Bonus Depreciation Rules 2026 for Rental Property Owners

Bonus depreciation under IRC §168(k) lets you expense a percentage of qualified property in the year you place it in service; the exception that costs landlords money is assuming the building itself qualifies — it doesn't, only the components a cost segregation study carves out into 5-, 7-, or 15-year buckets.

Bonus depreciation is the most powerful first-year deduction available to rental owners — and the most misunderstood. The headline rate (whether it's 100%, 80%, 60%, 40%, or 20% in a given year) changes annually under the current phase-down schedule, and Congress has revisited the timeline more than once. The rate for your tax year is whatever IRS Pub 946 shows for that year — verify before you file.

Whether you use it well decides whether a $50,000 appliance and renovation budget translates into a $50,000 current-year deduction or a 27.5-year drip. Below, the rules, what qualifies for a rental owner, and how it interacts with the rest of the tax code.

The rule explained

Section 168(k) lets you immediately deduct a percentage of the cost of "qualified property" in the year you place it in service. Qualified property is broadly:

• Tangible personal property with a recovery period of 20 years or fewer under MACRS
• Computer software
• Qualified improvement property (QIP) — interior improvements to non-residential buildings (with caveats)
• Certain plants and qualified film/television/live theatrical productions

The remainder of the cost (whatever isn't bonused) depreciates over the asset's normal MACRS life.

What this means for a residential landlord: the building itself doesn't qualify (27.5-year life > 20 years). But anything inside it that depreciates in 5, 7, or 15 years does — appliances, carpet, blinds, cabinets, land improvements, and the chunks of basis a cost segregation study reclassifies. That's where the leverage is.

The bonus rate is scheduled to step down each calendar year under current law. The exact rate for the year you place property in service is the only one that matters — and Congress has been known to retroactively restore higher rates, so always confirm the rate at the time you file, not when you bought the asset.

What actually qualifies for a landlord

The two ways most residential landlords activate bonus depreciation:

1. Direct purchase of 5-year property (an appliance, new carpet) — bonus applies automatically unless you elect out.
2. Cost segregation study that carves shorter-life components out of a 27.5-year basis. The study's reclassification report drives the bonus-eligible portion.

You claim bonus depreciation on Form 4562, line 14. There's no separate election to take it; the election is to opt OUT (you have to attach a statement saying you elect not to use bonus for that asset class in that year).

Who can use the loss it creates

Bonus depreciation makes the deduction big. Whether you actually save tax this year depends on whether you can use the loss it creates.

Three pathways:

1. Passive income offset. Bonus-driven losses on a rental are passive losses under IRC §469. They can fully offset other passive income (other profitable rentals, certain LP interests). If your portfolio nets passive income, bonus deductions absorb it.

2. $25,000 active participation allowance. If you actively participate (you make management decisions) and your modified AGI is under $100,000, up to $25,000 of rental losses offset ordinary income. Phases out fully at $150,000 MAGI.

3. Real estate professional or short-term rental material participation. REP status (750 hours, more than half your working time in real property trades) or material participation in a short-term rental (average guest stay ≤ 7 days plus the standard §469 material-participation tests) makes the losses non-passive — they offset W-2 income without the $25,000 cap.

Without one of these three pathways, the bonus deduction is real, but it sits suspended under PAL rules until you have passive income or sell the property.

How to calculate and claim

The mechanics on Form 4562:

1. Determine the cost basis of the bonus-eligible asset (purchase price + installation + non-deductible carrying costs).
2. Multiply by the current year's bonus rate.
3. Deduct that amount as bonus depreciation (Form 4562 line 14).
4. Depreciate the remaining basis over the asset's MACRS life using the half-year (or mid-quarter) convention.

For a $5,000 refrigerator placed in service mid-year with a hypothetical 60% bonus rate:

• Bonus: $5,000 × 60% = $3,000
• Remaining basis: $2,000
• Year-one MACRS at 20% (5-year, half-year convention): $400
• Total year-one deduction: $3,400

For a cost-segregated study that reclassifies $90,000 into 5-year property and $40,000 into 15-year land improvements on a building you placed in service this year, you'd apply the bonus rate to each bucket separately, then layer normal MACRS on the residual.

Common errors

Confusing bonus with Section 179. Both allow first-year expensing of personal property. Bonus has no taxable-income cap; Section 179 does. Bonus applies automatically; 179 is elected. Most residential landlords use bonus, not 179, because 179 has historically excluded property held for residential lodging.

