Bonus Depreciation in 2026: What Real Estate Investors Need to Know After the One Big Beautiful Bill

TL;DR: The One Big Beautiful Bill restored 100% bonus depreciation permanently for property placed in service after January 19, 2025. This changes acquisition timing, cost segregation value, and the 163(j) interest deduction trade. Recapture at exit is still Section 1245 at ordinary rates. The modeling is different now because the urgency is gone.

Core answers:

• 100% bonus depreciation is permanent for property placed in service on or after January 19, 2025

• Cost segregation studies identify 5, 7, and 15-year components eligible for immediate expensing

• The 163(j)(7)(B) election trades unlimited interest deductions for loss of QIP bonus depreciation

• Recapture on exit is Section 1245 at ordinary rates (37%) for personal property, Section 1250 at 25% for real property

• Qualified Production Property under Section 168(n) allows immediate expensing of manufacturing facilities built between 2025 and 2031

Most investors I talk to heard the headline. Almost none of them changed the math they run when they buy property.

Through 2024, bonus depreciation followed a phase-down schedule. 80% in 2023, 60% in 2024, 40% for property placed in service before January 19, 2025, then a hard cliff to zero. Investors factored a shrinking deduction into every model. The OBBBA flipped that completely. Property placed in service on or after January 19, 2025 qualifies for 100% bonus depreciation, and the change is permanent under current law.

Permanent is the word that matters. The phase-down created urgency. Permanence changes how you sequence acquisitions, how you structure financing, and which elections you make on the return. This is a different playbook.

What Changed Under the One Big Beautiful Bill

The pre-OBBBA rule was straightforward and shrinking. Bonus depreciation allowed an immediate first-year deduction on qualifying property with a recovery period of 20 years or less. The percentage depended on placed-in-service date:

• 2017 through 2022: 100%

• 2023: 80%

• 2024: 60%

• 2025 (before Jan 19): 40%

• 2026 onward: 0%

The OBBBA restored 100% for property placed in service on or after January 19, 2025 and made the rate permanent. There is no scheduled phase-down on the books right now. Property placed in service before January 19, 2025 still uses the old phase-down percentage from its placed-in-service date.

The placed-in-service date is the trigger. Not the contract date. Not the closing date. The date the property is ready and available for its intended use. For an acquisition, this is usually the closing date if the building is operational. For new construction or a renovation, this is the date the work is substantially complete and the asset is in service.

The IRS issued Notice 2026-11 earlier this year to clarify several open questions, including treatment of property straddling the January 19, 2025 cutoff and the interaction between new permanent rules and prior-year elections. If you have property placed in service in early 2025 and your return treated the deduction under the 40% rule, your return is worth a second look.

Key point: Permanent 100% bonus depreciation removes the urgency to accelerate purchases, but proper timing of the placed-in-service date still determines eligibility.

How Cost Segregation Unlocks Bonus Depreciation

This is where most investors get the mechanics wrong.

Bonus depreciation applies to property with a recovery period of 20 years or less. The building itself is 27.5-year residential or 39-year commercial property. Neither qualifies on its own. The structure does not get bonus depreciation.

What does qualify are the components inside and around the building. Carpet, cabinetry, specialty plumbing, decorative lighting, and interior finishes are 5-year property. Specific manufacturing or processing equipment is often 7-year property. Land improvements, parking lots, sidewalks, fencing, and landscaping are 15-year property.

A cost segregation study is the engineering analysis that identifies and reclassifies those components from 27.5 or 39-year property into their proper 5, 7, and 15-year buckets. Once reclassified, every dollar in those buckets is eligible for 100% bonus depreciation in the year placed in service.

The math is straightforward once you see the pieces.

A $5 million commercial building, depreciated straight-line over 39 years, gives you roughly $128,000 of depreciation per year. Run a cost seg study and reclassify 25% of the basis ($1.25 million) into 5, 7, and 15-year property. Under 100% bonus depreciation, the full $1.25 million becomes a first-year deduction. The remaining building basis depreciates over 39 years on the normal schedule.

