What Is Bonus Depreciation? How It Works for Rental Property Investors

Standard MACRS depreciation spreads an asset's cost over its recovery period: 5 years for personal property, 15 years for land improvements. Bonus depreciation overrides that schedule, allowing the entire cost to be deducted in year one instead.

For a short-term rental investor, this means the furniture, appliances, carpet, outdoor improvements, and other short-life components identified in a cost segregation study can all be fully expensed in the year of acquisition — generating a deduction that might equal 20–35% of the property's purchase price.

The 2025 Rate: Why OBBBA Changed Everything

The Tax Cuts and Jobs Act (2017) set 100% bonus depreciation through 2022, then scheduled a phase-down: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027. For investors acquiring property in 2023 and 2024, this was a significant reduction from the 100% they'd enjoyed previously.

The One Big Beautiful Act (OBBBA), signed July 4, 2025, restored and made permanent 100% bonus depreciation. It applies to property placed in service on or after January 19, 2025 (the date of House passage). For property placed in service January 1–18, 2025, the 40% TCJA rate applies. For property placed in service in 2024, the 60% rate applies.

What Qualifies for Bonus Depreciation

• 5-year MACRS property: Furniture, appliances, carpets, electronics, decorative fixtures, smart home technology
• 15-year MACRS property: Land improvements — driveways, pools, hot tubs, outdoor kitchens, landscaping, fencing
• Qualified Improvement Property (QIP): Interior improvements to nonresidential buildings placed in service after the building
• Does NOT qualify: Real property (the building structure) — 27.5-year residential or 39-year commercial property

Bonus Depreciation + Cost Segregation = Maximum Year-One Deduction

Cost segregation identifies which components of your property qualify for bonus depreciation. Without a study, the IRS treats the entire property as 27.5-year real property — ineligible for bonus. With a study, a significant portion (20–35% of purchase price for a typical STR) gets reclassified into bonus-eligible categories.

The combination of cost segregation + 100% bonus depreciation is the engine of the STR tax strategy. A $600,000 STR might yield $140,000 in bonus-eligible assets via cost seg. At 100% bonus depreciation, that's $140,000 deducted in year one — vs. $21,818 under straight-line.

Frequently Asked Questions