Real Estate Tax Strategy, Post-OBBBA

100% Bonus Depreciation Is Back

By Luke Allen · Licensed Texas Realtor, TREC #788149 · Updated July 17, 2026

An in-depth guide to the depreciation rules under the One Big Beautiful Bill Act, how real estate investors actually use them, and the fine print the headlines leave out.

100%
Bonus Depreciation Rate
Jan 20, 2025
Acquisition Date Cutoff
20 yrs
MACRS Recovery Ceiling
20 to 35%
Typical Cost Seg Reclass
37%
Max §1245 Recapture Rate
Educational only. This guide is for educational purposes and is not tax, legal, or financial advice. Tax law is complex, fact-specific, and changes frequently. Consult a licensed CPA or tax attorney to model your specific situation, including passive activity status, material participation, and recapture on exit.
The Short Version

The One Big Beautiful Bill Act, signed into law on July 4, 2025, permanently restored 100% bonus depreciation for qualifying property acquired and placed in service on or after January 20, 2025. For real estate investors, this is one of the most valuable provisions in the current code. But the way it's usually described online , "depreciate your whole property and pay no taxes in year one" , is misleading. The building itself does not qualify for bonus depreciation. The real strategy is narrower, more technical, and gated by rules that decide whether the deduction actually helps you. This guide walks through all of it.

Part 1

What Actually Changed

Under the Tax Cuts and Jobs Act of 2017, bonus depreciation let businesses immediately deduct 100% of the cost of qualifying assets, but only through 2022. After that, it phased down 20 percentage points per year. OBBBA scrapped that phase-out.

Bonus Depreciation Rate: Pre-OBBBA vs Post-OBBBA
Tax Year Pre-OBBBA Rate (Old Law) Post-OBBBA Rate (Current Law)
2022100%100%
202380%80%
202460%60%
Property acquired on/before Jan 19, 202540%40%
Property acquired on/after Jan 20, 202540%100% (permanent)
202620% (would have been)100%
2027 and beyond0% (would have been)100% (no scheduled step-down)

The key facts:

100% is permanent under IRC §168(k)

For most qualifying property acquired and placed in service on or after January 20, 2025.

The acquisition-date line is January 19, 2025

Property acquired after that date qualifies for the full 100%. If you had a binding written contract to acquire the property on or before that date, it generally does not qualify, even if closing happened later.

You can elect 40% instead of 100%

For the first tax year ending after January 19, 2025, if that fits your planning better. This isn't rare; it's a real planning tool covered in Part 9.

Property placed in service in 2026 gets the full 100%

Not the 20% that the old phase-out schedule would have produced. You'll still find outdated articles online quoting 20% for 2026; that reflects pre-OBBBA law and is no longer correct.

The Gating Rule

What Qualifies for Bonus Depreciation

Bonus depreciation applies to tangible property with a MACRS recovery period of 20 years or less. That includes used property, not just new, as long as it wasn't previously used by you and is acquired in an arm's-length transaction.

The Catch That Defines Everything Buildings do not qualify. Residential rental buildings are depreciated over 27.5 years and commercial buildings over 39 years. Both exceed the 20-year ceiling, so the structure itself is never eligible for bonus depreciation.

So how do investors get a giant year-one write-off from a building purchase? The answer is cost segregation.

Part 2

Cost Segregation: The Engine That Makes It Work

When you buy a property, the IRS default is to lump the entire improvement value into one 27.5- or 39-year bucket and depreciate it slowly, straight-line. A cost segregation study is an engineering-based analysis that breaks the property apart into its components and reassigns each to its correct, shorter depreciation schedule.

Many components that are physically part of a building actually qualify as 5-, 7-, or 15-year property:

Appliances, carpeting, and flooring

5-year property under MACRS.

Cabinetry, countertops, and certain fixtures

Depending on classification, 5- or 7-year.

Specialty electrical and plumbing tied to equipment

Separately identified from base building.

Window treatments and certain finishes

Personal property classification.

Land improvements

Driveways, parking areas, fencing, landscaping, sidewalks: all 15-year property.

Because these carved-out components have a recovery period of 20 years or less, they are bonus-eligible. With 100% bonus depreciation restored, their entire remaining cost can be deducted in the first year the property is placed in service.

