Bonus Depreciation

Bonus depreciation is a first-year tax deduction that lets you write off a large percentage of the cost of qualifying property in the year you place it in service, instead of spreading that cost out over its full recovery period. It applies to assets with a recovery period of 20 years or less, which on a rental usually means appliances, carpet, furniture, and the land improvements and personal-property components a cost study separates out, not the building itself.

The percentage is set by Congress and has moved around. For property acquired and placed in service after January 19, 2025, the 100 percent rate was restored, so a qualifying asset can be fully deducted in year one. Because the rate can change with the next tax law, always confirm the figure for the year you put the asset in service.

In practice

Say you buy a duplex and, in the same year, replace the carpet for $6,000 and add a new refrigerator and stove totaling $2,800. Both of those are 5-year property under the depreciation tables, so both qualify for bonus depreciation. At a 100 percent rate, you deduct the full $8,800 in year one rather than recovering it over five years at roughly $1,760 a year.

The real payoff shows up when bonus depreciation is paired with a cost study on the purchase itself. If a study on a $340,000 building reclassifies $51,000 of the basis into 5-year and 15-year buckets, that $51,000 can be deducted in the first year at the 100 percent rate, instead of trickling out across the 27.5-year schedule the building uses. The building portion still depreciates the slow way; only the carved-out shorter-life pieces get the fast treatment.

Why it matters to a small landlord

A big first-year deduction is not free money. It front-loads a write-off you would have taken anyway, and the trade is paid back later: the deductions you accelerate reduce your basis now, which raises the gain you report when you sell. The portion attributable to those deductions comes back as depreciation recapture, often taxed at a higher rate than long-term capital gains. Bonus depreciation is a timing tool, best when an early deduction is worth more to you than the same deduction spread out, for example a year with high income or a near-term plan to hold rather than sell.

It can also create or enlarge a paper loss, and rental losses are subject to passive-activity limits, so the deduction may not be usable in full the year you take it. If you want to see where the ordinary 27.5-year math sits before layering bonus on top, the rental depreciation guide works the standard schedule out line by line.

Bonus depreciation rarely stands alone. It rides on a cost segregation study to find the short-life components, it lives inside the broader MACRS system that assigns recovery periods, and it only touches outlays you have already classified as a capital expenditure rather than a repair. Sort those three out first, and the bonus question answers itself.