Bonus Depreciation 2026: What Real Estate Investors Need to Know

                                       

By: Wiss Team

Wiss Team

Key Takeaways

• The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, permanently restored 100% bonus depreciation for eligible assets placed in service after January 19, 2025 — the step-down phase-out that had eroded this deduction since 2023 is gone.
• Qualified Improvement Property (QIP) — interior non-structural improvements to nonresidential property — carries a 15-year MACRS recovery period and remains eligible for 100% bonus depreciation, making renovation-heavy strategies significantly more tax-efficient.
• Real estate investors who elected out of Section 163(j) interest deduction limitations in prior years are now operating under ADS depreciation schedules, which do not qualify for bonus depreciation — a tradeoff worth revisiting with your advisor.
• Bottom line: The permanent restoration of 100% bonus depreciation changes the math on property acquisition, renovation, and cost segregation. If you haven’t updated your depreciation strategy since the OBBBA passed, you’re leaving money on the table.

For most of the past three years, real estate investors watched bonus depreciation shrink by 20 percentage points annually — 80% in 2023, 60% in 2024 — on its way to zero under the original TCJA phase-down. The One Big Beautiful Bill Act ended that trajectory. Effective for assets placed in service after January 19, 2025, the 2025 bonus depreciation rates are now permanent under federal law. For investors with active acquisition or renovation pipelines, the implications are immediate and material.

What “Permanent” Actually Means for Your Depreciation Strategy

Permanence changes the planning calculus in a way that a temporary reinstatement would not. When a provision is set to expire, aggressive depreciation front-loading carries legislative risk. When it’s permanent, it’s a structural feature of the tax code — one you can model into acquisition underwriting with confidence.

Under current law, eligible personal property and land improvements with MACRS recovery periods of 20 years or fewer qualify for immediate 100% expensing in the year placed in service. That includes fixtures, equipment, carpeting, site improvements, and — critically — assets identified through a cost segregation study. For investors who have been holding off on cost segregation analysis while bonus depreciation rates have been reduced, this is the moment to revisit that decision.

The mechanics are straightforward: a cost segregation study reclassifies components of a real property acquisition from 39-year or 27.5-year schedules into 5-, 7-, or 15-year property. Under 100% bonus depreciation, those reclassified assets can be deducted entirely in year one. For a $5 million acquisition, even a modest cost segregation reclassification of 15% of the purchase price to shorter-lived assets yields $750,000 in accelerated deductions — an outcome that pencils out very differently at 100% versus 60%.

The QIP Opportunity That Renovation Investors Keep Underusing

Qualified Improvement Property is one of the more persistently misunderstood provisions in real estate tax planning. QIP covers interior, non-structural improvements to nonresidential real property after that property was originally placed in service. Think tenant build-outs, interior renovations, HVAC upgrades within the building envelope, and similar commercial property improvements.

Under the CARES Act correction — which assigned QIP a 15-year MACRS recovery period retroactive to 2018 — QIP is eligible for bonus depreciation. Under the OBBBA’s permanent 100% restoration, QIP improvements placed in service after January 19, 2025, can be fully expensed in the year incurred.

For investors active in commercial property repositioning, this is not a minor point. A $2 million gut renovation of a commercial tenant space can potentially generate a $2 million first-year deduction — subject to basis, passive activity rules, and the investor’s specific tax profile. The key qualifier: this applies only to nonresidential property. Interior improvements to residential rental property do not meet the QIP definition.

The 163(j) Election Tradeoff That Deserves a Fresh Look

Here’s the nuance that trips up many real estate investors: the Section 163(j) business interest deduction and bonus depreciation are related, but not in a straightforward way.

Taxpayers in a real property trade or business can elect out of the 163(j) limitation — which caps the deductibility of business interest expense — but doing so requires applying the Alternative Depreciation System (ADS) to their residential and nonresidential real property. ADS property is explicitly excluded from bonus depreciation eligibility under IRC Section 168(k).

The OBBBA also restored the 163(j) calculation to an EBITDA-based formula for tax year 2025 forward, replacing the more restrictive EBIT-based approach that had been in effect from 2022 through 2024. This materially improves the deductibility of business interest for leveraged real estate investors without the real property trade or business election. For investors who made the election specifically to avoid the EBIT-era 163(j) restriction, the EBITDA restoration may change the cost-benefit analysis. This election, once made, is irrevocable — which makes the timing of a fresh evaluation all the more important.

Making the Most of Bonus Depreciation in 2026 and Beyond

The permanent restoration does not mean bonus depreciation planning is static. A few considerations that remain property-specific and investor-specific:

Passive activity loss rules still apply. Individual investors in passive real estate activities cannot use bonus depreciation deductions to offset active income unless they qualify as real estate professionals under IRC Section 469 and materially participate in each activity. For LP interests and passive investors, the deductions result in carry-forward losses, not immediate tax savings.

Placed-in-service timing matters. The OBBBA’s 100% rate applies to assets placed in service after January 19, 2025. Assets placed in service before that date under a prior year’s acquisition close are subject to the rate in effect at that time.

State conformity is not guaranteed. A meaningful number of states do not conform to federal bonus depreciation, including New Jersey and New York — both major markets for Wiss clients. Investors should not assume that a federal deduction produces an equivalent state deduction without a jurisdiction-by-jurisdiction review.

Updating Your Real Estate Tax Plan Under the OBBBA

The permanent restoration of 100% bonus depreciation is one of several OBBBA provisions that affect real estate investors — alongside expanded estate tax exemptions, updated Section 179 limits, and the Opportunity Zones program overhaul. Together, they represent a meaningful restructuring of the federal tax environment for property investors.

Wiss works with real estate investors and developers across the tri-state market to build depreciation strategies that reflect current law, account for passive activity constraints, and integrate cost segregation, QIP analysis, and entity structure into a coordinated tax plan. If your current depreciation schedule hasn’t been reviewed since the OBBBA took effect, contact Wiss to assess what’s changed and what it means for your portfolio.

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