Bonus depreciation on rental property in 2026: 100% is back
What qualifies on a rental, who can use the loss, what it costs at sale and why California differs.
By Hans Goldstein, Enrolled Agent, admitted to practice before the IRS ·
What changed, and the dates that matter
Before the 2025 law, bonus was phasing down under the 2017 schedule. P.L. 119-21 section 70301 restored 100% for property acquired after January 19, 2025.
The acquisition date is not the closing date if you signed early: property is not treated as acquired after the date a written binding contract is entered into for the acquisition. A purchase contract signed in December 2024 and closed in March 2025 is a 2024 acquisition for this purpose.
Two elections sit next to the 100% rule. Elect out by class: IRC 168(k)(7) lets you elect out of bonus for all property in a class for the year, which owners who cannot use a passive loss for years sometimes prefer.
Elect a lower rate for the transition year: IRC 168(k)(10) allows an elective 40% (60% for long-production property) for the first taxable year ending after January 19, 2025. "Permanent" means only that the statute has no end date. Congress can change it.
What qualifies on a rental
Bonus applies to property "which has a recovery period of 20 years or less" (IRC 168(k)(2)(A)(i)).
| Part of a rental | Recovery period | Bonus eligible? |
|---|---|---|
| Residential building shell | 27.5 years | No |
| Commercial building shell | 39 years | No |
| Land improvements (paving, fencing, landscaping) | 15 years | Yes |
| Appliances, carpet, furniture, some fixtures | 5 or 7 years | Yes |
| Land | Not depreciable | No |
A plain purchase allocates everything to land and building, so there is nothing to bonus. A cost segregation study is what moves part of the price into the 5-, 7- and 15-year classes. Your study gives the real figure for your property. A few rules decide edge cases:
- Used property qualifies if you did not use it before and bought it from an unrelated seller (IRC 168(k)(2)(E)(i), which pulls in IRC 179(d)(2)). Purchases from a spouse, parent or child do not count.
- Inherited property does not qualify. A basis determined under IRC 1014 is not a purchase (IRC 179(d)(2)(C)(ii)). The heir still gets a fresh schedule on the stepped-up basis (inherited property).
- 1031 replacement property: for used replacement property, only the excess basis (basis added with new debt or new cash) is bonus-eligible. The carried-over basis is not (Reg. 1.168(k)-2(g)(5)(iii)). A leveraged trade-up can still produce a sizable bonus. See cost segregation after a 1031 with boot.
- Electing real property trades or businesses must use ADS under IRC 168(g)(8), and ADS property cannot take bonus (IRC 168(k)(2)(D)). But IRC 168(g)(8) reaches only nonresidential real property, residential rental property and qualified improvement property, so 5-, 7- and 15-year components stay eligible.
Who can actually use the loss
This is where most rental owners are surprised. Bonus creates a big first-year deduction. Whether it cuts your tax this year depends on the passive activity rules.
| Owner | Is the bonus loss passive? | Offsets wages this year? |
|---|---|---|
| Typical landlord with a job or a manager | Yes (IRC 469(c)(2)) | No. It goes to Form 8582 |
| Limited partner in a syndication | Yes (IRC 469(h)(2)) | No |
| Real estate professional who materially participates | No | Yes, subject to IRC 461(l) |
| Short-term rental, average stay 7 days or less, owner materially participates | No | Yes, subject to IRC 461(l) |
| Active participant with MAGI under $100,000 | Passive, but up to $25,000 allowed (IRC 469(i)) | Partly |
A simple example. A married couple with $400,000 of W-2 income buys a rental in 2026. A cost segregation study moves $250,000 into 5-, 7- and 15-year property, and they take 100% bonus.
If they are ordinary passive landlords, their 2026 federal tax does not change: about $73,468 on $367,800 of taxable income after the $32,200 standard deduction, and the $250,000 loss is carried forward on Form 8582.
If one spouse qualifies as a real estate professional and they materially participate, the same loss cuts taxable income to $117,800 and tax to about $15,340, a difference of about $58,128 (2026 married filing jointly brackets, Rev. Proc. 2025-32; federal income tax only, state tax ignored).
The passive loss is not wasted. It waits in the carryover, and it comes out when you have passive income, including gain on selling a passive rental. That is the logic of an installment sale with suspended losses: a bonus loss on a property you buy can meet the gain on a property you sell.
Two limits apply for owners whose loss is nonpassive. The at-risk rules in IRC 465 come first, and very large nonpassive losses face the excess business loss limitation of $512,000 for a joint return in 2026 (Rev. Proc. 2025-32).
Can bonus depreciation offset capital gains?
