Bonus depreciation is an accelerated depreciation tax benefit that lets you write off a high percentage of qualifying property components in the year they are placed in service, instead of spreading the deduction over 5, 7, 15, or 27.5 years. For rental real estate, it is most commonly used in conjunction with cost segregation studies that reclassify portions of a building into shorter life categories. Under the Tax Cuts and Jobs Act, bonus depreciation was 100% for qualified property placed in service between 2017 and 2022. It has been phasing down since: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% after 2026 unless Congress extends it. Even at 20% in 2026, bonus depreciation can produce meaningful first year deductions on a rental property with a cost segregation study behind it. Combined with real estate professional status, bonus depreciation can generate paper losses large enough to offset W2 or business income, which is one of the most powerful tax strategies available to high income investors.
Example
Cost segregation study identifies $80,000 of 5 year and 15 year property in a newly acquired rental. 2026 bonus depreciation rate is 20%. First year bonus depreciation deduction = 80,000 x 0.20 = $16,000 deducted on top of normal depreciation.