Bonus Depreciation Rental Property: Maximizing Savings in 2026

Part of How Is K1 Income Taxed: The Multifamily Passive Income Tax Rate Explained

Table of Contents

1. Depreciation Multifamily Property
2. Cost Segregation Multifamily
3. Cost Segregation Depreciation Bonuses and the Tax Cuts and Jobs Act of 2017
4. Investment Holding Periods and Depreciation Recapture
5. Is Time Running out on Cost Segregation Studies?
6. Your Total Multifamily Tax Depreciation
7. Frequently Asked Questions About Cost Segregation in Multifamily
8. Depreciation Multifamily Property - Conclusion
9. Sources

Bonus depreciation is the single most powerful tax mechanism in private real estate, and the rules just got materially better. OBBBA — the One Big Beautiful Bill Act, signed into law July 4, 2025 — permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. The TCJA phase-down that had bonus stepping from 60% in 2024 to 40% in early 2025 to zero by 2027 is gone, with no scheduled sunset replacing it.

That headline rate doesn't tell the whole story for passive LPs. Bonus depreciation flows through on your K-1 as a paper loss, but §469 of the Internal Revenue Code still treats syndication losses as passive — they offset passive income, not W-2 wages, unless you qualify for real estate professional status. This guide walks through what OBBBA actually changed, what it deliberately left alone, and how the math now looks on a typical multifamily cost segregation play.

Depreciation Multifamily Property

Depreciation, or real estate depreciation in the context of multifamily property investments, serves as a crucial tax-saving tool for investors. It grants you the ability to deduct the property’s cost over a predetermined depreciation period, effectively reducing your taxable income and, subsequently, your income taxes. This income tax deduction can be significant, making a real difference in your annual tax returns. Accelerated depreciation, achieved through a cost segregation study, can further enhance these tax savings by allowing you to take depreciation deductions at a quicker rate.

However, the depreciation process can be complex and may require the assistance of professionals, such as a qualified CPA with extensive real estate experience, to guide you through the process. Understanding the cost basis of your property, depreciation periods, and applicable deductions are all essential components of a successful depreciation strategy.

How Is Depreciation Calculated?

Calculating depreciation for multifamily properties involves the following steps:

1. Determine the property’s cost basis.
2. Subtract the land value from the cost basis.
3. Divide the remaining amount by the property’s useful life (27.5 years for multifamily properties).

The cost basis is an important financial term that refers to the original purchase price of the asset. This calculation process helps to accurately determine your annual depreciation expenses, which are instrumental in reducing your taxable income.

For example, if you purchased a $500,000 multifamily property, and the land value is $100,000, the depreciable amount would be $400,000. Dividing this by the property’s useful life (27.5 years) would result in an annual depreciation expense of $14,545, which can be deducted from your taxable income.

Cost Segregation Multifamily

Cost segregation is another powerful tax strategy for multifamily property investors. Cost segregation enables the acceleration of depreciation deductions by reclassifying building components into shorter recovery periods, resulting in substantial tax savings. Multifamily investors can reduce their federal tax liability by taking deductions over 5, 7, or 15-year periods on certain items. This significantly increases their cash flow. To reap the benefits of cost segregation, a cost segregation study must be conducted. The study aims to reclassify building components into shorter depreciation periods, thus creating substantial tax savings opportunities for multifamily investors.

The cost segregation process may be complex, but with the help of experienced professionals and a quality cost segregation study, you can maximize your tax savings and optimize your multifamily real estate investments. In addition to the tax savings from accelerated depreciation deductions, cost segregation may also provide opportunities for further tax savings through strategies such as taking advantage of the depreciation bonus offered by the Tax Cuts and Jobs Act of 2017.

Cost Segregation Depreciation Bonuses and the Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 set bonus depreciation at 100% for property acquired after September 27, 2017 and placed in service before January 1, 2023 — meaning the entire cost basis of qualifying short-life property could be deducted in year one rather than spread across five, seven, or fifteen years. That window started closing in 2023 when the bonus rate stepped down to 80%, then 60% in 2024, then 40% in early 2025. Under the original TCJA schedule, the benefit was set to fully sunset by 2027.

OBBBA reset that trajectory. Effective for property acquired and placed in service after January 19, 2025, the bonus rate snaps back to 100% and is now permanent under §168(k) as amended — no more phase-down, no scheduled sunset. The transitional cliff matters: anything placed in service on or before January 19, 2025, or anything under a written binding contract dated before January 20, 2025, stays on the old TCJA schedule (40% in 2025, 20% in 2026, zero thereafter). For property acquired after the cliff, the 100% first-year deduction returns in full.

