What is bonus depreciation?
Bonus depreciation is an extra first-year deduction under Internal Revenue Code Section 168(k) that lets you write off a set percentage of the cost of qualified property in the year you place it in service, instead of spreading it over the asset’s recovery period. For property acquired after January 19, 2025, that percentage is 100%.
The Form 4562 instructions define qualified property as tangible property depreciated under MACRS with a recovery period of 20 years or less, plus certain software, water utility property and some film, television, theater and sound recording productions. The property can be new or used, as long as you did not use it before you bought it.
For real estate, that definition draws a clear line. The building itself, at 27.5 years for residential rental property or 39 years for nonresidential real property, does not qualify. The shorter-life parts inside and around it often do, which is why bonus depreciation and cost segregation studies are so often used together.
Bonus depreciation 2025: what Public Law 119-21 changed
Public Law 119-21, signed on July 4, 2025 and often called the One Big Beautiful Bill Act, restored 100% bonus depreciation permanently for qualified property acquired after January 19, 2025. The IRS summary of Section 70301 calls it a permanent 100-percent additional first year depreciation deduction.
The date that matters is the acquisition date, not the closing date or the date you started collecting rent. Under the existing regulations, property bought under a written binding contract is treated as acquired on the date the contract was signed. If you signed a binding purchase agreement on December 15, 2024 and closed on March 1, 2025, the property counts as acquired before January 20, 2025 and stays under the old phase-down rules.
The law also removed the old deadline that required most qualified property to be placed in service before January 1, 2027. For property acquired after January 19, 2025, there is no end date.
| Acquired | Placed in service | Bonus rate |
|---|---|---|
| After January 19, 2025 | 2025 or later | 100% (or elect 40% in the first tax year ending after January 19, 2025) |
| Before January 20, 2025 | During 2025 | 40% |
| Before January 20, 2025 | During 2026 | 20% under the original phase-down |
| Before January 20, 2025 | 2027 or later | 0% |
IRS Notice 2026-11: the interim rules
IRS Notice 2026-11, released in January 2026, is the interim guidance for the 100% deduction, and taxpayers can rely on it until final regulations are issued. Its main move is simple: it keeps the existing bonus depreciation regulations in Treasury Regulation Section 1.168(k)-2 and swaps the 2017 dates for the 2025 ones.
- Date substitution: January 19, 2025 replaces September 27, 2017, and January 20, 2025 replaces September 28, 2017, wherever the old regulations use them.
- Binding contracts: a written contract enforceable under state law fixes the acquisition date at signing, so a contract signed before January 20, 2025 keeps the property under the old rules.
- Self-constructed property: acquisition happens when physical work of a significant nature begins, with a safe harbor once more than 10% of total cost (excluding land and preliminary work) is paid or incurred.
- Component election: for larger self-constructed projects that started before the cutoff, you can elect to treat components acquired or built after January 19, 2025 as eligible for 100%.
- Transition election: for the first tax year ending after January 19, 2025, you can elect 40% instead of 100% (60% for certain long-production property and aircraft). Each owner makes it separately, so a partnership makes it for its own property.
- Election out: you can still elect out of bonus depreciation for an entire class of property by attaching a statement to a timely filed return, including extensions.
The bonus depreciation phase-down: 80%, 60%, 40%
Before the 2025 law, bonus depreciation was scheduled to fall by 20 percentage points a year and disappear after 2026. The 2017 Tax Cuts and Jobs Act set 100% for property acquired after September 27, 2017 and placed in service through 2022, then stepped it down. The background section of Notice 2026-11 describes that prior-law schedule, under which property placed in service in 2025 got 40%.
The step-down years explain why many owners who bought between 2023 and early 2025 saw smaller first-year deductions from their cost segregation studies. A look-back study done today on one of those buildings still uses the percentage for the year the property was placed in service.
| Placed in service | Rate for property acquired before January 20, 2025 |
|---|---|
| September 28, 2017 through 2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 and later | 0% |
Bonus depreciation 2026: what applies this year
In 2026, bonus depreciation is 100% for qualified property you acquire and place in service this year, and that rate no longer has an expiration date. The 40% transition election applied only to the first tax year ending after January 19, 2025, so for a calendar-year taxpayer it was a 2025 choice.