How much can typically be reclassified

A cost segregation study on a residential rental commonly reclassifies roughly 20% to 35% of the building's cost basis into these short-life buckets. On a $600,000 property, that might be $150,000 to $200,000 deductible in year one instead of spread across decades.

Industry analyses have found that cost segregation paired with 100% bonus depreciation can produce something on the order of a five-fold increase in first-year depreciation compared to straight-line alone.

What a study costs

Cost Segregation Study Fees (Typical Ranges)
Property TypeStudy Cost (Typical Range)
Residential rental (single-family)$5,000 to $10,000
Small multi-family (up to 20 units)$8,000 to $15,000
Small commercial / mixed-use$10,000 to $25,000
Larger or complex commercialUp to $60,000

A study isn't legally required to claim bonus depreciation, but as a practical matter it's essential. It's how you defensibly identify which portions of the property qualify.

“

Depreciation isn't forgiven; it's borrowed. When you sell, the IRS recaptures the benefit.

The Fine Print
Part 3

The Rule That Decides Whether It Helps You: Passive Activity Losses

This is the part that most "pay zero taxes" content skips, and it's the single biggest reason the strategy fails for people who try it without understanding it.

A large first-year deduction usually creates a paper loss. The property shows a tax loss even while producing positive cash flow. The question is: what income can that loss offset?

Under IRC §469, rental real estate is passive by default. Passive losses can generally only offset passive income, not your W-2 wages, not your active business profits. This is true no matter how many hours you spend on the property, unless you fit one of the exceptions below.

There's a limited carve-out, the $25,000 special allowance, but it's aimed at middle-income investors who actively participate, and it phases out between $100,000 and $150,000 of modified adjusted gross income (MAGI). Above $150,000 MAGI, it's gone entirely. That's exactly the income range where a big depreciation deduction would be most valuable, so for high earners the special allowance is usually irrelevant.

So the real question becomes: how do you convert these losses from passive to non-passive so they can offset active income? There are two established paths.

Path One

Real Estate Professional Status (REPS)

If you (or your spouse) qualify as a real estate professional under IRC §469(c)(7), your rental activities are no longer automatically passive, and the losses can offset W-2 income, business income, or a spouse's income.

To qualify, you must meet both tests during the tax year:

Test 1: The 50% Test

More than 50% of the personal services you perform in all trades or businesses must be in real property trades or businesses in which you materially participate.

Test 2: The 750-Hour Test

You must perform more than 750 hours of services in those real property trades or businesses.

Then there's a second hurdle: even after qualifying as a real estate professional, you still have to materially participate in the rental activity itself. That means passing one of the IRS's seven material participation tests, most commonly the 500-hour test.

Practical Watch-Outs
  • The 50% and 750-hour tests must each be met by one spouse individually. You can't combine two spouses' hours to clear those thresholds. Once qualified, spouses can combine hours to satisfy material participation on the rentals.
  • Someone with a full-time 40+ hour W-2 job in an unrelated field will find the "more than 50% of all working time" test extremely hard to meet honestly. This is a frequent audit target.
  • A grouping election under Treas. Reg. §1.469-9(g) lets you treat all your rental properties as a single activity, which makes the material-participation hours easier to reach across a portfolio. It's binding, so file it deliberately.
  • Documentation is everything. Keep a contemporaneous log: dates, hours, and tasks. Reconstructing hours after the fact is a classic red flag in an audit.
Path Two

The Short-Term Rental Exception ("STR Loophole")

This is the path that gets the most attention, because it does not require real estate professional status. That makes it accessible to high-income W-2 earners who could never meet the 750-hour/50% REPS tests.

The mechanism sits in the passive activity regulations at Treas. Reg. §1.469-1T(e)(3)(ii). If the average period of customer use for a property is 7 days or less, the IRS does not treat it as a "rental activity" at all. That reclassification is the whole game: because it's not a rental activity, the automatic-passive rule of §469 doesn't apply.

To then treat the losses as non-passive and deduct them against active income, you only need to materially participate in the activity. You do not need to be a real estate professional.

You satisfy material participation by meeting any one of the seven IRS tests. The three most commonly used by STR owners:

The 500-hour test

You participated more than 500 hours in the year.

The substantially-all test

Your participation was substantially all of the participation by everyone. Useful if you self-manage with no property manager.

The 100-hour test

You participated more than 100 hours and more than anyone else, including any manager or cleaner.

