Federal percentage
100%
Eligible basis can generally be deducted in the year the property is placed in service, unless an election or limitation changes treatment.
2026 tax guide
Bonus Depreciation for Commercial Real Estate
Current federal law allows a 100% first-year deduction for eligible short-life property acquired after January 19, 2025. Commercial real estate investors usually access it through qualified improvements and components identified in a cost segregation study—not the land or entire 39-year building.
- Current federal rate
- 100%
- Eligible recovery period
- ≤20 years
- Building life
- 39 years
- Common reclasses
- 5 / 7 / 15
Current rule
What changed for bonus depreciation in 2025
The prior phase-down is no longer the complete current answer. New federal legislation made 100% bonus depreciation permanent for qualifying property acquired after January 19, 2025. Effective-date details matter: an earlier acquisition can be governed by the prior schedule even if the asset is placed in service later.
Property life
20 years or less
Qualified property generally includes eligible MACRS property with a recovery period of 20 years or less.
Not eligible
Land + 39-year shell
Land is not depreciable, and the nonresidential building is generally recovered over 39 years rather than through bonus depreciation.
Method
Cost segregation
An engineering-based analysis identifies eligible components and supports their tax classifications and basis.
Eligibility
What commercial real estate assets may qualify?
Qualification turns on the asset—not simply the fact that it sits inside a commercial building. Documentation should connect each cost to its function, class life, and placed-in-service date.
Common cost-segregation categories
- 5- or 7-year personal property such as qualifying equipment, specialized electrical, finishes, cabinetry, and certain fixtures
- 15-year land improvements such as qualifying parking areas, sidewalks, landscaping, site lighting, and fencing
- Certain 20-year or shorter assets that otherwise meet the qualified-property rules
Typically excluded or limited
- Land and its acquisition basis
- The structural building and other 39-year real property
- Property acquired from certain related parties
- Assets outside the applicable acquisition, placed-in-service, or prior-use requirements
- Acquired after the applicable effective date
- Placed in service and ready for its intended use
- Assigned to a qualifying MACRS recovery class
- New to the taxpayer under the used-property rules
- Supported by invoices, plans, methodology, and fixed-asset records
- Reviewed for business-interest, basis, at-risk, and passive-loss limitations
Qualified improvements
How qualified improvement property fits
Qualified improvement property, or QIP, generally means an improvement made by the taxpayer to the interior of a nonresidential building after that building was first placed in service. QIP is generally 15-year property for federal tax purposes and can be bonus-eligible.
Potentially included
Interior renovations such as qualifying drywall, ceilings, lighting, flooring, and certain building systems may be QIP when the taxpayer and timing requirements are met.
Statutory exclusions
QIP does not include building enlargement, elevators or escalators, or the internal structural framework of the building.
Acquisition distinction
Existing improvements purchased with a building are not automatically QIP to the buyer, though some components may qualify under separate cost-segregation classifications.
Worked example
Bonus depreciation after a cost segregation study
The deduction is based on eligible component basis, not the property's headline purchase price.
Illustrative calculation
$2,500,000 purchase − $500,000 land = $2,000,000 depreciable basis
Assume a study identifies $500,000 of eligible 5-, 7-, and 15-year components. At a 100% bonus rate, the potential first-year bonus deduction is $500,000 before limitations and elections. The remaining $1,500,000 is depreciated under its applicable recovery periods.
A deduction is not a dollar-for-dollar credit
A $500,000 deduction reduces taxable income. Its cash-tax value depends on tax rate, passive-loss status, basis, at-risk rules, business-interest limits, state conformity, and the investor's other facts. It also changes future depreciation and potential recapture.
Planning tradeoffs
Recapture, passive losses, and state conformity
Accelerating a deduction changes timing; it does not make tax consequences disappear. Model ownership, operations, and disposition together.
Depreciation recapture
Sale of reclassified assets can produce ordinary-income recapture under Sections 1245 or 1250 rules. The tax character depends on the component and transaction.
Loss limitations
A large deduction may be suspended under passive-activity, at-risk, basis, excess-business-loss, or other limitations rather than offsetting current income immediately.
State differences
Many states decouple from federal bonus depreciation or require additions and later subtractions. Calculate state basis and deductions separately.
Strategy coordination
Bonus depreciation and 1031 exchanges
The strategies can coexist, but they solve different timing problems. Section 1031 can defer gain on qualifying real property; bonus depreciation accelerates deductions on eligible replacement-property components.
- Carryover basis from the exchange is generally not a new tax investment
- Additional replacement-property basis can create new depreciable basis
- Eligible components of replacement property may be identified through cost segregation
- Personal-property components may not receive the same Section 1031 treatment as real property
- Recapture, boot, debt, and entity structure should be modeled before closing
- Exchange and cost-segregation teams should reconcile basis and closing allocations
Clear answers
Frequently asked questions
Straightforward answers to the questions investors ask most often.
Is bonus depreciation 100% in 2026?
Federal law restored 100% bonus depreciation for eligible property acquired after January 19, 2025, subject to the effective-date, acquisition, placed-in-service, election, and transition rules. Property acquired before that date may remain under the prior phase-down schedule. Confirm treatment with a tax professional.
Does an entire commercial building qualify for bonus depreciation?
Generally, the 39-year nonresidential building itself and land do not qualify. A cost segregation study may identify eligible personal-property and land-improvement components with recovery periods of 20 years or less. Qualified improvement property can also qualify when statutory requirements are met.
What is a cost segregation study?
A cost segregation study analyzes construction and acquisition costs and classifies eligible components into shorter tax lives, often 5, 7, or 15 years, rather than the building's 39-year period. Those components may qualify for bonus depreciation when the applicable rules are satisfied.
Can used property qualify for bonus depreciation?
Yes. Eligible used property may qualify if it is new to the taxpayer and the acquisition meets related-party and prior-use restrictions. The property must otherwise be qualified property and meet the applicable acquisition and placed-in-service rules.
Is bonus depreciation recaptured when property is sold?
Accelerated deductions can create depreciation recapture or other ordinary-income treatment when assets are sold. The character and rate vary by asset class and transaction. A future 1031 exchange may defer some gain on qualifying real property but does not automatically eliminate every recapture item.
Do all states follow federal bonus depreciation?
No. States may conform fully, partially, on a delayed basis, or not at all. Investors should model federal and state treatment separately for every property and ownership structure.
Evaluate the real estate before the tax benefit
Tax timing can improve an investment, but tenant quality, lease terms, location, basis, and residual value still drive the property decision.