depreciation (2026 Guide)

On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) permanently restored 100% cost segregation and bonus depreciation for certain assets.

But the new rules don’t apply to your entire property. 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 cost segregation?

Cost segregation is a tax strategy that allows property owners to accelerate depreciation by separating certain components of a property from the building’s core structure. Rather than depreciating assets over 27.5 years (residential) or 39 years (commercial), these components can be depreciated over shorter recovery periods.

A cost segregation study is the engineering-based analysis that enables this strategy. The study identifies and reclassifies qualifying property components into 5-, 7-, or 15-year categories, accelerating depreciation on rental properties and increasing deductions in the earlier years of ownership.

This reclassification is the key that unlocks both cost segregation and bonus depreciation benefits. According to recent data, these studies can accelerate the depreciation of 20-40% of your building's cost, saving between $40,000 and $200,000 in first-year taxes on properties valued at $1 million or more.

What is bonus depreciation?

Bonus depreciation for rental properties is another tax strategy that works alongsidea cost segregation study. It applies when yu identifies eligible short-life assets (e.g., fixtures, landscaping, carpenting, etc.), allowing immediate write-offs: for example, 100% of a $100,000 segregated asset in year one versus $3,636 annually under straight-line residential rules.

• Without the cost seg, the bonus applies only to the small personal property portion you might intuitively spot.
• With it, 20-40%+ of total basis often shifts to bonus-eligible categories, amplifying deductions exponentially.

Bonus depreciation in 2026: The OBBBA Impact

Before OBBBA, bonus depreciation was set to phase out by 2027, but OBBBA changed that. 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: 100% bonus depreciation

Which real estate assets qualify for 100% bonus depreciation

The real estate bonus depreciation benefit applies only 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.

Qualifying real estate assets for 100% bonus depreciation

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

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.

Maximize your tax savings with cost segregation and bonus depreciation

The true power of the OBBBA lies in the combined effort 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 rules may allow you to use these losses to offset W-2 income.

Tracking rental property operating expenses is critical; use a rental property expenses spreadsheet or read our guide on the best accounting software for rental properties to automate this process.

Baselane’s platform integrates banking and bookkeeping, giving you a clear view of your rental property cash flow. 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. Use our REPS time tracking sheet to track your rental service hours.
• 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.

Important considerations & pitfalls

While the cost segregation and bonus depreciation strategies focus on savings, there are some risks associated. 

Depreciation recapture

Depreciation recapture is the "clawback" mechanism the IRS uses to reclaim part of the tax benefit you received from depreciation deductions. When you sell a property, any gain attributable to prior depreciation is subject to recapture and taxed at a higher rate—up to 25%—rather than the more favorable long-term capital gains rate. Because cost segregation accelerates depreciation into earlier years, it can also increase the amount of depreciation subject to recapture at sale.

This doesn’t make cost segregation a bad strategy, but it does mean timing and exit plans matter. If you sell a cost-segregated property shortly after purchase, the recapture tax can reduce or even offset the upfront tax savings.

To mitigate this risk, hold properties for the long term to defer the impact of recapture over many years, or use a 1031 property exchange to roll gains—and the associated depreciation recapture—into a new property. In those cases, the tax savings from accelerated depreciation are often reinvested and compounded, rather than returned immediately at disposition.

State non-conformity

Not all states conform to federal depreciation rules. States like California, New York, and New Jersey require depreciation to be calculated differently at the state level, even if accelerated depreciation is allowed federally. As a result, you may claim a substantial deduction on your federal return while still owing meaningful state income taxes in the same year.

This mismatch can create cash-flow surprises if you assume federal savings automatically translate into state-level savings. The impact is especially relevant for investors with short-term or vacation rentals, where income is often taxed in multiple jurisdictions. Always consult a CPA who understands state-specific conformity rules and taxes on vacation rental income in the jurisdictions where your properties are located.

Audit risk

Large deductions can trigger scrutiny. To avoid such risks, 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% bonus depreciation rate.
• Calculate ROI: Use a cost-segregation bonus depreciation calculator or consult a firm to determine whether 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.

Take advantage of tax strategies with Baselane

The OBBBA’s permanent restoration of 100% cost segregation plus bonus depreciation presents a massive opportunity for real estate investors in 2026. But, to maximize deduction, you need to manage your finances to keep up with asset reclassification, depreciation schedules, and tax deductions.

Baselane offers the integrated banking and bookkeeping solution needed to maintain that clarity, helping you capture every deduction you deserve.

Ready to streamline your rental finances? Sign up for Baselane today!