Bonus Depreciation 2026: The 100% Rules for Real Estate Investors

The words P.L. 119-21 changed in section 168(k)

Before July 4, 2025, section 168(k)(1)(A) gave “an allowance equal to the applicable percentage of the adjusted basis of the qualified property”, and paragraph (6) phased that percentage down: 40 percent for property placed in service in 2025 and 20 percent for property placed in service in 2026 (26 U.S.C. 168(k)(6)(A)(iv) and (v), U.S. Code 2024 edition). The reconciliation law changed it in a few lines. Section 70301(b)(1) amends section 168(k) “in paragraph (1)(A), by striking ‘the applicable percentage’ and inserting ‘100 percent’” and strikes paragraphs (6) and (8), the phase-down rules. Section 70301(a)(1) strikes clause (iii) of section 168(k)(2)(A), the requirement that property be placed in service before January 1, 2027. The result, in IRS Notice 2026-11's words, is “a permanent 100 percent additional first year depreciation deduction for qualified property acquired and placed in service” after January 19, 2025.

Three effective-date rules come with it, all in section 70301(c):

• The cutoff. “The amendments made by this section shall apply to property acquired after January 19, 2025.” Property acquired earlier keeps the old text, including its phase-down and its January 1, 2027 deadline (our reading of section 70301(c)(1)). IRS Publication 527 (2025) says it for landlords: property “acquired before January 20, 2025, and put into service later will remain subject to the phase-down rules under prior law.”
• The contract rule. “Property shall not be treated as acquired after the date on which a written binding contract is entered into for such acquisition” (section 70301(c)(4)).
• The one-year option. For qualified property placed in service during “the first taxable year ending after January 19, 2025”, the taxpayer may elect 40 percent instead of 100 percent (section 168(k)(10)(A) as amended by section 70301(b)(3)). For a calendar-year individual that year was 2025, so the option does not reach property placed in service in 2026 (our reading).

The U.S. Code on govinfo.gov is the 2024 edition, which predates the amendment; the text above is the 2024 code read together with the enacted amendments in the Public Law. The House's online code was down for maintenance when we checked on October 11, 2026.

Which rate you get: the acquisition date, not the closing date

The rate for a placement depends on when the property was acquired. Our reading of the statute and the IRS documents gives this schedule:

Notice 2026-11 (the IRS's interim guidance, January 2026) says taxpayers decide whether property is acquired after January 19, 2025 by applying rules consistent with 26 CFR 1.168(k)-2(b)(5), “by substituting ‘January 19, 2025’ for ‘September 27, 2017’ each place it appears.” Those rules, as the notice and the regulation set them out:

The liquidated-damages rule is the one buyers of existing buildings should check first. The regulation: a contract is binding only if it is enforceable under state law “and does not limit damages to a specified amount (for example, by use of a liquidated damages provision)”, and “any contractual provision that limits damages to an amount equal to at least 5 percent of the total contract price will not be treated as limiting damages to a specified amount” (26 CFR 1.168(k)-2(b)(5)(iii)(A)). Our reading: a buyer who signed in late 2024 and closed in 2025, under a contract that capped the seller's remedy at an earnest-money deposit under 5% of the price, may have an acquisition date after January 19, 2025, and so 100% rather than 40% or 20%. It turns on the contract's wording and state law, and it is a question for whoever prepares the return, with the contract in hand.

What qualifies in real estate, and what never does

Section 168(k)(2)(A)(i)(I) limits qualified property to property “which has a recovery period of 20 years or less”. The Instructions for Form 4562 (2025) repeat it and add: “Qualified property can be either new property or certain used property.”

Four rules decide the edge cases:

• Used property. Bonus applies to components bought from a stranger, but not if you or a predecessor had a depreciable interest in the property during the lookback period, which counts “only the five calendar years immediately prior to the current calendar year” in which the property is placed in service, plus the current year before placement (26 CFR 1.168(k)-2(b)(3)(iii)(B)(1)). A partnership interest bought on the secondary market can also produce bonus through a section 743(b) basis increase, under the conditions in 26 CFR 1.168(k)-2(b)(3)(iii)(D).
• The ADS trap. Section 168(k)(2)(D) excludes “any property to which the alternative depreciation system under subsection (g) applies”. Publication 946 lists, among property that must use ADS, nonresidential real property, residential real property and qualified improvement property “held by an electing real property trade or business”, the election that takes a real estate business out of the section 163(j) interest limit. If you made that election, your qualified improvement property gets no bonus (our reading).
• Placed in service, not paid for. Publication 946: “You place property in service when it is ready and available for a specific use.” Its example is a house bought April 6 and ready for rent July 5: it is placed in service in July. For a 2026 deduction, the item has to be ready and available by December 31, 2026.
• Same-year disposal. Property placed in service and disposed of in the same tax year is not qualified property (Form 4562 instructions, Exceptions).

