Permanent 100% Bonus Depreciation Is Back: What the One Big Beautiful Bill Act Means for Real Estate Investors
A new tax law makes a generous first-year write-off permanent for landlords, but the building itself won't qualify, and claiming the deduction wrong sets up a costly surprise at the closing table.
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Rental property owners just got a more generous line in the tax code, and this time it’s meant to last. Under the One Big Beautiful Bill Act (Public Law 119-21, signed July 4, 2025), qualifying property can be written off in full in the year it’s placed in service.
The provision is bonus depreciation, found in 26 U.S.C. § 168(k). Below: what changed. We also cover which parts of a rental actually qualify, two elections that shrink or switch off the deduction, and the fine print that shows up when you sell.
Section 168(k) Now Allows a 100% First-Year Write-Off
Section 168(k)(1)(A) says the depreciation deduction for qualified property includes an allowance equal to 100% of its adjusted basis in the year it’s placed in service. In plain English, you deduct the full cost right away instead of spreading it over many years.
The law also repealed the old phase-down paragraphs of § 168(k), which had been cutting the allowance a little more each year. With no step-down schedule left in the statute, the full rate is described as permanent.
There’s one string attached. Under § 168(k)(1)(B), the property’s basis drops by whatever you deduct, which matters later because it comes back to bite you when you sell.
Why Your Rental Building Itself Won’t Qualify
Bonus depreciation covers only “qualified property,” and § 168(k)(2)(A)(i)(I) limits that to property with a recovery period of 20 years or less. The building structure of a rental property falls outside that window, so the walls and roof don’t qualify on their own.
For landlords, the real value is in the shorter-lived pieces: appliances, furnishings, fixtures and land improvements. A purchase price put into “building” leaves those deductions unclaimed.
That’s where cost segregation comes in. An engineering-based study breaks a property’s cost into its components and separates out the items that belong in shorter recovery classes. We’ll cover how those studies work in a companion piece.
The timing is relevant for anyone building or buying new. Housing starts ran at an annualized 1.22 million in September 2026, down 5.2% from August.
A 40% Election for Investors Who Want Less Now
Sometimes a smaller deduction does more for you. Section 168(k)(10)(A)(i) lets a taxpayer choose to use 40% instead of 100% for qualified property placed in service during the first taxable year ending after January 19, 2025.
Why would anyone take less? A deduction is worth the most in the years your marginal rate is highest. Say you’re having a low-income year, or you just retired and expect required minimum distributions to push your bracket up later. Saving more of the deduction for those years means each dollar shelters income taxed at a higher rate. The smaller allowance leaves more basis to depreciate on the regular schedule.
Under § 168(k)(10)(C), the IRS decides the timing and form of the election.
Opting Out Is Allowed, but Hard to Undo
Section 168(k)(7) goes further. You can elect out of bonus depreciation for any class of property in a given tax year, and qualified property in that class then follows standard depreciation instead.
The catch: you need the consent of the Secretary to revoke that election. Treat it as a one-way door and decide with your preparer before you file.
Recapture and Passive Loss Rules Can Cut the Payoff
Every dollar of bonus depreciation reduces your basis, and the IRS collects on the way out. Per IRS Publication 544, gain on Section 1245 property, which includes personal property, is treated as ordinary income to the extent of depreciation allowed or allowable. That piece gets taxed at ordinary rates, not capital gains rates.
Installment sales don’t get around it either. Publication 544 says recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale, even if you receive no payments that year.
The other question is whether you can use the loss at all. IRS Publication 550 explains that passive activity losses can generally be deducted only up to your passive income, and rental activity is passive by default. To escape that, you must spend more than half your working time in real property businesses where you materially participate, and log more than 750 hours of that work during the year.
That real estate professional test is key. Along with the separate treatment of short-term rentals, it decides whether a large first-year deduction offsets your wages and IRA withdrawals or sits suspended for years. Both deserve their own look.
The 40% election and opt-out are hard to reverse. Because they’re tied to specific tax years, run the numbers with a CPA or trusted tax advisor before you choose.
Contact [email protected] for any questions or corrections.
Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
