You are wondering whether bonus depreciation can actually move the needle on your first-year tax bill, especially if you are buying property in 2025 or 2026. The answer is yes. The One Big Beautiful Bill Act (OBBBA) restored 100% bonus depreciation permanently for qualifying property acquired and placed in service after January 19, 2025, and it pairs with cost segregation to front-load deductions that would normally stretch over decades. (Property placed in service on or before January 19, 2025 falls under the older phase-down schedule, which was 40% for 2025.)
What Is Bonus Depreciation and Why It Matters
Bonus depreciation lets you deduct a large portion of a qualified asset’s basis in the year it is placed in service, before you start the standard depreciation schedule. Importantly, bonus depreciation generally does not apply to the building structure itself. (One narrow exception applies: OBBBA’s new Section 168(n) allows a 100% deduction for certain “qualified production property” – nonresidential real property used in a qualifying manufacturing or production activity – but this is a limited, industry-specific rule that does not cover ordinary rental buildings.) Residential rental buildings (27.5-year) and nonresidential buildings (39-year) are generally not bonus-eligible. Bonus depreciation applies only to property with a recovery period of 20 years or less, which is why it is paired with cost segregation: the study carves out the 5-, 7-, and 15-year components (appliances, fixtures, flooring, land improvements) that do qualify, and bonus depreciation pulls those deductions forward into year one.
Think of it as accelerating your deductions. You are not creating a larger total deduction over the life of the property. You are moving dollars from future years into today, which saves money now when you need it most.
Key takeaway: bonus depreciation is not a new deduction. It is timing that puts cash in your pocket faster.
100% Bonus Depreciation Under OBBBA
The One Big Beautiful Bill Act restored 100% bonus depreciation, permanently, for qualifying property that is both acquired and placed in service after January 19, 2025. For that property you can deduct the full qualified (20-year-or-less) basis in year one, no longer subject to the TCJA phase-down.
This is a material change from the prior schedule. Under TCJA, bonus was 80% in 2023, 60% in 2024, and was set to fall to 40% in 2025 and phase out entirely by 2027. OBBBA reversed that for property placed in service after January 19, 2025. Property you placed in service earlier than that date still uses the older percentage for its placed-in-service year, so confirm your exact placed-in-service date with your CPA.
Key takeaway: if your property qualifies and closes in the right year, 100% bonus depreciation can move substantial deductions into your first-year return.
How Bonus Depreciation Pairs With Cost Segregation
Bonus depreciation and cost segregation work together. Cost segregation reclassifies parts of your property into shorter lives (5, 7, or 15 years instead of 27.5). Bonus depreciation then accelerates those pieces further.
On a 106 unit apartment deal in Atlanta where I am a general partner, a cost segregation study combined with bonus depreciation raised annual depreciation from roughly $100,000 to more than $1,000,000 in the purchase year. The study identified machinery, electrical systems, flooring, and other components that qualified for accelerated schedules and bonus treatment. Instead of claiming $100,000 in year one and $100,000 each year for 27.5 years, we pulled the bonus-eligible portion forward and created a $1,000,000-plus deduction when we bought the building.
That is the power of combining these two strategies. Cost seg identifies what can be accelerated. Bonus depreciation front-loads the result.
Key takeaway: together, cost seg and bonus depreciation front-load years of depreciation into year one.
Who Can Actually Use These Deductions: STR Operators vs Suspended Losses
This is the honest reality: the size of the deduction does not matter if you cannot use it. Depreciation deductions are only useful if you have income to offset.
If you are a short-term rental (STR) operator whose average guest stay is seven days or less, the activity is not treated as a “rental activity” under the passive loss rules, so if you materially participate you can use bonus depreciation and cost seg losses against your W-2 income. Material participation is met under any one of the IRS’s seven tests; a common one is spending more than 100 hours on the activity and more than anyone else (including any manager or cleaner), or spending more than 500 hours. A $420,000 STR acquired and placed in service in 2025 (after January 19) with $45,000 in improvements generated about $139,000 in accelerated depreciation. At a 24% tax rate, that produced roughly $32,000 in tax savings in year one.
If you are a Real Estate Professional (REPS, meaning you meet the 750 hour test, more than 50 percent of working time in real estate, and material participation in your rentals), the same large deductions offset your active income and potentially produce substantial refunds.
But if you are a passive investor with a W-2 job and no REPS or STR strategy, those same bonus depreciation deductions may be suspended. They do not disappear. They are deferred to years when you have passive income (capital gains on a sale, income from another rental) or until you sell the property. That is why passive loss planning is critical for non-REPS, non-STR investors.
Key takeaway: bonus depreciation and cost seg shine for STR operators and Real Estate Professionals who can use the losses against active income. Passive investors with W-2 jobs should plan differently.