The dollar amount per item is what a cost segregation study supports. How the IRS audits those studies, and what a study adds per $100,000 reclassified, is in our cost segregation guide; this page does not repeat it.

Not for landlords: section 168(n). P.L. 119-21 also created a 100% allowance for “qualified production property”, nonresidential real property used in manufacturing. The Form 4562 instructions say: “If you lease property to someone else that conducts a QPA within it, you generally do not qualify for the special depreciation allowance.”

Bonus is the default; section 179 mostly does not fit a rental

Two IRS statements set the frame. Publication 946 (2025): “Unless you elect out, you must take a 100% special depreciation allowance for certain qualified property” acquired and placed in service after January 19, 2025. And the Form 4562 instructions call the special allowance “an additional deduction you can take after any section 179 expense deduction and before you figure regular depreciation under MACRS.”

Section 179 is the other first-year write-off, with limits raised by P.L. 119-21 section 70306 to $2,500,000, reduced above $4,000,000 of purchases, for 2025. Publication 946 gives 2026: “the maximum section 179 expense deduction is $2,560,000”, reduced by the amount by which section 179 property placed in service exceeds $4,090,000. For a real estate investor the exclusions matter more than the limits:

Publication 946 is explicit on the first row: “Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify.” And on the second: “Land and land improvements do not qualify as section 179 property.” The IRS's own data show which write-off real estate uses: in Statistics of Income Table 13, active corporations in real estate and rental and leasing claimed $63.2 billion of special depreciation allowance for 2022 and $1.26 billion of section 179 expense, about 50 to 1 (our arithmetic).

Filing it: Form 4562 line 14, the election out, and who elects

• Where it goes. Publication 946: “For qualified property other than listed property, enter the special depreciation allowance on Form 4562, Part II, line 14.” Any remaining basis is depreciated under MACRS after the allowance is subtracted (section 168(k)(1)(B)); at 100% nothing is left for that item.
• Electing out. “You can elect, for any class of property, to not deduct any special depreciation allowance for all such property in such class placed in service during the tax year” (Form 4562 instructions). You attach a statement to a timely filed return (including extensions) naming the class. If you filed without it, the instructions allow an amended return within 6 months of the original due date (excluding extensions), marked “Filed pursuant to section 301.9100-2.” Once made, the election “cannot be revoked without IRS consent.”
• Why someone would elect out. Our reading, not a recommendation: when the loss would be suspended under section 469 anyway, when a sale within a few years would turn the deduction into ordinary income, or when a state's different schedule makes the bookkeeping not worth it. Electing out leaves regular MACRS on that class: for 5-year property, 20.00% of the cost in the first year under Publication 946 Table A-1 (half-year convention), and 5.00% for 15-year property.
• Who elects in a partnership or syndication. “The election must be made separately by each person owning qualified property (for example, by the partnership, by the S corporation, or for each member of a consolidated group by the common parent of the group).” An investor in a real estate partnership does not choose; the partnership's choice arrives as depreciation on the Schedule K-1. Which funds send a K-1 at all is in our K-1 vs 1099-DIV census.
• The 40% option for 2025. It was made on the return for the first tax year ending after January 19, 2025, by statement, following 26 CFR 1.168(k)-2(f)(3) as modified by Notice 2026-11 section 4.03. For calendar-year taxpayers that was the 2025 return.

What Notice 2026-11 does not settle. It is interim guidance. Treasury and the IRS “intend to issue proposed regulations”, and taxpayers may rely on the notice only if they follow “the guidance provided in sections 3 through 5 of this notice in its entirety for all eligible property placed in service in such taxable years” (section 6.02). We did not find the proposed regulations among the documents we read on October 11, 2026; check the Federal Register before filing.

How much real estate claims: IRS Statistics of Income

The IRS does not publish bonus depreciation on individuals' rentals or partnerships as a separate line. Its Corporation Complete Report does, from Form 4562 line 14, by sector. The figures are estimates from samples, reported in thousands of dollars, and they exclude Forms 1120-S, 1120-REIT and 1120-RIC; they describe real estate corporations, not individual landlords.

Over 2018 to 2022, when the rate was 100% for most property, real estate corporations claimed $265.1 billion of special allowance (our sum), close to half of all the depreciation they reported each year. Tax year 2022 is the latest year the IRS has published (Publication 16, September 2025); the phase-down years 2023 and 2024 and the return to 100% are not in the data yet.

