What is Bonus Depreciation?
Bonus depreciation lets investors deduct a portion of qualifying property costs in the first year instead of over the asset's useful life. In 2026, the bonus rate is 60% (down from 100% in 2017-2022), phasing to 0% by 2027 without congressional action.
Combined with cost segregation, bonus depreciation can produce huge first-year tax shelter from a rental property acquisition. The 5-year and 15-year components identified by a cost-seg study are eligible — meaning 60% of those amounts can be deducted in the year of purchase.
For a $500,000 rental with $120,000 in cost-seg-identified short-life property, the 2026 bonus would yield $72,000 in additional first-year deduction beyond normal depreciation. Combined with mortgage interest and operating losses, this often produces a paper loss that offsets W-2 income (for real estate professionals) or passive income from other rentals.
Schedule: 100% (2017-2022) → 80% (2023) → 60% (2024-2026) → 40% (2027) → 20% (2028) → 0% (2029+) without legislation extending it. Watch for changes — this is one of the most-lobbied tax provisions.
Concepts that connect.
Cost segregation is a tax strategy that breaks a real estate purchase into shorter-lived components (5-year personal property, 15-year land improvements) to accelerate depreciation. Often produces 20-40% additional first-year tax deductions vs straight 27.5-year depreciation.
Depreciation is the annual non-cash tax deduction allowed against rental property income — residential is depreciated over 27.5 years, commercial over 39. It reduces taxable income without reducing cash flow, the single largest tax advantage of rental real estate.
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