Same building. Same purchase price. Different first-year tax outcome by roughly a factor of ten.

This is why cost segregation is the prerequisite for maximizing bonus depreciation on real estate. Without the study, the IRS has no documented basis for treating those components as anything other than building. Skip the study and you leave the deduction on the table.

A few things worth understanding about cost seg:

• The study is performed by engineers, not by your tax preparer. The analysis is engineering work that gets reported on the tax return.

• The work product is a defensible report you keep with your records. If the return is examined, the study is what the IRS reviews.

• Cost seg is not aggressive. The Tax Court has been settled law on component depreciation since the Hospital Corporation of America case in 1997. The IRS has its own published guide on what a study should contain.

The reason a typical CPA does not run cost seg studies is the same reason a typical doctor does not perform surgery. Tax preparation and tax strategy are different disciplines. A great preparer is excellent at compliance, the return itself, the elections on the return, and the relationship with the taxing authority. Specialized engineering analysis like cost seg is a different lane. The answer is not to replace your CPA. The answer is to add a specialist alongside them. Your CPA prepares the return. The specialist runs the study. Both belong on the team.

Key point: Cost segregation identifies eligible components. Bonus depreciation converts those components into immediate deductions. You need the study first.

The 163(j) Interest Deduction Trade Most Investors Miss

Here is the trade I see investors walk into without understanding the price.

Section 163(j) limits the business interest deduction to 30% of adjusted taxable income. For most real estate investors with significant leverage, the limit binds. You cannot fully deduct the mortgage interest on the portfolio in the current year, and the excess gets carried forward.

There is a way out. Real estate businesses make the real property trade or business election under Section 163(j)(7)(B). Make the election and the interest limit goes away. You deduct the full interest expense in the year incurred.

The price for the election is that you must depreciate residential property over 30 years instead of 27.5, nonresidential property over 40 years instead of 39, and Qualified Improvement Property (QIP) loses bonus depreciation eligibility.

The last point is what catches people.

QIP is improvements to the interior of nonresidential property made after the building was first placed in service. This is the major category of upgrade you do on a commercial property between tenants or as part of a value-add strategy. Under the standard rules, QIP is 15-year property and qualifies for bonus depreciation. Under the 163(j)(7)(B) election, QIP is depreciated on an Alternative Depreciation System (ADS) schedule over 20 years with no bonus.

For a commercial investor running a value-add strategy, this is the central trade. You have the unlimited interest deduction, or you have bonus depreciation on QIP. You do not have both.

The right answer depends on the math, and the math depends on the specific portfolio. Highly leveraged operators with limited improvement spend usually come out ahead with the election. Lower-leverage operators with significant QIP each year usually do not. The middle is where the modeling matters most.

I have seen investors make this election because their lender told them to, or because a previous CPA made the election years ago and the election rolled forward, and they never went back to check whether the election still served them. Worth verifying before you sign next year's return.

Key point: The 163(j)(7)(B) election gives unlimited interest deductions but eliminates bonus depreciation on QIP. Model both scenarios before choosing.

Understanding Recapture When You Sell

Bonus depreciation is not a permanent tax savings. This is a timing benefit. The IRS gets the money back when you sell, and the rate at which the IRS gets paid is the part most investors do not model.

When you sell a property, gain attributable to depreciation on personal property (the 5 and 7-year components reclassified by your cost seg study) is recaptured under Section 1245 at ordinary income rates, which currently top out at 37% federal. Gain attributable to depreciation on real property (the 15-year land improvements and the building itself) is recaptured under Section 1250 at a maximum rate of 25%.

This matters because cost segregation pushes basis from real property into personal property, which means a chunk of your future recapture lands at the 37% rate instead of the 25% rate. The bigger the cost seg study, the bigger the recapture exposure on exit.