Legacy contracts are the exception. If you are only now placing in service property you contracted for before January 20, 2025, the original schedule gives you 20%. Self-constructed projects that began before the cutoff may be able to use the component election for parts built later.
Section 179 expensing is a separate option with its own limits. Revenue Procedure 2025-32 sets a 2026 maximum of $2,560,000, reduced dollar for dollar once qualifying purchases pass $4,090,000. Section 179 is less useful for apartment owners because property used to furnish lodging is generally excluded, but it can cover roofs, HVAC, fire protection and security systems on nonresidential buildings.
| Feature | Bonus depreciation (2026) | Section 179 (2026) |
|---|---|---|
| Rate or limit | 100% of cost, no dollar cap | Up to $2,560,000 |
| Phase-out | None | Reduced once purchases exceed $4,090,000 |
| Taxable income limit | No; can create a loss | Limited to business taxable income |
| Residential rental contents | Eligible if 20-year life or less | Generally excluded as lodging property |
| How to claim | Automatic unless you elect out by class | Elect asset by asset on Form 4562 |
Which real estate components qualify for bonus depreciation
In real estate, the components that qualify are the ones with a recovery period of 20 years or less: personal property used in the rental, land improvements and, for commercial buildings, qualified improvement property. The structure itself and the land never qualify.
Qualified improvement property, or QIP, is an improvement to the interior of a nonresidential building made after the building was first placed in service. Section 168(e)(6) excludes enlargements, elevators and escalators, and the internal structural framework. QIP is 15-year property, so it qualifies for bonus depreciation. Interior work in an apartment building is not QIP, because the building is residential, and it generally goes on the 27.5-year schedule unless the specific items are personal property.
The 2025 law also created a new 100% deduction for qualified production property under Section 168(n), covering certain nonresidential buildings used in manufacturing and similar production. It does not cover rental property or space leased to others, so most landlords will not use it.
| Component | Recovery period | Bonus eligible? |
|---|---|---|
| Appliances, carpet, furniture in a rental | 5 years | Yes |
| Office furniture and equipment | 7 years | Yes |
| Parking lots, sidewalks, fences, landscaping | 15 years | Yes |
| Qualified improvement property (nonresidential interior) | 15 years | Yes |
| Residential rental building and structural components | 27.5 years | No |
| Nonresidential building | 39 years | No |
| Land | Not depreciable | No |
Accelerated depreciation in real estate
Accelerated depreciation in real estate means any method that moves deductions into earlier years than straight-line on the building would. Three tools do most of the work, and they stack in a set order.
First, the MACRS rules themselves are accelerated for short-life property: 5- and 7-year property uses the 200% declining balance method, and 15-year property uses 150% declining balance. Second, a cost segregation study identifies how much of your basis belongs in those classes. Third, bonus depreciation lets you deduct those classes in full in year one. Section 179 is a fourth option for nonresidential property.
The building portion is always straight-line. Residential rental buildings and nonresidential buildings both use the straight-line method with the mid-month convention, per the Form 4562 instructions, so a building placed in service in June 2026 gets only about 1.97% of its basis in the first year.
Commercial building depreciation life
A commercial building is depreciated over 39 years under the general system, compared with 27.5 years for a residential rental building, according to the recovery period table in Section 168(c). A building is residential rental property if at least 80% of its gross rental income comes from dwelling units, so a mixed-use building with ground-floor shops can fall on either side of that line.
Some owners must use the longer alternative depreciation system instead. A real property business that elects out of the Section 163(j) business interest limit has to use it for its buildings and for QIP, and property depreciated under that system is not eligible for bonus depreciation. Personal property and land improvements identified in a study generally stay eligible.
| Property type | General recovery period | Method |
|---|---|---|
| Residential rental building | 27.5 years | Straight-line, mid-month |
| Nonresidential (commercial) building | 39 years | Straight-line, mid-month |
| Qualified improvement property | 15 years | Straight-line |
| Land improvements | 15 years | 150% declining balance |
| Personal property in a rental | 5 years | 200% declining balance |
Worked example: 100% bonus vs the phase-down rates
This example shows what the acquisition date is worth in dollars. An investor buys an apartment building with a $3,200,000 depreciable basis and places it in service in June. A cost segregation study assigns $700,000 to 5-year property and $300,000 to 15-year land improvements, leaving $2,200,000 for the building.