What this means practically for a multifamily acquisition: the value of a cost segregation study is materially higher than it was during the phase-down years. The 5, 7, and 15-year property identified by the study — appliances, carpeting, fixtures, paving, landscaping, fencing, site lighting — now generates a 100% first-year deduction rather than the 40% it would have under TCJA's 2025 rate. The arithmetic on a typical Class B value-add deal swings meaningfully in the operator's and LP's favor.

Investment Holding Periods and Depreciation Recapture

While cost segregation and accelerated depreciation deductions can yield substantial tax savings, the potential impact of investment holding periods and depreciation recapture on these benefits should be taken into account. Depreciation recapture refers to the taxation of capital gains made from the sale of a depreciated property, which are considered personal income and taxed at the taxpayer’s ordinary income tax rate. This recapture can reduce some of the benefits of cost segregation and accelerated depreciation.

However, the time value of money and increased cash flow often outweigh the potential drawbacks of depreciation recapture. By taking advantage of accelerated depreciation deductions, multifamily investors can benefit from increased cash flow in the short term, which can be reinvested or used for other purposes. The potential drawbacks of depreciation recapture should be carefully considered, but the overall benefits of cost segregation and accelerated depreciation deductions often make them worthwhile strategies for multifamily property investors.

Is Time Running out on Cost Segregation Studies?

The short answer is no — OBBBA removed the deadline. For most of 2023 and 2024, the case for completing a cost segregation study quickly was driven by the TCJA phase-down: every year of delay meant a lower bonus rate on the property identified. Under the new rules, qualifying property acquired and placed in service after January 19, 2025 gets the full 100% first-year deduction regardless of when the study is performed (within standard IRS look-back limits). The “act before the rate drops” urgency is gone.

The timing question that remains is on the LP side, not the cost seg side. §469 governs whether you can actually use the paper loss in the current year, and OBBBA did not change §469. For a passive limited partner, a 100% first-year deduction is still subject to passive activity rules — it offsets passive income but not earned income unless you meet the 750-hour real estate professional test and devote more than 50% of personal services to real property trades or businesses. That means cost seg dollars are most valuable to investors who already have passive income to offset, or who qualify for REPS through a spouse or their own activity. For most W-2-earning LPs, the loss carries forward until passive income materializes or the investment is fully disposed of.

Your Total Multifamily Tax Depreciation

Combining depreciation and cost segregation strategies can lead to significant tax savings for multifamily property investors, increasing cash flow and overall return on investment. By utilizing these tax-saving tools, you can reduce your tax liability, free up funds for other investments or purchases, and optimize the financial performance of your multifamily properties. Working with seasoned professionals, like qualified CPAs and cost segregation specialists, is crucial for the effective implementation of these strategies and for maximizing tax savings. With the right guidance and expertise, you can make the most of depreciation and cost segregation to enhance your multifamily property investments.

Frequently Asked Questions About Cost Segregation in Multifamily

Depreciation Multifamily Property - Conclusion

The headline of OBBBA is straightforward: 100% bonus depreciation is back, and unlike its TCJA predecessor, it doesn't have an expiration date under current law. For multifamily acquisitions closing in 2026, the math on a cost segregation study is materially better than at any time since 2022 — the same 5, 7, and 15-year property buckets that fund the strategy now drive a permanent 100% first-year deduction. The deadline pressure that defined the 2023–2024 conversation around cost seg is gone, replaced by a stable regime that operators and CPAs can plan around for the foreseeable future.

What didn't change matters just as much. §469 still treats syndication K-1 losses as passive, which means the dollars unlocked by bonus depreciation only become usable when you have passive income to offset them, when you qualify for real estate professional status, or when the investment is fully disposed of in a taxable transaction. State conformity to OBBBA also varies — many states don't adopt federal bonus depreciation rules, so your state K-1 may differ from the federal version. As always, the specifics of your situation belong in a conversation with your CPA, not in an article.

Sources

1. IRS — Publication 946, How to Depreciate Property
2. IRS — Topic No. 704, Depreciation
3. Cornell Law — 26 U.S. Code § 168 – Accelerated cost recovery system
4. Congress.gov — H.R.1 — One Big Beautiful Bill Act (Public Law 119-21)