Put together, the STR strategy is: average guest stay of 7 days or less + material participation + a cost segregation study with 100% bonus depreciation. Each piece alone does little; combined, they can generate a large first-year deduction that offsets W-2 or business income.

Watch-Outs Specific to STR
  • Track the average stay continuously. It's easy to let the average drift above 7 days in off-peak months, which can blow up the classification.
  • Personal use of the property can jeopardize the treatment.
  • Log hours as you go. Same audit-defense logic as REPS.
  • This is not a "loophole" in the pejorative sense. It's an application of how the regulations classify short-duration rentals, addressed in IRS Publication 925 and upheld in Tax Court. But it is fact-specific and enforcement-tested, so it has to be done correctly.
Part 6

A Worked Example

Numbers make this concrete. Assume a high-income investor buys a short-term rental and materially participates.

Sample First-Year Bonus Depreciation Calculation
Line ItemAmount
Purchase price$600,000
Land basis (backed out; not depreciable)$100,000
Depreciable building basis$500,000
Cost segregation reclass (30% of building basis)$150,000
100% bonus depreciation deducted in year one$150,000
Combined marginal tax bracket (federal + NIIT)~35%
Approximate first-year tax savings~$52,500

That $150,000+ paper loss, because the activity is non-passive (7-day average + material participation), can offset ordinary income. Add the normal first-year straight-line depreciation on the remaining building basis, plus operating expenses and mortgage interest, and total first-year deductions can climb well past $200,000.

Published examples across the industry are consistent with this range: high earners buying $500K to $1M short-term rentals commonly see $50,000 to $300,000+ in first-year deductions, translating to five- and six-figure tax savings.

Important Framing This reduces tax on the income the loss offsets. It is a cash-flow and timing advantage, not free money. Which brings us to the part almost nobody puts on their landing page.
Part 7

The Catch Nobody Mentions: Depreciation Recapture

Depreciation isn't forgiven; it's borrowed. When you sell, the IRS recaptures the benefit. And cost segregation actually increases your recapture exposure, because it converts slow building depreciation into fast component depreciation.

There are two buckets, taxed very differently:

Section 1250 vs Section 1245 Recapture
BucketWhat It CoversRecapture TreatmentMax Rate
§1250 The building itself (real property depreciated straight-line) Unrecaptured §1250 gain, taxed at ordinary rate but capped 25%
§1245 Cost-segregated components: appliances, flooring, cabinetry, land improvements (personal property) Ordinary income up to the depreciation you claimed. No rate cap. Up to 37% federal, plus potential 3.8% NIIT

So the same accelerated deduction you took at your top marginal rate can come back at your top marginal rate on exit. If you took $150,000 of bonus depreciation on §1245 components and sell in the 37% bracket, that's roughly $55,500 of recapture on those components alone.

This is the honest trade-off cost-seg critics point to. It doesn't mean the strategy is bad. The time value of deducting now and paying later is real, and there are ways to manage it. But the exit has to be modeled before you authorize a study, not discovered at closing.

Ways to Defer or Reduce Recapture
  • 1031 exchange , roll the gain (including recapture) into a replacement property and defer the entire bill.
  • Hold long-term , the longer you hold, the more the up-front deduction's time value outweighs the eventual recapture.
  • Time the sale into a lower-income year.
  • Allocate the sale price carefully between land, building, and components (with support), since land isn't depreciable and isn't subject to recapture.
Part 8

Two Related OBBBA Provisions Worth Knowing

Section 179 expensing was expanded

The annual expensing limit rose to $2.5 million (indexed; roughly $2.56M for 2026) with a $4 million phaseout threshold. Section 179 differs from bonus in a key way: it cannot create or increase a business loss, while bonus depreciation can. For real estate investors trying to generate a deductible loss, bonus depreciation is usually the more powerful tool; §179 is a supplement.

Qualified Production Property (new Section 168(n))

OBBBA created a brand-new, elective 100% depreciation allowance for certain nonresidential real property used in manufacturing, production, or refining. Meaning, for the first time, the building itself can be fully expensed. But it's narrow: only the manufacturing-use portion qualifies (office, parking, and retail areas are excluded), it applies to newly constructed facilities within specified timeframes, the election must be made each year, and special recapture rules claw it back as ordinary income if the property leaves qualified use within 10 years. This is relevant to industrial developers, not to standard residential or commercial rental investors.

