Financial Glossary
Bonus Depreciation on Rental Property
Bonus depreciation is a federal tax provision that lets businesses immediately deduct a portion of the cost of qualifying assets in the year they are placed in service, rather than spreading the deduction across the asset's normal recovery period. For rental property, the building itself does not qualify, but shorter-lived components identified through a cost segregation study, along with qualifying personal property and certain improvements, often can. The percentage that can be deducted upfront has changed over time, so the current-year rate must be confirmed.
Problem & Application
STR and rental owners frequently pair bonus depreciation with a cost segregation study to accelerate deductions on furniture, appliances, landscaping, and other shorter-lived assets, which can produce large paper losses in early years. For those who qualify under the STR or real estate professional rules, those losses may offset other income, making this one of the highest-impact tax moves in real estate. The mechanics interact with passive activity rules and recapture on sale, so the strategy needs to fit your overall tax picture rather than being applied blindly.
In Short
Bonus depreciation can dramatically front-load deductions on rental assets, but only the qualifying components, not the building, are eligible. Because the applicable percentage and rules shift, confirm current IRS guidance before relying on it.