Whether you can use it: section 469

Bonus depreciation usually turns the first year of a rental into a tax loss, and the passive activity rules say the term “includes any rental activity” (26 U.S.C. 469(c)(2)), except for qualifying real estate professionals under paragraph (7). A disallowed loss “shall be treated as a deduction or credit allocable to such activity in the next taxable year” (section 469(b)) and is released when you dispose of your entire interest (section 469(g)).

The door open to most owners is small. Publication 925 (2025): the $25,000 special allowance for active participants is “reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000”, and at $150,000 or more you generally can't use it. The publication's example: an unmarried taxpayer with $120,000 of salary and a $31,000 rental loss can deduct only $15,000 and carries $16,000 to 2026. Faster depreciation does not change that arithmetic; it makes the carried amount bigger. The real estate professional and short-stay rental routes are covered in our cost segregation guide.

The bill on sale: section 1245 recapture, worked from the IRS example

Section 1245(a)(1) makes the gain on depreciable personal property, up to the depreciation behind its “recomputed basis”, ordinary income: the excess “shall be treated as ordinary income.” Publication 544 lists “Any special depreciation allowance you claimed” among the deductions recaptured. The Form 4562 instructions add a line real estate owners miss: “There is no recapture for residential rental and nonresidential real property, unless that property is qualified property for which you claimed a special depreciation allowance.”

Publication 544 (2025) works an example with a 5-year asset. Next to it, the same facts with 100% bonus:

The IRS example is a truck. In a rental the same lines apply to the appliances, carpet and furniture a study puts in 5-year property, and when depreciable and other property are sold together the Form 4797 instructions require the amount realized to be allocated by fair market value. A hypothetical, our arithmetic: $40,000 of appliances and carpet expensed with 100% bonus in 2026 and allocated $8,000 of the price on a 2030 sale produce $8,000 of ordinary income; the other $32,000 is not taxed back, because section 1245 stops at the gain. How the building's own gain is taxed (unrecaptured section 1250 gain, at most 25%) is in our depreciation recapture guide, and a 1031 exchange defers both.

States: California does not follow

Federal bonus depreciation does not carry to every state return. California's 2025 instructions for form FTB 3885A list “Additional depreciation (IRC Section 168(k))” among the federal provisions where its law differs, say California “has not conformed” to the 2002 federal law that created the additional first-year deduction, and set the California section 179 maximum at $25,000. A California landlord who takes 100% federally keeps a separate, slower state schedule, and the state gain on sale differs. Other states have their own rules; we did not survey them.

What a reader can do with this before December 31, 2026

• Find your acquisition date, not your closing date. Pull the purchase contract: the signing date, the contingency and cancellation dates, and the damages clause. If it was binding on or before January 19, 2025, plan on 20% for a 2026 placement; if the damages cap was under 5% of the price, ask whether it was binding at all.
• Have items in service by December 31. Appliances, flooring, furniture or a fence that is ready for use only on January 2, 2027 is a 2027 deduction.
• Decide on the election out before you file. It is per class of property, per year, and permanent without IRS consent; the 6-month amended-return window under section 301.9100-2 is the only second chance.
• Run the section 469 test first. If your modified AGI is $150,000 or more and you are not a real estate professional, a bigger loss is likely to be carried forward, not used.
• Price the exit. Bonus on 5- and 7-year property can return as ordinary income on a sale, and the Form 4562 instructions say real property with a special allowance can be recaptured too.
• If you own through a fund, read the K-1. The partnership elects; you inherit its choice and its passive loss.
• In California, budget for two depreciation schedules.

FAQ

Sources, read and saved on October 11, 2026: Public Law 119-21, sections 70301 and 70306 (139 Stat. 72, July 4, 2025), as published by the Government Publishing Office; 26 U.S.C. 50, 168, 179, 469, 1245 and 1250, United States Code 2024 edition on govinfo.gov (before the 2025 amendments); 26 CFR 1.168(k)-2 on the eCFR (version as of October 1, 2026); IRS Notice 2026-11; Instructions for Form 4562 (2025) and Form 4562 (2025); IRS Publication 946 (2025), including Table A-1 and What's New for 2026; Publication 544 (2025); Publication 527 (2025); Publication 925 (2025); Instructions for Form 4797 (2025); California Franchise Tax Board, 2025 Instructions for Form FTB 3885A; IRS Statistics of Income, Corporation Complete Report, Table 13, tax years 2018 to 2022, with our extraction script and its output. The $40,000 example and every sum, share and ratio marked as ours are our arithmetic. This is analysis of public documents, not investment, legal or tax advice.