TL;DRThe One Big Beautiful Bill Act (OBBB) signed in July 2025 permanently restored 100% bonus depreciation, creating unprecedented tax planning opportunities for real estate investors. Here's what you need to know about bonus depreciation in 2026 and beyond:
Here's how to take advantage of the new rules before the market fully adjusts in 2026. |
For the last few years, real estate investors have watched bonus depreciation benefits steadily erode. What started as a powerful 100% deduction gradually diminished, with complete elimination scheduled for 2027. The uncertainty made long-term tax planning nearly impossible.
The One Big Beautiful Bill (OBBBA for short), signed in July 2025 changed everything. It permanently restored 100% bonus depreciation for qualified property: no phase-down, no sunset provision, no more uncertainty.
This was a landmark moment for real estate investors, with the return of 100% bonus depreciation representing the return of one of the most significant tax opportunities available. But the benefit only materializes if you understand how to unlock it through cost segregation studies.
Here's what you need to know heading into 2026.
Bonus depreciation allows you to immediately deduct the full cost of qualifying assets in the year they're placed in service, rather than spreading deductions over multiple years. For your real estate holdings, qualified property includes:
What it doesn't include: the building structure itself, or the land the property sits on. Commercial buildings still depreciate over 39 years, residential rentals over 27.5 years. This is exactly why cost segregation becomes essential.
Most investors think about properties as single assets: "I bought a $2 million office building." But buildings are composed of thousands of individual components, many of which qualify for much faster depreciation.
A cost segregation study breaks down your property into component parts and identifies which pieces can be depreciated over 5, 7, or 15 years instead of 39 years.
Common accelerated components include:
Across commercial buildings, 20-35% reclassification is typical, though highly improved or specialized properties may exceed that. For leveraged real estate, accelerated depreciation also boosts after-tax cash-on-cash returns in year one.
Here’s an example: You acquire a $2 million commercial property. Without cost segregation, you depreciate the entire building over 39 years, roughly $51,000 annually.
Our cost segregation analysis identifies $800,000 in accelerated property. With 100% bonus depreciation, you deduct that entire $800,000 in year one, plus normal depreciation on the remaining building basis.
Your first-year deduction: $830,000 versus $51,000 without cost segregation.
At a 37% tax rate, that's over $288,000 in immediate tax savings: cash you can reinvest or deploy toward your next acquisition.
|
Scenario |
Year 1 Deduction |
Tax Savings (37% rate) |
|
Without Cost Seg |
$51,000 |
$18,870 |
|
With Cost Seg + 100% Bonus |
$830,000 |
$307,100 |
|
Difference |
$779,000 |
$288,230 |
|
💡 Key Insight: Cost segregation doesn't create phantom deductions: it accelerates depreciation you're entitled to claim anyway. With 100% bonus depreciation permanent, the acceleration effect is maximized, converting years of future deductions into immediate cash flow. |
You'll see the strongest returns from cost segregation if you fall into one of these categories:
The sooner you complete a study after acquisition, the more years of benefit you'll capture. If you're planning 2026 acquisitions, understanding the cost segregation benefit is essential for accurate underwriting and return projections.
Note: Cost segregation benefits may be subject to passive activity loss limitations depending on your level of participation in rental activities. Consult with advisors who understand both the technical requirements and your specific tax situation.
If you bought property in 2022, 2023, or 2024 without doing cost segregation, you haven't lost the opportunity. You can still capture substantial benefits through a look-back study.
A look-back study uses IRS Form 3115 (Application for Change in Accounting Method) and an IRC Section 481(a) adjustment to claim catch-up depreciation on your current tax return: no need to amend prior years. The Section 481(a) adjustment is taken entirely in the year you file the Form 3115, allowing you to match deductions to a strategic tax year, such as the sale of another property or an unusually high-income year.
Here’s a hypothetical scenario: an investor purchased a $1.5 million commercial building in 2022 without cost segregation. Standard depreciation gave them roughly $38,000 annually. In 2025, we performed a look-back study identifying $600,000 in accelerated components.
With proper cost segregation applied retroactively to the 2022 acquisition, they should have taken approximately $650,000 in total depreciation through 2025 (thanks to 100% bonus depreciation on accelerated components in 2022). The Section 481(a) adjustment allowed them to claim the ~$498,000 difference on their 2025 return, all at once.
This created the perfect opportunity to offset an unusually profitable 2025 and reduce their tax bill by more than $184,000.
The bonus depreciation percentage you receive depends on when the property was originally placed in service: 100% for 2022 acquisitions, 80% for 2023, and 60% for 2024. Even at reduced percentages, the catch-up benefit is typically substantial.
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💡 Key Insight: Look-back studies let you "re-depreciate" properties from prior years, claiming missed deductions on your current return. This is particularly valuable for properties placed in service during 2022-2024 when bonus depreciation was still substantial, or when you need large deductions in the current year. |
Cost segregation is not a loophole. It's a legitimate, well-established methodology explicitly recognized by the IRS, which even published a Cost Segregation Audit Techniques Guide outlining proper procedures.
The quality of your study matters. An engineering-based analysis creates defensible documentation that withstands IRS scrutiny. Look for real estate tax professionals that combine tax expertise with engineering principles to classify assets appropriately, backed by detailed property inspections, construction records, and site documentation.
With bonus depreciation now permanent under OBBB, the IRS is expected to continue reviewing studies for proper classification, but high-quality engineering-backed reports are consistently upheld.
A well-executed study actually reduces audit risk by proactively building the comprehensive documentation the IRS expects to see. Poorly executed studies—those based on rough estimates or generic percentages—create unnecessary risk.
The permanence of 100% bonus depreciation removes artificial urgency, but "permanent" doesn't mean "wait indefinitely." You'll benefit most from acting now if you've acquired property in 2024 or 2025 without completing a study, you're planning 2026 acquisitions and want accurate tax impact modeling, you have properties from 2022-2024 where look-back studies could generate significant deductions, or you're facing a high-income year and need deductions to offset it.
The time value of money matters. Getting $200,000 in deductions in 2026 is worth considerably more than the same amount spread over five years. Earlier deductions mean more cash in your pocket sooner—cash you can reinvest or deploy toward growth.
The OBBB Act created a permanent tax advantage, but advantages only matter if you act on them.
Cost segregation studies, combined with permanent 100% bonus depreciation, offer one of the most powerful tax strategies available in real estate. Whether you're acquiring new properties or sitting on assets purchased years ago, the opportunity to accelerate hundreds of thousands—or millions—in deductions exists right now.
At Iota Finance, we specialize in helping real estate investors maximize depreciation benefits through strategic tax planning. We coordinate with qualified cost segregation specialists to ensure your studies are defensible, properly documented, and optimized for your specific situation—whether you're analyzing recent acquisitions or exploring look-back opportunities.
Schedule a cost segregation evaluation to discover which properties in your portfolio offer the best opportunities and how much in tax savings you might be leaving on the table in 2026.
Disclaimer: This article reflects the tax environment as of December 2025 and is for informational purposes only. Tax planning should be tailored to your specific situation and goals. For personalized guidance on cost segregation and bonus depreciation strategies, contact Iota Finance.