A simplified example. $5 million property, $1.25 million reclassified into 5 and 7-year property, fully bonus-depreciated in year one. Hold for five years. Sell.

The $1.25 million you deducted is recaptured at ordinary rates. At 37%, this means $462,500 of federal tax on the recapture alone, before any capital gains on appreciation. If you had not done cost seg, the same $1.25 million would have been recaptured under Section 1250 at 25%, costing $312,500.

The cost seg deferral was worth roughly $462,500 at the federal level in year one (37% of $1.25 million). The recapture cost on exit is roughly $150,000 more than the cost without the study. The remaining $312,500 of recapture is the same either way. So the net win from the study, even with the higher recapture rate, is roughly $312,500 of permanent benefit plus the time value of having $462,500 in your pocket for five years instead of the IRS having the money.

This is still a strong outcome. But this is not the "you save $462,500 in taxes" outcome that gets repeated on social. The honest number depends on your hold period and your exit strategy.

There are four real ways to manage the recapture:

1. 1031 exchange. Defer the gain and the recapture by rolling into a like-kind replacement property. The clock keeps running and the deferred recapture follows you, but you do not pay on this transaction.

2. Qualified Opportunity Zone investment. Defer the gain (including depreciation recapture component, subject to the QOZ rules in effect at the time of investment) by rolling proceeds into a QOZ fund within 180 days.

3. Installment sale. Spread the gain across multiple tax years. Recapture is generally accelerated in the year of sale under Section 453(i), so this manages the capital gain portion more than the recapture portion, but the structure still smooths the overall hit.

4. Step-up at death. The basis of the property steps up to fair market value at the owner's death under Section 1014. Recapture is wiped clean. This is the only true permanent escape, and this is a real planning lever for investors holding generational real estate.

The recapture math is part of the decision to do cost seg in the first place. If you know you are selling in three years with no 1031 lined up, the analysis is different than if you are buying a property to hold for your grandchildren.

Key point: Section 1245 recapture at 37% ordinary rates applies to personal property components. Factor recapture into the decision, not just the year-one benefit.

Qualified Production Property Under Section 168(n)

The OBBBA added a new lane for manufacturing facilities. Section 168(n), the Qualified Production Property (QPP) provision, allows 100% immediate expensing of the manufacturing-use portion of nonresidential real property for qualifying construction.

The window is specific. Construction must begin on or after January 19, 2025 and the property must be placed in service before January 1, 2031. The eligible use is the active conduct of a manufacturing, production, or refining trade or business producing a tangible product.

The mechanics. The portion of the building used directly for qualifying production activity, the production floor itself, gets expensed immediately. Office space, employee facilities, parking, and other non-production zones do not qualify and are depreciated under the normal 39-year schedule.

The allocation between qualifying and non-qualifying square footage is the central technical question, and the allocation requires a cost segregation study tailored to the QPP rules. This is not a general cost seg study with a different cover page. The engineering team has to map production zones to specific square footage and document the qualifying use.

If you are an owner-occupant building or expanding a manufacturing facility, this is the most significant tax provision in the bill for your industry. The benefit runs into millions of dollars of immediate expensing on a single project. If you are a real estate investor whose tenant is a manufacturer, the provision affects lease structuring and tenant negotiations.

Key point: QPP allows immediate expensing of manufacturing facilities built between 2025 and 2031, but requires specialized engineering analysis to allocate qualifying square footage.

Three Questions to Model Before You Decide

Run these three questions before you commit on either side of these elections.

One. What is your effective tax rate, federal plus state, this year and over the holding period? Bonus depreciation is worth more when your rate is higher. If you have a known income spike this year, accelerating depreciation against the spike produces a bigger benefit than spreading depreciation across normal years.

Two. What is your leverage strategy? If your interest expense is large and growing, the 163(j)(7)(B) election is worth modeling. If your interest expense is modest and you are doing significant QIP each year, the election probably costs more than the election saves.