The Stepped Deduction Math: A Real STR Example
Let me walk through the economics. A short-term rental in 2025 cost $420,000. The owner added $45,000 in improvements, bringing depreciable basis to roughly $348,000 after removing land and non-depreciable components.
A cost segregation study found that about 40% of the qualified basis was eligible for bonus depreciation, yielding roughly $139,000 in accelerated depreciation. At a 24% federal tax rate, that produced about $32,000 in tax savings in year one alone.
Without cost seg and bonus depreciation, the owner would have claimed roughly $8,900 in standard depreciation in year one. A short-term rental used on a transient basis – a hotel- or motel-type use where a transient unit is not a dwelling unit under Section 168 – is generally treated as nonresidential property depreciated over 39 years, so $348,000 divided by 39 years is about $8,900, not the $12,655 you would get over a 27.5-year residential life. The cost seg plus bonus strategy accelerated $32,000 in savings into the first year.
The owner still has standard depreciation continuing on the remaining basis over the 39 year life. This is not a net increase in total deductions over time. It is a reordering of when the deductions hit your return. But that timing difference is worth tens of thousands of dollars in time value of money.
Key takeaway: on a $420,000 STR, bonus depreciation plus cost seg produced roughly $32,000 in first-year tax savings by accelerating deductions from future years into today.
Specifics Depend on Your Situation and the Code
The rules around placed-in-service dates, asset class qualification, and bonus depreciation percentages change with tax law. The OBBBA restored 100% bonus, but confirm the window with your CPA when you close a property. If you are buying in late 2025 or 2026, the rules may differ from what someone bought in early 2025.
Also, the size of your deduction depends on your depreciable basis, which depends on your purchase price, improvements, land allocation, and whether any components are non-depreciable. A real estate professional should calculate all of this for you before you close, not after.
Key takeaway: bonus depreciation and cost segregation are powerful, but the specifics depend on your situation, the current code, and your ability to use the deductions. Confirm everything with a professional before you close.
Frequently Asked Questions
Does bonus depreciation apply to all property types?
No. Bonus depreciation applies to qualified property, which generally means property with a recovery period of 20 years or less, such as the 5-, 7-, and 15-year components identified in a cost segregation study (appliances, fixtures, flooring, land improvements) and qualified improvement property. The building structure itself, whether 27.5-year residential or 39-year nonresidential real property, is generally not bonus-eligible (outside the narrow Section 168(n) qualified-production-property exception noted above). OBBBA restored 100% bonus for qualifying property acquired and placed in service after January 19, 2025. Your CPA should confirm whether your specific asset qualifies and in which year, because the placed-in-service date sets the bonus percentage.
Can I claim both bonus depreciation and standard depreciation on the same property?
Yes. Bonus depreciation accelerates a portion of your depreciable basis into year one. The remaining basis continues on the standard depreciation schedule. The 106 unit example illustrates this: the bonus-accelerated piece hit in year one, and the rest depreciates over the standard residential or commercial life.
If I do a cost segregation study, do I have to use bonus depreciation?
No, but you almost always should if you qualify. The study identifies components that can be reclassified into shorter lives. Bonus depreciation then accelerates that result. If you do not claim bonus, you still get the benefit of shorter lives, just spread over more years. Most investors want the cash-flow benefit of acceleration, which is where bonus comes in.
What happens to depreciation I do not use in year one because I am a passive investor?
It suspends. The deduction does not go away. It carries forward to future years when you have passive income or when you sell the property and trigger capital gains. This is why high-income passive investors often need a REPS or STR strategy to use the deductions immediately, rather than waiting years to harvest them.
Next Steps
If you are closing on a property in 2025 or 2026, talk to your CPA about whether a cost segregation study makes sense for your deal. The study typically costs $2,000 to $4,000 for a single family property, less for smaller rentals, more for larger commercial assets. The payoff, like the $32,000 on the STR, usually justifies the cost.
For short-term rental operators and Real Estate Professionals, bonus depreciation plus cost seg can be a cornerstone of your tax strategy. For passive investors, the same deductions may suspend, which is why you need a plan to unlock them (REPS, an STR strategy, or waiting for future income).
Join our free Facebook community, REI Tax Hack, where we discuss strategy with real investors. If you want a deeper conversation about your situation, we would be glad to work with you at Malabute and Company CPAs.
Internal Links
- Up to pillar: The Complete Guide to Depreciation and Cost Segregation
- Across to siblings: What Is Cost Segregation and How It Works, Real Estate Professional Status and How to Qualify
- Related pillar: Real Estate Professional Status and Passive Loss Rules
If you want to talk through how this applies to your properties, book a discovery call.