What Is Bonus Depreciation?
Bonus depreciation, governed by Section 168(k) of the Internal Revenue Code, allows real estate investors to deduct a significant percentage of the cost of qualifying assets in the first year they are placed in service. Instead of depreciating assets over multiple years, investors can accelerate deductions upfront, reducing taxable income and improving cash flow.
This strategy is especially powerful when combined with cost segregation, which identifies components eligible for accelerated depreciation. Investors often incorporate bonus depreciation into broader tax planning strategies such as a 1031 exchange, or evaluate its role within the real estate tax strategy comparison guide. In some cases, it may also complement long-term investments like Opportunity Zone strategies.
This strategy is especially powerful when combined with cost segregation, which identifies components eligible for accelerated depreciation.
Bonus Depreciation Phase-Out Schedule
Bonus depreciation is currently phasing down after reaching 100% in 2022. The schedule is as follows:
| Year | Bonus Depreciation Percentage |
|---|---|
| 2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 | 0% |
Unless new legislation is passed, bonus depreciation will be fully phased out by 2027.
What Qualifies for Bonus Depreciation in Real Estate?
Bonus depreciation applies to certain property types identified through cost segregation:
- 5-year property: appliances, carpeting, specialized electrical systems
- 7-year property: furniture, fixtures, equipment
- 15-year property: land improvements such as parking lots, landscaping, and sidewalks
- Qualified Improvement Property (QIP): interior improvements to commercial buildings
These components can be depreciated much faster than the standard 27.5 or 39-year schedules.
Bonus Depreciation + Cost Segregation — The Combined Strategy
Cost segregation and bonus depreciation work together as a powerful tax strategy. A cost segregation study identifies which parts of a property qualify for shorter depreciation schedules, and bonus depreciation allows you to deduct a large percentage of those components in the first year.
This combination can significantly reduce taxable income and generate immediate cash flow benefits for investors.
Strategies as Bonus Depreciation Phases Down
As bonus depreciation decreases each year, investors should adapt their strategies:
- Act early to maximize higher depreciation percentages
- Use lookback cost segregation studies on existing properties
- Combine with 1031 exchanges to defer gains while accelerating deductions
- Focus on high-value properties where partial bonus depreciation still delivers strong ROI
Legislative Watch — Will Bonus Depreciation Be Extended?
Bonus depreciation has been a major tax incentive for real estate investors, and there have been ongoing discussions in Congress about extending or modifying the phase-out schedule.
While no permanent extension has been enacted as of 2026, investors should stay informed, as future legislation could restore higher deduction levels or extend the program.
Frequently Asked Questions
Maximize Your Depreciation Deductions Today
Primary CTA:
Maximize Your Depreciation Deductions — Free Consultation
Secondary CTA:
Get a Cost Segregation + Bonus Depreciation Estimate