Bonus Depreciation Phase-Out: Strategies for 2026 and Beyond

For the past few years, bonus depreciation was on a scheduled decline that would have reduced it to zero by 2027. That schedule is gone. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, permanently restored 100% bonus depreciation for qualifying property placed in service after January 19, 2025.

For STR investors using the STR loophole and cost segregation, this is significant. The most powerful element of the tax strategy — taking massive first-year deductions — is no longer subject to a declining rate.

• 100% bonus depreciation is permanently restored under the OBBBA for property placed in service after January 19, 2025.
• Properties placed in service in 2023 (80%) and 2024 (60%) are locked at those rates — OBBBA doesn't change past placements.
• New improvements placed in service after January 19, 2025, even on older properties, qualify for 100%.
• Section 179 was also expanded under the OBBBA: $2.5 million maximum with a $4 million phase-out.

What Bonus Depreciation Is (And Why It Matters)

When you purchase a rental property, normal tax rules spread your depreciation deduction over 27.5 years using the straight-line method. Bonus depreciation allows you to take a large percentage of eligible costs upfront — in the year the asset is placed in service.

For real estate investors, the bonus depreciation benefit applies to property identified through a cost segregation study: components reclassified into 5-year, 7-year, or 15-year depreciation lives. The building structure itself still depreciates over 27.5 years, but the short-life components can be immediately expensed.

Combined with the STR loophole (which makes those losses non-passive), this creates a mechanism for generating large first-year paper losses that offset W-2 income directly.

The History: Phase-Down and Restoration

The Tax Cuts and Jobs Act of 2017 (TCJA) introduced 100% bonus depreciation, the highest rate ever. But it built in a scheduled phase-down:

The OBBBA, signed July 4, 2025, changed the trajectory entirely. Properties acquired and placed in service after January 19, 2025 qualify for 100% bonus depreciation indefinitely. There is no new phase-out.

What the OBBBA Changed

For new acquisitions (after January 19, 2025): 100% bonus depreciation applies. A cost segregation study that identifies $120,000 in short-life components results in $120,000 in year-one deductions. No more calculating what percentage applies based on the acquisition year.

For improvements on existing properties: Improvements placed in service after January 19, 2025, qualify for 100% bonus depreciation even if the property itself was acquired earlier. This is important for investors who bought properties during the phase-down years and are now renovating or adding amenities.

For properties acquired in the phase-down years: The bonus depreciation rate from the year the property was placed in service is locked in. A property placed in service in 2023 is at 80%, regardless of the OBBBA. You can't retroactively claim 100% on those assets.

Section 179: The Other Expensing Option

Section 179 of the tax code allows immediate expensing of certain assets, similar to bonus depreciation. The OBBBA also expanded Section 179:

• Maximum deduction: $2.5 million (up from $1.16 million pre-OBBBA)
• Phase-out threshold: $4 million (properties above this see the deduction reduced dollar-for-dollar)

The key difference between Section 179 and bonus depreciation for STR investors: Section 179 cannot create a net operating loss. If your deduction would exceed your business income, the excess Section 179 is suspended and carried forward.

Bonus depreciation has no such limitation. It can create substantial losses, which — combined with the STR loophole — offset W-2 income.

For most STR investors, bonus depreciation is the primary tool. Section 179 is supplementary and most useful in states that conform to Section 179 but not bonus depreciation, or in specific situations where the income limitation isn't a constraint.

Impact on STR Strategy in 2026 and Beyond

The permanent restoration of 100% bonus depreciation removes the urgency that previously drove some investors to rush acquisitions before the rate dropped further. It also removes the complexity of calculating different rates for different placement years.

Key implications for your strategy:

1. Cost segregation ROI is maximized. Every dollar identified in a cost seg study generates a dollar of immediate deduction. At a 35% marginal rate, the first-year tax savings on $100,000 of bonus depreciation is $35,000.

2. Improvements now count fully. Adding a hot tub, deck, or landscaping feature to your STR? Those 15-year improvements placed in service after January 19, 2025, qualify for 100% bonus depreciation. The same applies to new appliances, carpeting, and fixtures.

3. No strategic timing pressure. Previously, investors who were considering a year-end purchase sometimes rushed to close before the rate stepped down. With the rate fixed at 100%, timing decisions can be driven by property quality and price, not bonus depreciation optimization.

4. Look-back studies are worth doing. If you've owned an STR for several years without a cost segregation study, the look-back study captures missed depreciation for prior years. New improvements on that property can still capture 100% bonus depreciation from the OBBBA effective date.

The Tax Math in 2026

For a property acquired in 2026:

• Purchase price: $500,000
• Land: $75,000
• Depreciable building: $425,000
• Cost seg identifies 25% in short-life assets: $106,250
• Year-one bonus depreciation (100%): $106,250
• Year-one straight-line on remaining $318,750: $11,591
• Total year-one depreciation: $117,841

At a 35% combined federal/state marginal rate, that's approximately $41,244 in tax savings from depreciation alone — before operating expenses are factored in.

Without the STR loophole, that $117,841 is a passive loss and provides zero current-year benefit. With the STR loophole, it reduces your W-2 taxable income immediately.

State Tax Considerations

Not all states follow federal bonus depreciation rules. Some states require you to add back bonus depreciation and spread the deduction over several years. This reduces the state-level benefit but doesn't eliminate the federal savings.

In states that don't conform to bonus depreciation, Section 179 may provide a partial substitute since more states conform to Section 179 than to bonus depreciation. Your CPA can model the optimal combination for your specific state.

Multi-state investors must allocate income and deductions to the state where the property is located, which may have different conformity rules than your home state.

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