If the property was acquired after January 19, 2025, the full $1,000,000 of short-life property is deducted in year one. If the purchase contract was signed in late 2024 and the property was placed in service in 2025, only 40% qualifies, or $400,000. The other $600,000 goes on its regular schedule: 20% of the remaining $420,000 of 5-year property ($84,000) and 5% of the remaining $180,000 of 15-year property ($9,000), for $493,000 in year one.
The building adds about $43,340 in every scenario (1.970% of $2,200,000 for a June start). At a 37% federal rate, the gap between 100% and 40% is $507,000 of deductions, worth about $187,590 in tax in year one if the investor can use the loss. The later years catch some of that back, since total depreciation is the same.
| Scenario | Bonus portion | Regular MACRS on the rest | Year-one total (short-life property) |
|---|---|---|---|
| Acquired after January 19, 2025 (100%) | $1,000,000 | $0 | $1,000,000 |
| Acquired earlier, placed in service 2025 (40%) | $400,000 | $93,000 | $493,000 |
| Acquired earlier, placed in service 2026 (20%) | $200,000 | $124,000 | $324,000 |
| No bonus depreciation | $0 | $155,000 | $155,000 |
Bonus depreciation recapture when you sell
Bonus depreciation is recaptured when you sell in a taxable sale: the gain on the short-life components, up to the depreciation you took, is taxed as ordinary income, at rates up to 37%. For 5- and 7-year property that is Section 1245 recapture; land improvements that are Section 1250 property are recaptured as ordinary income to the extent depreciation, including bonus, exceeded straight-line. Building depreciation is unrecaptured Section 1250 gain, taxed at a maximum 25% federal rate, per IRS Topic 409.
In the example above, the investor took $1,000,000 of bonus depreciation and the components now have a tax basis of zero. If the investor sells five years later and the sale price allocated to those components is $250,000, that $250,000 is ordinary income. At 37%, the federal tax on it is $92,500. The other $750,000 of first-year deductions is not recaptured as ordinary income, because it reflected real wear on those components.
That allocation is the lever. A sale price split that assigns a realistic, depreciated value to old personal property keeps ordinary income recapture in proportion. A 1031 exchange can defer the gain on the real property, though personal property no longer qualifies for like-kind treatment. Model a sale with the depreciation recapture calculator.
Can you use the loss? Passive rules and state tax
A 100% bonus deduction often creates a tax loss, and the passive activity rules in IRS Publication 925 decide whether you can use it this year. Rental losses are passive unless you qualify as a real estate professional and materially participate. Passive losses offset passive income, and the unused part carries forward to later years or until you dispose of the activity.
State returns can look very different. Many states do not follow federal bonus depreciation and require you to add back the deduction and depreciate the property on a state schedule. Check your state’s conformity before you count the savings.
When electing out of 100% bonus makes sense
Electing out can make sense when the deduction would land in a year you cannot use it, or would waste lower tax brackets. Common cases include a first year with little other income, a state that requires add-backs anyway, or a plan to sell soon, when much of the deduction would be recaptured at ordinary rates.
The election out applies to a whole class of property, such as all 5-year property placed in service that year, and cannot be revoked without IRS consent. Some owners keep bonus on 5-year property and elect out for 15-year property to spread deductions. Decide with your CPA before the return is filed.
Bonus depreciation in apartment syndications
In an apartment syndication, the partnership claims bonus depreciation and passes each investor’s share through on a Schedule K-1, so limited partners do not make the election themselves. Each owner of qualified property makes elections separately, which means the partnership, not you, decides whether to take 100% or elect out.
Skyline Capital Investments buys apartment buildings with five or more units, and depreciation is part of how we review the tax side of each purchase. Any offering is made only through official offering documents to eligible investors. Most syndications are for accredited investors, and Rule 506(b) and Rule 506(c) offerings follow different rules on advertising and on how investors are verified.
