Real estate investors now operate in the most favorable depreciation environment since the Tax Cuts and Jobs Act. OBBBA made 100% bonus depreciation permanent, expanded Section 179 limits, and preserved the treatment of qualified improvement property. Together, these provisions let property owners accelerate cost recovery in ways that were set to phase out before the law changed.
For finance teams, the opportunity comes with homework. Timing rules, eligible asset categories, and documentation requirements all determine how much value you can actually capture. Here's what you need to know.
Bonus Depreciation Rules Under OBBBA
Before OBBBA, bonus depreciation was scheduled to decline steadily. The Tax Cuts and Jobs Act had set bonus rates at 60% for 2024, 40% for 2025, 20% for 2026, and complete elimination by 2027. Real estate investors faced diminishing returns on accelerated depreciation strategies.
OBBBA eliminated the phasedown entirely. The law permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. This change applies to both new and used property, provided the taxpayer has not previously used the asset and acquired it in an arm's-length transaction.
Assets Eligible for 100% Bonus Depreciation
The restoration of bonus depreciation applies to property with a MACRS recovery period of 20 years or less. For real estate investors, this includes a broad range of components that can be identified through cost segregation studies:
- Furniture, fixtures, and equipment with recovery periods of 5 or 7 years
- Interior finishes including flooring, wall coverings, and ceiling systems
- Qualified improvement property with its 15-year recovery period
- Land improvements such as landscaping, paving, parking areas, and site lighting
- Certain electrical, plumbing, and HVAC components identified through cost segregation
Used property remains eligible for bonus depreciation under OBBBA, as long as the taxpayer did not previously use the property themselves. This provision allows investors acquiring existing buildings to claim accelerated deductions on eligible components.
Qualified Improvement Property Under OBBBA
Qualified improvement property remains one of the most valuable categories for real estate investors. QIP refers to improvements made to the interior of nonresidential buildings after the building has been placed in service. The 15-year recovery period makes QIP eligible for bonus depreciation under the 20-year threshold.
OBBBA permanently restored 100% bonus depreciation for QIP placed in service after January 19, 2025. This eliminates the uncertainty that existed during the phasedown period and allows long-term planning for renovation strategies.
Qualifying improvements include:
- Interior walls, partitions, and room dividers that do not affect structural framework
- Lighting systems, electrical wiring, and data infrastructure
- Flooring, ceiling systems, and interior finishes
- HVAC, plumbing, and fire protection systems serving the interior space
Certain improvements do not qualify as QIP. Enlargements to the overall building structure, elevators and escalators, and modifications to the internal structural framework are excluded. These items must be depreciated over 39 years for nonresidential property.
Critical Timing Rules for Bonus Eligibility
OBBBA introduced an important distinction that practitioners must understand. Bonus depreciation eligibility depends on both the placed-in-service date and the date the binding acquisition contract was signed. Both dates must fall after January 19, 2025, for property to qualify for 100% bonus treatment.
- Contract signed before January 20, 2025, with property placed in service after: Only 40% bonus applies
- Contract signed after January 19, 2025, with property placed in service after: Full 100% bonus applies
- Property placed in service between January 1-19, 2025: Prior law 40% rate applies regardless of contract date
Consider an investor who purchases a warehouse for $2 million and spends $250,000 on interior improvements. If the property was placed in service on January 15, 2025, with a contract signed before January 20, only 40% bonus depreciation applies.
The same property placed in service on January 22, 2025, with a contract signed after January 19, qualifies for 100% bonus. The difference could mean writing off $100,000 versus $250,000 in year one.
Section 179 Expensing Limits for 2026
OBBBA substantially increased the Section 179 baseline limits, which are adjusted annually for inflation. For tax years beginning in 2026:
- Maximum Section 179 deduction: $2,560,000
- Phaseout threshold: $4,090,000 in qualified property placed in service
- Full phaseout occurs at $6,650,000 in qualifying purchases
- Eligible property includes QIP, roofs, HVAC systems, fire protection, and security systems
- Section 179 has no acquisition date requirement, unlike bonus depreciation
Section 179 offers flexibility that bonus depreciation does not. Taxpayers can elect Section 179 treatment on an asset-by-asset basis, and Section 179 applies based on placed-in-service date without the contract date requirement. However, Section 179 cannot create or increase a tax loss, and the property must be used in an active trade or business.
Coordinating Bonus Depreciation and Section 179
Both provisions allow immediate deduction of capital investments, but they operate under different rules. Developing an optimal strategy requires understanding when each provision provides the greatest benefit.
The conventional approach applies Section 179 first to assets that may not qualify for bonus depreciation or where selective expensing is useful. Bonus depreciation then applies to remaining qualified assets for full expensing. This combined approach maximizes current-year deductions while preserving flexibility.