Three. What is your exit assumption? If you have a clear 1031 path or a generational hold strategy, the recapture exposure is manageable. If you are a five-to-seven year hold with a planned sale, the recapture math reduces the benefit of aggressive cost seg and the analysis tightens.

These three questions interact. The 163(j) election affects what is left to bonus-depreciate. The hold period affects what gets recaptured. The tax rate affects the value of every dollar of deduction in every year.

There is no general right answer. There is only the answer for your specific portfolio, your specific financing, and your specific exit plan.

Key point: Model your effective tax rate, leverage strategy, and exit plan together. The right answer depends on how the three variables interact in your portfolio.

Frequently Asked Questions

Does 100% bonus depreciation apply to a property I buy from someone else, or only to new construction?

Used property qualifies, with one condition. The property must not have been previously used by you or a related party. Buying a building from an unrelated seller is qualified property. Buying from your own LLC is not.

Do I need to do a cost segregation study in the year I buy the property, or is there a way to do the study later?

Yes, you do the study later. A study performed in a later year captures the missed depreciation through a Section 481(a) catch-up adjustment in the year of the study. You do not have to amend prior returns. The catch-up runs through Form 3115.

Do short-term rentals get bonus depreciation?

Yes, on the qualifying components identified in a cost seg study, same as any other rental property. The STR-specific rules in Section 469 and the material participation tests are about whether the resulting loss is currently deductible against your other income, not about whether bonus depreciation applies to the property itself.

What about residential rentals owned by a passive investor?

Bonus depreciation applies to qualifying components the same way. The passive activity loss rules under Section 469 then determine whether the resulting loss is currently deductible. Real estate professional status under Section 469(c)(7), or the short-term rental exception, are the two main ways to deduct the loss against ordinary income.

Is the 100% rate definitely permanent, or will Congress change the rate again?

The current statute makes the rate permanent with no scheduled phase-down. Congress changes tax law, and the bonus depreciation rate has been changed multiple times in the last 25 years. Plan around the current rule. Stay alert for future legislation.

Does QPP under Section 168(n) require a separate cost segregation study, or do I combine the QPP analysis with a regular study?

The engineering analysis combines into a single study, but the QPP allocation requires specific documentation of qualifying production square footage that a standard study does not produce. Work with an engineering team that has done QPP studies specifically.

What to Do Next

If you purchased a property in 2025 or 2026 and have not done a cost segregation study, start there. If you have property placed in service before January 19, 2025 with no cost seg study, the catch-up election is the next place to look. If you made the 163(j)(7)(B) election in a prior year and have not revisited the election, review whether the election still serves you.

The decisions interact, the math is portfolio-specific, and the right answer changes with your tax rate, your leverage, and your exit plan. This is the work I do with investors before year-end, modeling the elections side by side so the number on the return reflects an informed decision instead of a default.

If you want to run the numbers on your portfolio before December, reach out. I will tell you what I would look at first.

Key Takeaways

• 100% bonus depreciation is permanent for property placed in service on or after January 19, 2025, removing acquisition urgency but requiring updated modeling

• Cost segregation studies identify 5, 7, and 15-year components eligible for 100% immediate expensing, often converting 10x the annual depreciation into year-one deductions

• The 163(j)(7)(B) election provides unlimited interest deductions but eliminates bonus depreciation on QIP, model both scenarios for your leverage profile

• Section 1245 recapture at 37% ordinary rates applies to personal property on exit, factor recapture into the decision from acquisition

• Qualified Production Property under Section 168(n) allows immediate expensing of manufacturing facilities built 2025 through 2030, requires specialized cost seg analysis

• Model your effective tax rate, leverage strategy, and exit plan together because the right answer depends on how the three variables interact

• Section 481(a) catch-up adjustments allow retroactive cost seg studies without amending prior returns