Bonus Depreciation for Real Estate: What Changed and What It Means for Your Portfolio

For most of the last decade, the conversation about real estate depreciation had a single punchline: bonus depreciation lets you write off qualifying assets in year one instead of spreading them over 5, 7, or 15 years. At 100%, the math was straightforward and the savings were immediate.

That era is over. Bonus depreciation has been stepping down since 2023 and hits zero in 2027 — unless Congress acts. What's left in 2026 is still worth capturing, but only if you move before the year closes.

Bonus depreciation (formally called the "additional first-year depreciation deduction" under IRC §168(k)) allows taxpayers to immediately expense a percentage of the cost of qualifying property in the year it's placed in service — rather than depreciating it over its normal useful life.

Normal MACRS depreciation spreads deductions over 5, 7, or 15 years for short-lived assets. Bonus depreciation collapses that into a single year-one deduction. On $300,000 of qualifying assets at 100%, you get a $300,000 deduction in year one. At 20%, you get $60,000 in year one and depreciate the remaining $240,000 on the standard schedule.

This doesn't create deductions that wouldn't exist eventually — it accelerates them. The total amount you can deduct over the life of the asset is the same either way. But a dollar of tax savings today is worth more than the same dollar spread over 15 years. The time value of that difference is where bonus depreciation creates real wealth.

The Tax Cuts and Jobs Act of 2017 expanded bonus depreciation to 100% and extended it through 2022. After that, the phase-down schedule built into the law kicked in:

The rate applies to the year the property is placed in service — not the year you sign a contract or start a renovation. Timing matters. A $2M commercial property acquired in late 2026 still gets 20% bonus on qualifying components. The same property placed in service in January 2027 gets nothing, under current law.

Could Congress restore 100% bonus depreciation?

Possibly. There's been ongoing legislative discussion, and the TCJA sunset has created political pressure to extend provisions. But building a tax strategy on speculative legislation is not planning — it's hoping. Model your decisions on current law. If legislation passes that improves the picture, you'll benefit. If it doesn't, you won't be stuck with a strategy that only works on a bet that didn't pay off.

Twenty percent sounds small compared to where we were in 2022. But on a $2M commercial property, 20% bonus depreciation on reclassified assets still produces a six-figure first-year deduction. Investors who act in 2026 capture real savings. Investors who wait for 2027 get nothing — at current rates.

There's also an interaction effect worth understanding. Bonus depreciation doesn't apply to the whole property. It applies to qualifying assets — tangible personal property and land improvements — that have been properly identified and reclassified. That identification process requires a cost segregation study. Which means that the earlier you run the study, the more options you have for timing property acquisitions or renovations to maximize the remaining rate.

Investors waiting for "the right time" to do a cost seg study have already missed 80% bonus depreciation (2023), 60% (2024), and 40% (2025). The window isn't closing — it's almost closed. At 20% in 2026, there's still material money on the table, but the decision needs to happen this year.

Bonus depreciation and cost segregation are separate tax tools — but they're most powerful when used together. Here's why they're inseparable in practice.

The IRS doesn't let you apply bonus depreciation to an entire building. It only applies to assets with depreciation lives of 20 years or less — primarily 5-year tangible personal property, 7-year property, and 15-year land improvements. The structural shell of the building (on a 27.5- or 39-year schedule) doesn't qualify.

So if you purchase a commercial property for $2M and treat it as a single asset, you get standard 39-year straight-line depreciation on $2M. Zero bonus depreciation. The tax code made bonus available, but you can't access it without first identifying what qualifies.

That's what a cost segregation study does. A cost seg study is the mechanism that identifies and values the bonus-eligible components of your property. Without one, you're leaving bonus depreciation on the table even when the rate is 100% — and certainly at 20%.

The combined strategy works like this: you run a cost seg study, which identifies (say) $300,000 in qualifying 5- and 15-year property within a $2M building. You then apply the current-year bonus depreciation rate — 20% in 2026 — to that $300,000, generating a $60,000 first-year write-off that you otherwise would have spread over 5 and 15 years. The remaining $240,000 in reclassified assets depreciate on the standard short-life schedule. The rest of the building ($1.7M) depreciates over 39 years as normal.

To understand the full cost segregation methodology — how studies work, what they cost, and what ROI to expect — read our complete cost segregation guide.

Here's the math on a $2M commercial property (office building, mixed-use, or retail), with $1.8M allocated to the building (the remainder to land, which doesn't depreciate).

Without cost segregation:
$1,800,000 ÷ 39 years = $46,154/year — the same every year for 39 years.

After cost segregation + 2026 bonus depreciation:
A typical study on a $2M commercial property reclassifies 15–20% of the building value — approximately $300,000 — into 5- and 15-year categories. Here's the year-one picture:

If you ran the same study in 2025 at 40% bonus depreciation, the first-year deduction on $300K reclassified would have been $120,000 instead of $60,000 — roughly double the immediate write-off. That's what a one-year delay costs at this stage of the phase-down. In 2027, the bonus depreciation component is $0.

Not all property placed in service qualifies. IRC §168(k) limits bonus depreciation to:

• Tangible personal property (5- or 7-year MACRS property) — specialty flooring, cabinetry, appliances, certain fixtures, window treatments, carpeting, tenant improvement components
• Land improvements (15-year MACRS property) — parking lots, sidewalks, fencing, outdoor lighting, landscaping, irrigation systems
• Qualified Improvement Property (QIP) — interior improvements to nonresidential real property made after the building was placed in service; 15-year depreciation life as of the CARES Act (2020)

What does not qualify:

• The structural shell of a building (load-bearing walls, foundation, roof structure, HVAC serving the building as a whole) — these remain on 27.5- or 39-year schedules
• Land itself — land never depreciates
• Property used in regulated utility businesses or certain aircraft
• Property with a depreciable life exceeding 20 years (which is why the building structure doesn't qualify)

The passive loss caveat

Bonus depreciation generates losses — sometimes large ones. Whether you can use those losses against your other income depends on your classification. Passive losses from rental real estate generally can only offset passive income, not W-2 wages, unless you qualify as a real estate professional under IRC §469(c)(7) or you use the short-term rental exception.

This doesn't eliminate the value. Unused passive losses carry forward indefinitely and are released in full when you sell the property. But if your goal is immediate tax reduction in 2026, your advisor needs to confirm you have passive income to absorb the losses or that you meet the REP test. This analysis is required before deciding whether 2026 is the right year to run a study.

The Bottom Line

Bonus depreciation has gone from 100% to 20% in four years, and it hits zero in 2027 under current law. The investors who acted in 2022 and 2023 captured the most value. But 20% on a properly structured $2M property still produces $60,000+ in first-year write-offs that wouldn't exist without a cost segregation study.

The math changes fundamentally in 12 months. If you own commercial real estate or significant residential rental property, the cost segregation decision needs to happen in 2026 — not "eventually."

A strategy call takes 15 minutes. We'll tell you whether your properties qualify, what the study would likely yield, and whether your tax situation allows you to use the deductions this year.