Forgetting QIP requires commercial property. Qualified Improvement Property is 15-year property eligible for bonus — but only for non-residential (commercial) buildings. Interior improvements to a residential rental don't get QIP treatment. Commercial landlords gained huge benefit from the CARES Act fix that retroactively made QIP 15-year property; residential landlords didn't.

Assuming the rate that applied at purchase still applies at placed-in-service. Bonus rate depends on the date the asset is placed in service, not when you bought it. Buying $50,000 of appliances in December at one bonus rate but not installing them until January means the January rate applies.

Missing the opt-out for low-rate years. If your taxable income is low this year and you expect to be in a much higher bracket next year, you can elect out of bonus depreciation for an asset class. The election is irrevocable for that class in that year.

Edge cases

Mid-quarter convention. If more than 40% of your year's depreciable property is placed in service in Q4, you have to use the mid-quarter convention instead of half-year — which front-loads less in year one. Bonus depreciation doesn't count toward the 40% test, but the residual MACRS depreciation does.

Bonus on used property. Since the TCJA, bonus depreciation applies to both new and used property, provided you didn't previously use it and you didn't acquire it from a related party. This is what makes cost-seg-on-acquisition so powerful for resale property.

State conformity. Many states don't conform to federal bonus depreciation. California, for example, requires you to add bonus depreciation back and recompute state depreciation under straight-line. Maintain dual depreciation schedules.

Section 1031 + bonus. Bonus depreciation generally doesn't apply to the carryover basis from a 1031 exchange — only to the excess basis (the amount you paid over the relinquished property's adjusted basis). This often surprises operators chaining exchanges.

Examples with numbers

Example 1: Mid-size renovation, no cost seg

You spend $30,000 in a year on a rental: $8,000 new appliances, $7,000 carpet, $5,000 cabinets (under de minimis safe harbor, deducted as repairs), and $10,000 of structural work (capitalized to building).

• Appliances ($8,000) — 5-year, bonus eligible
• Carpet ($7,000) — 5-year, bonus eligible
• Cabinets ($5,000) — deducted under de minimis (no bonus needed)
• Structural ($10,000) — 27.5-year, no bonus

Assume current bonus rate is 60%:

• Bonus on $15,000 of 5-year property: $9,000
• Residual MACRS ($6,000 at 20%): $1,200
• Cabinets: $5,000
• Structural depreciation ($10,000 / 27.5, half-year): $182
• Total year-one deduction: $15,382

At 30% federal + state combined, that's roughly $4,600 in current-year tax savings. Without bonus, the same spend would deduct ~$8,800 year one — a $2,000 swing.

Example 2: $1M building + cost seg + STR loophole

You buy a $1.2M short-term rental property (land $200K, building $1M) and qualify as materially participating in the STR (average stay 5 days, you handle bookings personally — 200+ hours). A cost seg study reclassifies $250,000 (25%) of the building basis into 5-year property and $100,000 (10%) into 15-year land improvements.

Assume 60% bonus rate:

• 5-year property: $250,000 × 60% = $150,000 bonus + $20,000 residual MACRS = $170,000
• 15-year property: $100,000 × 60% = $60,000 bonus + ~$2,500 residual = $62,500
• 27.5-year structure ($650,000 / 27.5): $23,636
• Total year-one depreciation: ~$256,000

Because the STR is non-passive (material participation + avg stay ≤ 7 days), the loss offsets your W-2 income. At a 37% federal rate, that's ~$95,000 of current-year federal tax saved on a single acquisition.

FAQ

What's the current bonus depreciation rate? It phases down annually under the schedule set in TCJA, but Congress has revisited the timeline. Check IRS Pub 946 (or your CPA) for the rate that applies to the year you place the asset in service.

Can I take bonus depreciation on a property I already own? Only on new improvements or on a catch-up basis via Form 3115 paired with a cost segregation study. The Form 3115 catch-up isn't itself bonus, but the reclassified asset bases become eligible for bonus going forward in some cases.

Does bonus depreciation create an NOL? Yes, if it pushes your overall income negative. Net operating losses can carry forward indefinitely (TCJA changed the carryback rules). For most rental owners, the bigger constraint is PAL rules.

Should I always take 100% bonus when available? Not always. If you're in a low bracket this year and expect a much higher bracket next year, electing out lets you save the deduction for when it's worth more.

---

Need built-in trust accounting, 1099 reports, and owner statements without bolt-ons? Try Proprietio free.

This isn't tax advice. Consult a CPA familiar with US rental real estate.