Part 9

When You Might Not Want the Full Deduction

Bonus depreciation is applied by default, but taking the full 100% isn't always optimal. You can elect 40%, or elect out entirely for a class of property, if:

You'd create a net operating loss you can't use efficiently
You expect to be in a higher tax bracket in future years

And would rather spread deductions forward.

You plan to sell soon and want to limit recapture exposure

This is a real planning decision, not an automatic "always take the max."

Part 10

A Note for Texas and Austin Investors

Because Texas has no state income tax, the entire strategy plays out at the federal level. There's no state-conformity wrinkle to worry about (unlike high-tax states such as California, where passive-loss rules and REPS interact with state returns). For Austin-area investors, that means the federal deduction is the whole benefit.

The Austin short-term rental market makes the STR path especially relevant. Central Austin ZIPs like 78704 (Zilker, Bouldin Creek, Travis Heights, Barton Hills) and 78702 (East Austin: Cherrywood, Chestnut, Holly, Govalle) have historically supported STR-eligible acquisitions well suited to the strategy. Local short-term rental regulations and permitting are a separate consideration and change periodically, so confirm current rules for the specific jurisdiction before building a strategy around STR classification.

See also: Austin investment property guide and 1031 exchange in Austin for related strategies.

Frequently Asked

Questions Answered

Can I really pay no taxes in year one using bonus depreciation?
Sometimes the depreciation loss can fully offset the income it's allowed to offset, which for a qualifying investor can dramatically cut or even zero out tax on that income. Whether it offsets your W-2 or business income depends entirely on the passive activity rules above. Without REPS or the STR exception, a high earner's rental loss is usually suspended, not deductible against active income.
Do I get to depreciate the whole building at once?
No. The building (27.5- or 39-year property) is never bonus-eligible. Only the shorter-life components a cost segregation study identifies can be bonus-depreciated.
Is a cost segregation study required?
Not legally, but practically yes. It's how you defensibly identify and support the bonus-eligible portion.
What's the bonus depreciation rate for a property I buy in 2026?
100%, permanently, as long as it's acquired after January 19, 2025. Ignore older articles quoting 20% for 2026. That was the pre-OBBBA phase-out.
Does this apply to long-term rentals too?
Yes. Cost segregation and bonus depreciation work on any rental. The difference is that long-term rentals are passive by default, so unlocking the loss against active income generally requires real estate professional status, whereas short-term rentals can use the 7-day exception instead.
What happens when I sell?
Depreciation recapture. The building portion is capped at 25%; the cost-segregated components come back as ordinary income at up to 37%. A 1031 exchange can defer it.
Does this strategy work in Texas and Austin specifically?
Yes, and it's simpler than in high-tax states. Texas has no state income tax, so the strategy plays out entirely at the federal level with no state-conformity issues. Austin's STR market makes the STR path especially relevant. Confirm current local STR permitting rules for the specific jurisdiction before building a strategy around it.
Bottom Line

The Real Takeaway

100% bonus depreciation is permanently back, and paired with a cost segregation study it can produce a very large first-year deduction on a real estate purchase. Whether that deduction actually lowers your tax bill hinges on the passive activity rules. Which is why real estate professional status and the short-term rental exception matter so much.

And the benefit is a timing play: depreciation recapture waits at the exit, so the strategy should be modeled end to end, not just for year one.

Luke Allen, Licensed Austin Texas Realtor, TREC #788149
About the Author

Luke Allen, Licensed Austin Realtor

Luke is a licensed Texas Realtor (TREC #788149) and the principal at Austin Marketing + Development Group. He works with real estate investors on acquisitions across the Austin metro, including short-term rental-eligible properties in Central Austin ZIPs and value-add opportunities in East Austin, Manor, and the Samsung Taylor corridor. Luke is not a CPA and does not provide tax advice, but he coordinates directly with qualified cost segregation engineers and tax professionals so investor clients can execute the strategy correctly from acquisition through exit.

More about Luke → · (254) 718-2567 · [email protected]

Buying an Investment Property in Austin?

The strategy above only works if you buy the right property, with a place-in-service date after January 19, 2025, and with the sub-neighborhood dynamics that support your material participation and (if STR-focused) your average-guest-stay math. Luke walks investor clients through property selection, cost-seg-engineer referral, and 1031 planning from first call through closing.

Call (254) 718-2567 or email [email protected]