Bonus Depreciation for Rental Property: OBBBA 100% Guide
The One Big Beautiful Bill Act restored 100% bonus depreciation — retroactively. If you own rental property, this is the single biggest tax benefit available to you right now. Here's exactly how it works, what qualifies, and how to claim it.
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What Changed with OBBBA
The One Big Beautiful Bill Act (OBBBA), signed into law in January 2025, restored 100% first-year bonus depreciation for qualifying assets — retroactively overriding the phase-down that had been in effect since 2023.
Key Change
The TCJA bonus depreciation phase-down schedule (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, 0% in 2027) has been overridden. OBBBA restores the rate to 100% for qualifying property placed in service through at least 2029.
This means if you purchased appliances, furniture, or made land improvements at your rental property in 2023, 2024, or 2025, you may be able to amend prior returns to claim the full 100% deduction instead of the reduced percentage you originally filed with.
For landlords buying properties or making improvements right now, this is straightforward: you get to deduct the full cost of qualifying assets in Year 1 instead of spreading them over 5, 7, or 15 years.
What Assets Qualify
Not everything in your rental property qualifies for bonus depreciation. The building structure itself (27.5-year residential real property) does not qualify. But many components within and around the property do.
Appliances (refrigerators, stoves, dishwashers, washers, dryers), carpeting, vinyl flooring, window treatments, cabinets (if removable). These are the easiest assets to identify and claim.
Furniture (desks, tables, beds for furnished rentals), fixtures, specialty lighting, built-in shelving. Less common for unfurnished rentals but significant for short-term and furnished units.
Land improvements: fencing, driveways, sidewalks, landscaping (hardscaping), parking lots, retaining walls, irrigation systems. These are high-value and often overlooked.
The building structure itself (27.5-year residential real property) — walls, roof, foundation, plumbing within walls, electrical wiring within walls. These must be depreciated over the full 27.5 years using straight-line MACRS.
Used Property Qualifies
Since the Tax Cuts and Jobs Act (TCJA), used property qualifies for bonus depreciation — it just needs to be "new to you." If you buy a rental property with existing appliances and a paved driveway, those assets qualify. This was a major change from pre-TCJA rules.
Cost Segregation Connection
A cost segregation study is the key that unlocks bonus depreciation for existing properties. When you buy a rental property, the IRS default is to depreciate the entire building value over 27.5 years. A cost seg study breaks down the building into its component parts and reclassifies 20-30% of the value into shorter-lived asset categories.
Example: How Cost Seg + Bonus Depreciation Works
Result: Year 1 deduction of $110,909 instead of $14,545. That's a 7.6x increase in first-year depreciation.
Cost seg studies typically cost $3,000-$8,000 for residential properties and pay for themselves many times over on properties worth $200K+. The study fee itself is also tax-deductible.
How to Claim on Your Tax Return
Bonus depreciation is reported on Form 4562 (Depreciation and Amortization), Part III — MACRS Depreciation. Here's what you need to know:
It's automatic
Bonus depreciation is the default. You don't need to elect into it — you must actively opt OUT if you don't want it by attaching a statement to your return for each class of property.
No taxable income limitation
Unlike Section 179, bonus depreciation has no income floor. It can create or increase a net operating loss (NOL), which can be carried forward to offset future income.
Placed in service, not purchased
The asset must be placed in service (ready and available for use) during the tax year. Buying an appliance in December but not installing it until January means it goes on next year's return.
Flows to Schedule E
The depreciation calculated on Form 4562 flows to Line 18 of Schedule E, where it reduces your rental income (or increases your rental loss).
Existing Properties
If you already own a property and haven't done a cost seg study, you can still claim bonus depreciation. File a Form 3115 (Change in Accounting Method) to take a "catch-up" deduction in the current year — no need to amend prior returns. This is called a Section 481(a) adjustment.
Real Examples with Dollar Amounts
Example 1: New Rental with Appliances
You purchase a rental property and install $25,000 in new appliances, carpeting, and window treatments (all 5-year property).
| Method | Year 1 | Years 2-5 | Total |
|---|---|---|---|
| Without bonus (5-yr MACRS) | $5,000 | $5,000/yr | $25,000 |
| With 100% bonus | $25,000 | $0 | $25,000 |
Tax savings in Year 1: At the 22% bracket, that's $5,500 in your pocket now instead of $1,100. At 32%, it's $8,000 vs $1,600.
