Bonus Depreciation in 2026: What CRE Investors Need to Know

Where Bonus Depreciation Stands in 2026 Bonus depreciation, codified under IRC §168(k), allows investors to immediately expense a portion of qualifying property in the year placed in service instead of depreciating it over time. After the TCJA-era phase-down dropped the rate to 40% in 2025 and was on track for 20% in 2026, recent federal action restored bonus depreciation to 100% for qualifying property placed in service after January 19, 2025. Always confirm the current rate with your CPA before closing — this provision has moved fast. What Qualifies — and What Does Not Bonus depreciation applies to property with a MACRS recovery period of 20 years or less. For a typical commercial building: - 39-year structural shell: does NOT qualify for bonus - 5-year personal property (carpeting, decorative lighting, signage, specialty plumbing): qualifies - 7-year fixtures in some classifications: qualifies - 15-year land improvements (parking lots, landscaping, site lighting, fencing): qualifies - Qualified Improvement Property (QIP) — interior nonstructural improvements to existing nonresidential buildings: qualifies at 15 years This is exactly why cost segregation is the unlock. Without a cost seg, your CPA defaults the entire purchase (less land) to 39 years and you get nothing. How Cost Segregation Stacks With Bonus A cost segregation study reclassifies portions of a building's purchase price into 5-, 7-, and 15-year property based on engineering analysis. Once reclassified, those buckets are eligible for bonus depreciation in year one. Typical reclassification percentages by asset type: - QSR / fast food: 25–35% of depreciable basis into short-life property - Retail strip / single tenant retail: 20–30% - Industrial flex: 15–25% - Car wash: 35–50% (tunnel equipment and site improvements are heavily short-life) - Self-storage: 25–35% - Medical office: 20–28% A Real After-Tax Example Take a $3.0M Dollar General STNL acquisition, 80% LTV, $600K equity, land value of $400K. Without cost seg: - Depreciable basis: $2.6M - Annual depreciation (39-year SL): ~$66.7K - Year-1 tax shield at 37% bracket: ~$24.7K With cost seg and 100% bonus, 25% reclassified to short-life: - Short-life basis: $650K — 100% bonus in year one - 39-year basis: $1.95M — annual depreciation ~$50K - Total year-1 depreciation: ~$700K - Year-1 tax shield at 37% bracket: ~$259K — against $600K of equity That's a 43% first-year cash-on-equity tax shield, before any actual cash flow from the property. The shield can offset rental income and, for real estate professionals, other active income as well. Real Estate Professional Status The tax shield is most powerful for those who qualify as a real estate professional under IRC §469(c)(7). REPS lets passive losses from real estate offset active W-2 or business income. The bar: - More than 750 hours per year in real property trades - More than half your personal services in real property trades - Material participation in each rental activity If you do not qualify, losses are still valuable — they offset other passive income and carry forward indefinitely. Recapture: The Trade You're Making Bonus depreciation is acceleration, not free money. When you sell: - Short-life property recaptures at ordinary rates (up to 37%) - §1250 real property recaptures at a 25% rate - Remaining gain is taxed at long-term capital gains rates The standard playbook to avoid recapture: 1031 exchange into the next deal. As long as you keep exchanging, the recapture is deferred. Combining cost seg, bonus, and 1031 across a career creates a powerful compounding effect. When Not to Do a Cost Seg - The deal is small (under ~$750K depreciable basis) and the study cost eats the benefit - You're planning to flip within 2 years - You have no income to shield this year and no carry-forward strategy - You're inside an Opportunity Zone QOF where the tax structure already covers it How Net Lease World Buyers Use This Most institutional and 1031 buyers on Net Lea…