Bonus depreciation in 2026: what rental property owners can deduct

For a rental property you acquire and place in service in 2026, bonus depreciation lets you deduct 100% of the cost of qualifying components in the first year. Qualifying components are the parts with a recovery period of 20 years or less, which you usually identify through a cost segregation study. The building itself doesn't qualify.

Whether that deduction lowers your tax bill this year is a separate question. For many investors with a full-time job, especially higher earners, it doesn't, because of the passive loss rules.

What the law is for 2026

The federal tax law enacted on July 4, 2025 changed bonus depreciation in two ways. It raised the rate to 100% and made it permanent for qualified property acquired after January 19, 2025. Under the prior law, the rate had been phasing down by 20 percentage points a year and was 40% for property placed in service in 2025.

The IRS issued interim guidance in Notice 2026-11 on January 14, 2026. The points that matter for rental owners:

The acquisition date rule. Property isn't treated as acquired after the date you enter into a written binding contract to buy it. If you signed the purchase contract in 2025 after January 19, or sign it in 2026, the 100% rate generally applies. If you signed a binding contract before January 20, 2025 and closed later, the older rules may govern that property. The exact acquisition date depends on when the contract became binding and when its contingencies were met, so your CPA confirms it. The IRS applies the same contract rules it used under the 2017 law, with the new date swapped in.

Used property counts, with limits. The components don't have to be new. Used property qualifies if neither you nor a predecessor used it before, you bought it from an unrelated party, and your basis comes from what you paid. In a 1031 exchange, the basis carried over from the property you sold doesn't qualify for bonus depreciation as used property. Only the extra amount you paid can.

What bonus depreciation applies to on a rental

The building itself is residential rental property with a 27.5-year recovery period. That's longer than 20 years, so it doesn't qualify. Land doesn't qualify because it isn't depreciable.

What does qualify are the parts of the property with shorter lives. IRS Publication 527 lists appliances, carpets, and furniture used in residential rental property as 5-year property, and items such as fences, roads, and shrubbery as 15-year property. A cost segregation study is how most owners separate those parts from the building's purchase price. The IRS's audit guide describes what a quality study looks like and what auditors check. We compare the methods in cost segregation vs. straight-line.

An illustrative example

Say you buy a $230,000 rental in 2026. These figures are assumptions for illustration only.

With a study, first-year depreciation is the $30,000 bonus plus a partial year on the building. Without one, it's a partial year on $190,000. The building figure in year one is smaller than a full year because of the mid-month convention, and the actual split depends on the property and the study.

On a rental with a modest cash profit, a $30,000-plus deduction produces a large tax loss on paper. What happens to that loss decides whether the study paid off this year.

Illustrative example. Actual allocations, deductions, and tax results vary by property and by taxpayer.

Build my plan to see the cash side of a rental portfolio before you model the tax side.

The catch: who can use the deduction now

Rental losses are passive by default. A passive loss can offset income from other passive activities, but not your wages. There are two main ways around that:

• The $25,000 allowance for owners who actively participate. It phases out between $100,000 and $150,000 of modified AGI, so it's zero for most high earners.
• Real estate professional status, which requires more than half your working hours and more than 750 hours a year in real estate, plus material participation in the rentals. We cover who qualifies in real estate professional status.

If neither applies, the loss offsets other passive income or carries forward. It's generally released when you sell your entire interest in a fully taxable sale. The deduction isn't lost, but it isn't cutting this year's tax either. Non-passive losses above a separate federal cap on excess business losses, $256,000 in 2026 ($512,000 on a joint return), carry forward too. The 2025 tax law made that cap permanent.

Short-term rentals follow different rules. See the short-term rental tax loophole.

Recapture when you sell

When you sell, bonus depreciation comes back as ordinary income. On personal property such as appliances, carpet, and furniture (Section 1245 property), gain is taxed as ordinary income up to the depreciation you took, with no 25% cap. On land improvements such as fences and paving (usually Section 1250 property), the bonus above straight-line depreciation is taxed as ordinary income and the rest falls under the 25% maximum rate. A big deduction now can mean a bigger ordinary-income bill later, unless you defer it. We walk through the math in depreciation recapture.

State conformity varies

Your state may not follow the federal rule. California, for example, doesn't conform to federal bonus depreciation under Section 168(k), so the state return depreciates the same components more slowly. Other states have their own rules, and some adopt federal changes on a delay. Your CPA confirms how your state, and the state where the property sits, treats it.

Your CPA also confirms whether bonus depreciation, or electing out of it, makes sense for your return. The federal guidance is still interim, and final regulations may adjust the details.

This article explains general federal tax rules for educational purposes. It is not tax advice. Your CPA confirms how these rules apply to you.

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