Example 2: Cost Seg on $500K Property
You own a $500,000 single-family rental (building value, land excluded). A cost seg study reclassifies $125,000 into 5, 7, and 15-year property.
| Method | Year 1 Deduction | Tax Saved (32%) |
|---|---|---|
| Default (27.5-yr straight-line) | $18,182 | $5,818 |
| Cost seg + 100% bonus | $138,636 | $44,364 |
Difference: $38,546 more in tax savings in Year 1 alone ($44,364 vs $5,818). The $5,000 cost seg study pays for itself nearly 8x over.
Depreciation Recapture Warning
Important
Bonus depreciation accelerates your deduction — it does not eliminate depreciation recapture. When you sell the property, all depreciation taken (including bonus depreciation) is recaptured and taxed at a maximum rate of 25% under Section 1250.
If you claimed $125,000 in bonus depreciation and later sell, you'll owe up to $31,250 in recapture taxes (25% x $125K) in addition to capital gains tax on any appreciation.
This doesn't mean bonus depreciation is a bad deal. The time value of money matters: a $40,000 tax savings today is worth significantly more than paying $31,250 in recapture taxes 10 years from now, especially after inflation.
How to defer recapture: A 1031 exchange defers both capital gains and depreciation recapture indefinitely. If you exchange into a new property, you carry the depreciation basis forward and reset the clock.
Section 179 vs Bonus Depreciation
Both allow accelerated deductions, but they work differently. Here's how they compare for rental property owners:
| Feature | Section 179 | Bonus Depreciation |
|---|---|---|
| Income limitation | Yes — can't exceed business income | No — can create a loss |
| Rental property eligible? | Limited (not for building or improvements) | Yes — most personal property |
| New vs used property | Both | Both (since TCJA) |
| Annual dollar limit | $1,250,000 (2026) | No limit |
| Can create NOL? | No | Yes |
| Carryforward | Yes — unused amount carries forward | N/A — always 100% in Year 1 |
Bottom Line
For most rental property owners, bonus depreciation is superior because it has no income limitation and can create a net operating loss. Section 179 is more useful for active businesses (like property management companies) where income limitations aren't a constraint.
Strategy Tips
Time your purchases strategically
If you're buying appliances or making land improvements, ensure they're placed in service before December 31 to claim the full deduction in the current tax year. Even one day matters.
Combine cost seg with bonus depreciation
This is the most powerful combination in rental property tax planning. A cost seg study identifies the assets; bonus depreciation lets you deduct them 100% in Year 1. Don't do one without the other.
Watch for passive activity limitations (PAL)
Rental losses (including bonus depreciation) are generally passive. If your AGI exceeds $150K, losses may be fully suspended unless you qualify as a Real Estate Professional (REPS). Suspended losses carry forward and release when you sell.
Coordinate with QBI deduction
The Section 199A qualified business income deduction (20% of QBI) interacts with depreciation. Large bonus depreciation deductions can reduce your QBI, potentially lowering your QBI deduction. Model both scenarios before filing.
Consider opting out in low-income years
If you have little taxable income this year but expect higher income next year, it may make sense to opt out of bonus depreciation and spread the deductions across higher-bracket years. This is an election you make per asset class.
Document everything
Keep invoices, receipts, and photos for every asset you claim bonus depreciation on. If audited, you'll need to prove the asset exists, its cost, and when it was placed in service.
How SheltrIQ Helps
SheltrIQ is built specifically for landlords who want to maximize depreciation deductions without hiring a CPA for every decision.
Bonus Depreciation Tracker
Automatically identifies which assets qualify for bonus depreciation and calculates your Year 1 deduction across all properties.
Cost Seg Estimator
Get a preliminary cost segregation estimate for free — see how much you could reclassify before paying for a full engineering study.
Depreciation Recapture Calculator
Know exactly how much recapture tax you'll owe before you sell. Compare selling vs. 1031 exchange scenarios side by side.
Form 4562 Auto-Fill
SheltrIQ generates your depreciation schedule and populates Form 4562 data, ready for your tax return or CPA.
Maximize Your Depreciation Deductions
SheltrIQ's depreciation engine automatically calculates bonus depreciation, tracks asset lives, and estimates cost segregation savings. 100% free to start.