- Apply Section 179 to QIP and building improvements where bonus eligibility is uncertain
- Use bonus depreciation for assets with clear eligibility and shorter recovery periods
- Consider Section 179 when bonus depreciation would create losses exceeding limitations
- Evaluate state conformity to determine which provision provides better combined federal and state results
Trust and estate considerations add complexity. Section 179 deductions are not available to trusts other than grantor trusts and to estates. For these entities, bonus depreciation under Section 168(k) may be the only accelerated option available.
Cost Segregation Studies in the OBBBA Environment
The permanent restoration of 100% bonus depreciation significantly enhances the value of cost segregation studies. These engineering-based analyses identify building components with shorter recovery periods that qualify for accelerated depreciation.
A typical commercial building may have 20-40% of its cost allocated to components with recovery periods of 15 years or less. Under 100% bonus depreciation, these components can be fully expensed in the year placed in service rather than depreciated over 27.5 or 39 years.
- Commission cost segregation studies before property closing to have results ready for tax filing
- Coordinate study timing with contract signing dates to confirm bonus depreciation eligibility
- Review prior acquisitions for catch-up depreciation opportunities using Form 3115
- Maintain documentation supporting asset classifications for potential IRS examination
State Tax Conformity Considerations
Many states do not conform to federal bonus depreciation rules, creating separate depreciation schedules for federal and state purposes. Finance teams must track these differences to ensure accurate reporting on both returns.
- Some states require addback of federal bonus depreciation with subsequent subtraction as depreciation is allowed
- Section 179 conformity varies by state and may provide an alternative for accelerated state deductions
- States may conform to OBBBA provisions at different dates, creating additional timing complexity
Modeling the interplay between federal and state treatment is essential for properties in states with limited bonus depreciation conformity. The optimal federal strategy may not produce the best combined result when state taxes are considered.
Fixed Asset System Requirements
The complexity of OBBBA depreciation rules creates substantial tracking requirements for fixed asset management systems. Accurate records are essential for both ongoing calculations and audit defense.
- Record both acquisition contract date and placed-in-service date for each asset
- Track bonus depreciation eligibility status based on both date requirements
- Maintain separate depreciation schedules for federal and non-conforming states
- Document cost segregation allocations with supporting engineering analysis
- Flag assets where Section 179 was elected versus bonus depreciation applied
The documentation requirements increase for properties with multiple improvement projects over time. Each project may have different eligibility based on its specific contract and placed-in-service dates.
The Bottom Line for Property Investors
OBBBA created a permanently favorable environment for real estate depreciation. The elimination of the bonus depreciation phasedown, combined with expanded Section 179 limits and preserved QIP treatment, allows investors to accelerate cost recovery on a scale not available since early TCJA implementation.
Success requires careful attention to timing rules. The contract signing date now matters as much as the placed-in-service date for bonus depreciation eligibility. Finance teams must coordinate closely with acquisition and construction personnel to document these dates accurately.
Cost segregation studies have become more valuable than ever. With 100% bonus depreciation permanent, the upfront investment in engineering analysis produces immediate and substantial tax benefits. Properties acquired or improved after January 19, 2025, present the greatest opportunities for accelerated deductions.
FAQs
What is the bonus depreciation rate for 2026 under OBBBA?
OBBBA permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. Property acquired or placed in service between January 1-19, 2025, remains subject to the prior 40% rate. The 100% rate now applies indefinitely rather than phasing down.
Does the contract signing date affect bonus depreciation eligibility?
Yes. Under OBBBA, both the binding acquisition contract date and the placed-in-service date must fall after January 19, 2025, for property to qualify for 100% bonus depreciation. Property with contracts signed before January 20, 2025, receives only 40% bonus even if placed in service later.
What qualifies as qualified improvement property?
QIP is any improvement made to the interior of a nonresidential building after the building has been placed in service. It excludes enlargements, elevators, escalators, and changes to the internal structural framework. QIP has a 15-year recovery period and qualifies for 100% bonus depreciation under OBBBA.
What are the Section 179 limits for 2026?
For tax years beginning in 2026, the maximum Section 179 deduction is $2,560,000, and the phaseout threshold is $4,090,000. The deduction is fully phased out when qualifying purchases exceed $6,650,000. These amounts are adjusted annually for inflation.
Should I use Section 179 or bonus depreciation for real estate improvements?
The optimal choice depends on several factors. Section 179 has no contract date requirement and allows asset-by-asset election, but cannot create a tax loss. Bonus depreciation can generate losses but requires both contract and placed-in-service dates after January 19, 2025. Many practitioners apply Section 179 first for flexibility, then bonus depreciation to remaining qualified assets.
