How to Take Bonus Depreciation on Rental Property

Rick Ruberg
Aug 22
5 min read

Updated: Aug 29

Large gray house with white trim and porch, decorated with American flags and bunting. Surrounded by lush green lawn and bushes.

If you own rental property, you’ve probably heard the buzz about bonus depreciation. For some, it sounds like a loophole too good to be true. For others, it feels like complex accounting reserved for the big players.

But here’s the scoop: Bonus depreciation is 100% legitimate, written right into the tax code, and it could put thousands (sometimes hundreds of thousands) of dollars back in your pocket... if you know how to use it correctly.

Let’s walk through exactly how to take bonus depreciation on rental property, step-by-step.

Step 1: Understand What Bonus Depreciation Is

At its core, bonus depreciation is an accelerated tax deduction. Normally, a rental property has assets that can be depreciated over 27.5 years (residential) or 39 years (commercial). That means small slices of deductions year after year.

Bonus Depreciation flips the script: certain parts of your property can be written off all at once in the first year. Instead of waiting nearly three decades, you capture the tax savings today.

Step 2: Know Which Assets Qualify

Not every part of your property qualifies. The IRS allows bonus depreciation on assets with a useful life of 20 years or less. For rental properties, that usually includes:

Appliances, cabinets, flooring, and furniture (5-year property)
Equipment or fixtures (7-year property)
Land improvements like landscaping, fencing, etc. (15-year property)

The building structure itself (walls, roof, foundation) does not qualify, it stays in the long bucket.

Step 3: Use a Cost Segregation Study

The secret sauce: most landlords don’t know how to separate all these items out on their own. That’s where a cost segregation study comes in.

It’s an engineering analysis that breaks your property into classes...

5-year, 7-year, 15-year, and the standard 27.5/39-year.

Without a study, the IRS assumes everything should be depreciated slowly.

With a study, you can pull forward those short-life assets and apply bonus depreciation immediately.

Step 4: Apply Bonus Depreciation in Year One

Once the study is complete, you’ll know exactly how much of your purchase price can be deducted right away.

For example:

You purchase a rental property for $500,000.
A cost seg study identifies $125K of assets that fall into 5, 7, or 15-year categories.
Instead of depreciating those items over years, you deduct the full $125K in year one.

That’s bonus depreciation at work! Cutting your taxable income, increasing your cash flow, and giving you the ability to reinvest sooner.

Step 5: Work With a Qualified Tax Professional

This isn’t a do-it-yourself deduction. To protect yourself (and leverage the most benefit), you'll want to:

A professional cost segregation study with proper documentation.
A tax advisor who understands real estate investing.
A proactive tax plan so the deduction fits into your overall strategy.

FAQs for Bonus Depreciation

What Is Cost Segregation?

Cost segregation is a tax strategy that uses an engineering-based study to break down a rental or commercial property into its individual components for faster depreciation. Instead of treating the entire building as a single 27.5-year (residential) or 39-year (commercial) asset, a cost segregation study reclassifies certain parts of the property into shorter depreciation schedules, 5, 7, or 15 years.

What is 100% Bonus Depreciation?

100% bonus depreciation is a allows real estate investors to deduct the full cost of certain property improvements or components in the first year they’re placed in service as a rental, rather than depreciating them slowly over time. With 100% bonus depreciation, qualifying assets, such as appliances, flooring, landscaping, and other items with a useful life of 20 years or less can be written off all at once. This accelerates your tax savings and can make a huge difference in the early years of owning or improving rental property.

How Cost Seg Combines with Bonus Depreciation?

Cost segregation and bonus depreciation work together to accelerate tax savings on rental property. A cost seg study breaks your property into components (such as appliances, flooring, or landscaping) that qualify for shorter depreciation lives. Bonus depreciation then allows you to deduct 100% of those costs in the first year, instead of spreading them out over time. This combination can generate significant upfront tax deductions, improving cash flow and boosting your return on investment right away.

What year was bonus depreciation 100%?

Bonus depreciation was set at 100% for qualified property placed in service between September 27, 2017, and December 31, 2022 under the Tax Cuts and Jobs Act (TCJA). Starting in 2023, the deduction began phasing down each year. However, in 2025 Congress reinstated 100% bonus depreciation through the One Big Beautiful Bill, allowing investors once again to deduct the full cost of qualifying assets in the year they’re placed in service.

Does bonus depreciation apply to Airbnb or short-term rentals?

Yes. If you own short-term rentals like Airbnb or VRBO properties, you can typically use bonus depreciation on qualifying assets such as furniture, appliances, and improvements. This can be especially powerful since STR income is often treated differently for tax purposes and may allow you to use the deduction against other income if you meet material participation rules.

Can bonus depreciation offset W-2 income?

It depends. Generally, rental real estate is considered passive activity, so deductions can only offset passive income. But if you qualify as a "real estate professional" or your property is a short-term rental where you materially participate, you may be able to use bonus depreciation to reduce your W-2 or business income as well.

Why Does Cost Segregation with Bonus Depreciation Matter?

Combining cost segregation with bonus depreciation delivers major benefits for real estate investors. It puts more cash in your pocket today by front-loading large deductions that free up capital for more deals. It offers tax planning flexibility, since bonus depreciation can sometimes offset not only rental income but also W-2 or business income (depending on your tax situation). And when backed by a professional study, it’s an audit-proof strategy, fully supported by the IRS tax code.

Can I take bonus depreciation on renovations?

Yes, many renovations qualify for bonus depreciation, especially if they involve assets with a useful life of 20 years or less. However, improvements to the building structure itself generally do not qualify. A cost segregation study can help identify which parts of your renovation can be deducted immediately.

How does bonus depreciation affect property sales?

When you sell, depreciation is “recaptured,” meaning part of your gain may be taxed at higher rates. Still, bonus depreciation can give you a huge tax advantage up front, and many investors use strategies like 1031 exchanges to defer taxes when selling.

Using Bonus Depreciation to Lower Taxes on Your Rental Property

Taking bonus depreciation on rental property isn’t complicated once you understand the steps. If you’re serious about building wealth with rental properties, understanding bonus depreciation and cost segregation is a must.

Don’t assume this is only for commercial properties. I’ve seen it benefit everyone from small Airbnb owners to large multifamily investors.

The key is to plan early and find a qualified tax advisor who understands both real estate and depreciation rules.

Done right, this strategy can supercharge your portfolio’s profitability and accelerate your path to financial freedom.