Indirectly, yes, in the year you have passive gain. Gain on selling a passive rental is passive income (Temp. Reg. 1.469-2T(c)(2)(i)(A)), and passive losses, including bonus losses, can offset it.
Because IRC 1(h) taxes ordinary income first, an allowed loss reduces your ordinary layer before it reaches the capital gain layer. That is the rate swap explained in do passive losses offset capital gains.
Bonus losses cannot offset gain that is not passive: stock sales, land held for investment, or a rental you materially participated in as a real estate professional.
The bill at sale: recapture in year one
Every bonus dollar on a 5- or 7-year component is IRC 1245 property. When you sell, that depreciation comes back as ordinary income. Bonus on 15-year land improvements is recaptured as ordinary income under IRC 1250(a) to the extent it exceeds straight-line.
Under IRC 453(i), that recapture is recognized in the year of sale, even on an installment sale with no cash in year one. Only the straight-line building depreciation (unrecaptured section 1250 gain, taxed at up to 25%) can ride out with the payments (Reg. 1.453-12).
See the depreciation recapture calculator and cost segregation before a sale.
Exchanging a bonus-heavy building has its own trap: IRC 1245(b)(4) can trigger recapture even with no boot if the replacement has less section 1245 property. See 1031 exchange and 1031 vs installment sale. If you are weighing a sale and a new purchase with bonus against a 1031, read sell and buy with bonus vs a 1031.
California does not follow
California does not allow IRC 168(k) (R&TC 17250(a)(11)). Your California return depreciates the same components over regular lives. Two results: the California loss in year one is much smaller, and your California adjusted basis stays higher, so the California gain on sale is smaller than the federal gain. Every projection needs a separate California column.
Bottom line
For property acquired after January 19, 2025, the short-life parts of a rental qualify for 100% bonus depreciation. For most owners the result is a large passive loss that waits on Form 8582, not a W-2 deduction.
That can still be valuable, because it is exactly the kind of loss that gain on a future sale can absorb. Plan the exit at the same time as the purchase, since every bonus dollar comes back as ordinary recapture in the year of sale.
Questions to ask your CPA
- When did we sign the binding contract, and does this property qualify for 100% or the transition-year election?
- Is my loss passive, and if so, when do I expect passive income to use it?
- Should we elect out of bonus for any class this year?
- How much excess basis does my 1031 replacement have?
- What will the section 1245 recapture be if I sell in five or ten years, and can I pay it in year one?
- What does the California return show without bonus?
Sources and dates
- 26 USC 168(k).
- Public Law 119-21, section 70301.
- IRS Publication 946.
- IRS Publication 527.
- 26 USC 1245.
- 26 USC 469(c), (h), (i).
Checked against the sources above on October 30, 2026. Dollar figures are 2026 federal (Rev. Proc. 2025-32) unless the page says otherwise. Education only, not tax or legal advice for your situation.
Questions
Is bonus depreciation 100% in 2026?
Yes, for qualified property acquired after January 19, 2025. P.L. 119-21 amended IRC 168(k)(1) to allow 100% of adjusted basis, with no phase-down in the statute. Property under a written binding contract signed before January 20, 2025 is treated as acquired on the contract date and keeps the old rate.
Can I take bonus depreciation on a rental building?
Not on the building itself. Bonus applies only to property with a recovery period of 20 years or less (IRC 168(k)(2)(A)(i)). A 27.5-year residential or 39-year commercial building does not qualify, but the 5-, 7- and 15-year parts a cost segregation study identifies do.
Can bonus depreciation on a rental offset my W-2 income?
Usually not. For most owners the rental is a passive activity, so the bonus creates a passive loss that waits on Form 8582 for passive income. It offsets wages only if you qualify as a real estate professional who materially participates, or the property is a short-term rental you materially participate in.
Does bonus depreciation apply to inherited property?
No. Property with a basis determined under IRC 1014 is not purchased property (IRC 179(d)(2)(C)(ii)), so it does not qualify, although the heir's stepped-up basis starts a new depreciation schedule.
Does California allow bonus depreciation?
No. California does not follow IRC 168(k) (R&TC 17250(a)(11)), so the California deduction comes over regular lives and the California gain on sale differs from the federal gain.
What happens to bonus depreciation when I sell?
Bonus on 5- and 7-year components is IRC 1245 property, so that depreciation comes back as ordinary income at sale. Under IRC 453(i) the recapture is recognized in the year of sale, even on an installment sale with no cash in year one.
Related
- Real estate professional status
- Form 8582 explained
- Passive loss carryover
- Suspended losses and an installment sale
- All passive loss guides
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Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service. Not affiliated with or endorsed by the IRS. He is not a CPA or attorney. Education only, not tax or legal advice for your situation.