100% Bonus Depreciation Is Permanent: What It Means for Residential and Short-Term Rental Buyers in 2026

For most of the last decade, bonus depreciation was a moving target. The Tax Cuts and Jobs Act of 2017 gave real estate buyers 100% bonus depreciation, then began phasing it down by 20 percentage points a year starting in 2023 — on track to disappear completely after 2026.

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, reversed that countdown. It permanently restored 100% bonus depreciation for qualifying property acquired after January 19, 2025. There is no sunset date this time, no phase-down schedule, no "use it before it's gone" urgency. For anyone buying real estate in 2026, that's one of the most consequential — and most underused — tools available.

Here is what it actually means, depending on what kind of buyer you are.

The Mechanics, in Plain English

Bonus depreciation doesn't apply to an entire house or building. Land is never depreciable, and the building structure itself is depreciated slowly — 27.5 years for residential rental property under standard rules.

What bonus depreciation accelerates is everything inside and around that structure: appliances, cabinetry, flooring, fixtures, decorative lighting, and site improvements like landscaping, fencing, and paving. A cost segregation study is the engineering-based process that identifies and reclassifies those components into shorter recovery categories — typically 5, 7, and 15 years instead of 27.5. Once an asset is in one of those shorter categories, 100% bonus depreciation lets you deduct its full value in the year you place the property in service, instead of spreading it out over decades.

On a typical residential purchase, a cost segregation study tends to reclassify somewhere in the range of 20–30% of the depreciable basis into these accelerated categories. That is the lever this entire strategy pulls.

For Traditional, Long-Term Residential Rental Buyers

If you are buying a conventional long-term rental — a single-family home, a duplex, a small multifamily building — bonus depreciation still works in your favor, but it runs into a guardrail: passive activity loss rules under IRC §469.

For most owners, rental real estate is "passive" by default. That means depreciation losses generated through cost segregation can offset rental income (often reducing it to zero in year one), and even other passive income, but generally cannot offset W-2 wages or active business income — unless you qualify as a Real Estate Professional under IRS rules (broadly: more than 750 hours per year in real estate activities, and more time spent there than in any other trade or business).

That makes 100% bonus depreciation especially valuable for:

• Buyers scaling a rental portfolio, where large first-year deductions can shelter income across the portfolio.
• Real Estate Professionals, who can use those same losses against active income, including a spouse's W-2 earnings if filing jointly.
• High-net-worth buyers building toward Real Estate Professional status, since the income-offset benefit compounds once that threshold is met.

Even without REP status, accelerated depreciation improves early-year cash flow and after-tax return — it just stays within the passive bucket until the property is sold or other passive income absorbs it.

For Short-Term Rental Buyers: The STR Loophole

Short-term rentals sit under a different part of the tax code, and that difference is what makes them so popular among bonus depreciation strategies right now.

Under Treasury Regulation §1.469-1T(e)(3)(ii), a rental activity is not treated as a "rental activity" for passive-loss purposes if the average guest stay is seven days or less. Instead of needing Real Estate Professional status, an owner only needs to materially participate in operating the property — commonly satisfied by working more than 100 hours on the activity in a year, with no one else (including a property manager) working more hours than the owner.

Meet both conditions — the seven-day average stay and material participation — in the same tax year, and the losses generated by a cost segregation study become non-passive. That means they can directly offset ordinary income, including W-2 wages.

This is the mechanism people mean when they refer to the "STR loophole." It is not a gray area — it is a long-standing, IRS-recognized distinction in how short-term rental activity is classified, now made significantly more powerful by permanent 100% bonus depreciation.

Illustrative Example

The deduction itself is identical. What changes is what it is allowed to offset — and for a high-income W-2 earner, that distinction can be worth tens of thousands of dollars in the first year alone.

What to Keep in Mind

This strategy is well-established, but it rewards precision:

• Recapture applies on sale. Accelerated depreciation is not free — it is a timing benefit. When the property sells, previously depreciated amounts are generally recaptured as ordinary income (for the personal-property components) under IRC §1245.
• Material participation must be documented. Time logs, not estimates, are what hold up if the IRS asks questions.
• The average-stay test is a 12-month average, not a per-booking rule. A handful of longer stays can shift the calculation — this needs to be tracked across the year, not assumed.
• State conformity varies. Not every state automatically follows federal bonus depreciation rules, so the state-level benefit can differ from the federal one.
• A cost segregation study is what makes this real. Without one, most of a property's value stays parked in the 27.5-year bucket, and there is little to accelerate.

None of this is tax or legal advice — it is a framework for the kind of conversation worth having with a CPA before you close.

Where This Fits Into the Buying Decision

Permanent 100% bonus depreciation changes the math on which property makes sense, not just how it is taxed afterward. A property that pencils out modestly on cash flow alone can look very different once you model in a cost segregation study and, where applicable, the short-term rental income reclassification.

That is the kind of analysis worth running before you make an offer — not after you have already closed. If you are evaluating a residential or short-term rental purchase and want a second set of eyes on the underlying numbers, acquisition structure, or how a property fits into a broader portfolio strategy, that is exactly where this kind of planning belongs.

This article is for general informational purposes and does not constitute tax, legal, or financial advice. Tax outcomes depend on individual circumstances — consult a qualified CPA or tax attorney before acting on any strategy described here.