100% Bonus Depreciation Is Back: What It Means for Real Estate Investors in 2026 | Madsen and Company

Quick Answer

Yes. 100% bonus depreciation is restored and, under current law, permanent. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, amended IRC §168(k) to allow a 100% first-year deduction for qualified property acquired and placed in service after January 19, 2025.

Qualified property may be new or used, but used property must satisfy special acquisition requirements. Generally, it cannot have been used previously by the taxpayer, acquired from a related party, or acquired with a carryover or substituted basis.

The part most summaries leave out: bonus depreciation does not apply to the building itself. It applies only to property with a recovery period of 20 years or less. A residential rental building depreciates over 27.5 years and a commercial building over 39 years, so neither qualifies on its own.

That single detail is what separates investors who actually capture the deduction from those who expect it and never see it.

This article covers what changed, what genuinely qualifies, the two dates that control eligibility, and the limitations that decide whether the deduction is usable in the year you generate it.

What actually changed

Under prior law, bonus depreciation was phasing out: 80% in 2023, 60% in 2024, 40% in 2025, and scheduled to reach zero. Many investors made hold-or-buy decisions around that countdown.

OBBBA reversed it. Section 70301 of the Act provides a permanent 100% additional first-year depreciation deduction for qualified property acquired and placed in service after January 19, 2025. Treasury and the IRS released interim guidance in January 2026 confirming that taxpayers may generally rely on the existing regulations with the dates updated.

The old phase-down percentages no longer apply to property in this window. If you are reading a 2024-era article that says 40% or 60%, it is describing law that OBBBA superseded.

One practical note: “permanent” in tax law means “until Congress changes it.” It removes the artificial deadline that was driving rushed acquisitions, which is a planning improvement in itself. It does not mean the provision is beyond future legislation.

What qualifies, and what does not

Qualified property is generally tangible property with a recovery period of 20 years or less. For real estate investors, that draws a hard line through the middle of any purchase.

Qualified improvement property generally qualifies only when it is depreciated under the General Depreciation System. QIP required to be depreciated under the Alternative Depreciation System, including QIP held by certain electing real property trades or businesses, is not eligible for bonus depreciation.

This is why bonus depreciation and cost segregation are discussed together. On a normal purchase, everything is lumped into the building and depreciates over decades. A cost segregation study is the engineering-based analysis that identifies which components properly belong in the 5-, 7-, and 15-year classes. Bonus depreciation is what then allows those components to be deducted in year one.

Bonus depreciation is the benefit. Cost segregation is the mechanism that produces something for it to apply to. Without the study, most of a building has no bonus-eligible property to find.

A cost-segregation study may reclassify a meaningful portion of a building’s depreciable basis into shorter-lived components. The result varies substantially based on the property type, construction, components, and supporting documentation.

Two dates control eligibility

Both must fall after January 19, 2025.

Acquired. The closing date alone does not always determine when property was acquired. When property is acquired under a written binding contract, the acquisition date is generally the later of the date the contract was entered into, became enforceable under state law, all cancellation periods ended, or all conditions subject to contractual contingencies were satisfied. Accordingly, a contract signed before January 20, 2025, does not necessarily settle the issue; the agreement and its terms must be reviewed.

Placed in service. For rental real estate, “placed in service” generally means the property is ready and available for its intended use, not the day the first tenant or guest arrives. A rental that is finished, furnished, listed, and genuinely available in December is generally placed in service in December, even with no booking until the following spring. A property still under renovation and not yet rentable is not.

That distinction is worth real money at year-end, and it is fact-specific. Documentation of when the property became rent-ready matters, including listing dates, certificates of occupancy, and completion records.

An illustrative example

Consider a $1,200,000 residential rental purchase. Assume $250,000 is allocated to land, which is never depreciable. That leaves a $950,000 depreciable basis.

If a cost segregation study reclassifies 25% of that depreciable basis into 5-, 7-, and 15-year property, roughly $237,500 becomes bonus-eligible and may be deducted in year one under current law. The remaining $712,500 continues over 27.5 years, at roughly $25,900 per year. Our cost segregation calculator illustrates how the split can look for a given property, though the reliable figure comes from an actual study.

This example is illustrative only. It excludes financing costs, closing-cost allocations, and furnishings purchased separately, each of which follows its own rules. The land allocation itself is a supportable-position question, not a plug figure. Your actual results depend on the property, the study, and your return.

The limitation stack: generating a deduction is not the same as using it

This is where planning matters more than the headline. A large first-year deduction can be fully allowed, partially allowed, or entirely suspended depending on rules that sit outside §168(k) altogether.

• Passive activity rules (§469). Rental activities are passive by default. A passive loss generally cannot offset W-2 wages. It is suspended and carried forward. This is the most common reason a large bonus deduction produces no current-year benefit. Two routes out exist: the short-term rental provision and Real Estate Professional Status, each with its own tests.
• Tax basis and at-risk rules. Losses are limited to your basis in the activity and to amounts you have at risk.
• Excess business loss limitation. For 2026, the threshold is $256,000 for single and other non-joint filers and $512,000 for married taxpayers filing jointly, per Revenue Procedure 2025-32. A large first-year deduction may exceed the applicable limit, with the disallowed amount carried forward under the rules applicable to excess business losses.
• Vacation-home rules. Personal use of the property can limit deductions independently of everything above.
• State tax treatment. This article addresses federal tax law. State conformity varies, and a state may limit bonus depreciation or require an adjustment even when the full federal deduction is allowed.

Understanding these limitations, including federal and state differences, is the difference between generating a deduction and receiving a current tax benefit from it.

The exit: this is timing, not free money

Accelerated depreciation moves deductions forward. It does not create permanent savings on its own.

On sale, the components identified by a cost segregation study may produce ordinary-income recapture under Section 1245. Depreciation-related gain on the real property may be subject to the unrecaptured Section 1250 rate of up to 25%. The blended result depends on which assets were identified, how the sale price is allocated, and your rates in the year of sale.

A 1031 exchange can defer qualifying real property gain, but since 2018 it applies to real property only. It does not automatically defer Section 1245 recapture attributable to personal-property components. That interaction is a planning item to address before a study is performed, not after a sale is under contract.

The strategy generally works best for investors with a longer intended hold, a clear exit plan, or a reason to value cash today more than a deduction spread over decades.

You can also elect out

Bonus depreciation is not mandatory. A taxpayer may elect out for any class of property for a given tax year. That is occasionally the better answer, for example when you expect to be in a materially higher bracket in future years, when a large current deduction would be suspended anyway, or when preserving depreciation for later years fits the plan better. The election is made by class and by year, so it deserves an actual decision rather than a default.

Who this tends to fit

May fit: investors who acquired and placed a property in service after January 19, 2025; owners of short-term rentals who materially participate; taxpayers who qualify as real estate professionals; commercial owners who completed interior improvements; and investors expecting a strong income year who can actually absorb the deduction.

Likely does not fit: passive investors with no route around the §469 limits, owners planning a near-term sale where recapture arrives before the benefit is enjoyed, lower-basis properties where study costs outweigh the benefit, and anyone whose acquisition date, after applying the written-binding-contract rules, falls on or before January 19, 2025.

Frequently asked questions

Sources

• IRS Notice 2026-11: Interim Guidance on Additional First-Year Depreciation
• IRS Publication 946: How to Depreciate Property
• IRS Publication 925: Passive Activity and At-Risk Rules
• IRS Revenue Procedure 2025-32: 2026 Inflation Adjustments
• IRS Bonus Depreciation FAQ