Under IRC § 168(k) as amended by the 2025 federal law known as the One Big Beautiful Bill Act (OBBBA), qualified property acquired after January 19, 2025 can get a 100% first-year depreciation deduction, and the IRS calls it permanent. It applies only to property with a recovery period of 20 years or less, so the 27.5-year rental building and its 27.5-year improvements do not qualify, but items such as appliances, carpeting and fences can. California does not allow bonus depreciation at all.

The short version

  • Federal bonus depreciation is 100% for qualified property acquired after January 19, 2025 (OBBBA § 70301), permanent under current law.
  • Property acquired before January 20, 2025 stays under the older phase-down rules. For qualified property placed in service in 2025 under those rules, the rate is 40%.
  • Qualified property has a recovery period of 20 years or less. A residential rental building (27.5 years) does not qualify.
  • Section 179 expensing generally requires that the rental rise to the level of an actively conducted trade or business. Many individual landlords do not qualify.
  • Cost segregation is a recognized engineering-based practice that the IRS examines using its own audit guide. It promises no particular result.
  • California does not conform: R&TC 17250(a)(11) says § 168(k) "shall not apply."

The 2025 law and current bonus rules

OBBBA § 70301 changed § 168(k)(1)(A) to allow "100 percent of the adjusted basis of the qualified property." It repealed the phase-down paragraphs and struck the old placed-in-service deadline of January 1, 2027. Notice 2026-11 describes the result as "a permanent 100 percent additional first year depreciation deduction for qualified property acquired ... after January 19, 2025."

Key dates and rules:

SituationFederal rule
Acquired after January 19, 2025100% (OBBBA § 70301(c)(1))
Written binding contract entered into on or before January 19, 2025Not treated as acquired after the date the contract was entered into (§ 70301(c)(4))
Acquired after September 27, 2017 and before January 20, 2025, placed in service in 202540% (Form 4562 Instructions, 2025)
Acquired before January 20, 2025, placed in service laterStays under the older phase-down rules (Pub 527, 2025)
First tax year ending after January 19, 2025You may elect 40% instead of 100% (§ 168(k)(10))
Choosing not to take bonusAttach a statement to the return (Pub 527)

The bonus amount reduces the asset's adjusted basis before regular depreciation is figured on the rest (§ 168(k)(1)(B)).

What qualifies in a rental

Qualified property under § 168(k)(2)(A)(i)(I) is property "which has a recovery period of 20 years or less," plus some software and a few other categories. For a residential rental, that sorts out like this:

Item (classes per Pub 527)Recovery periodBonus eligible?
The building27.5 yearsNo
Improvements such as a new roof, and structural components like furnaces and water pipes27.5 yearsNo
Appliances, carpeting, furniture used in the rental5 yearsCan qualify
Fences, roads, depreciable shrubbery15 yearsCan qualify
LandNot depreciableNo

"Qualified improvement property" (a 15-year class) is defined only for interiors of nonresidential real property (§ 168(e)(6)), so it does not help a residential rental building. Pub 527 (2025) says only that "some properties used in connection with residential real property activities may qualify for a special depreciation allowance."

Section 179 for landlords

Section 179 is a separate expensing deduction with its own dollar limits. The federal limits by tax year:

Tax yearMaximum deductionReduced once § 179 property placed in service exceeds
2025$2,500,000$4,000,000
2026$2,560,000$4,090,000

Residential rental ("lodging") property is no longer excluded from § 179 under § 179(d)(1). The real limits for landlords are different:

  • The property must be acquired by purchase "for use in the active conduct of a trade or business" (§ 179(d)(1)(C)).
  • Pub 946 says property acquired only for the production of income, including "rental property (if renting property is not your trade or business)," does not qualify.
  • The deduction is limited to taxable income from the active conduct of a trade or business.
  • Property acquired by gift or inheritance does not qualify.
  • "Qualified real property" under § 179(e), such as roofs, HVAC, fire protection and alarm, and security systems, covers improvements to nonresidential real property only.

Section 179 is generally available only if the rental is a trade or business, and many individual landlords do not qualify. Ask a tax professional.

Cost segregation: what the IRS says

A cost segregation study allocates part of a building's cost to shorter-lived property. The IRS publishes a Cost Segregation Audit Technique Guide, Publication 5653 (Rev. 2-2025). What it says:

  • Studies "are most commonly prepared for the allocation or reallocation of building costs to tangible personal property."
  • The motive is "the significant tax benefits derived from using shorter recovery periods and accelerated depreciation methods," including bonus depreciation and § 179.
  • A building is § 1250 property recovered over 27.5 years (residential); equipment, furniture and fixtures are § 1245 property with 5- or 7-year recovery.
  • Its 2024 update added industry-specific guidance for residential rental property.
  • It is written to help IRS examiners review studies, it "is not an official IRS pronouncement and may not be cited as authority," and its revision date predates OBBBA.

Before ordering a study, ask what it costs, how the preparer supports each allocation and how it would be presented if examined. On a later sale, § 1245 components carry ordinary-income recapture to the extent of depreciation allowed or allowable (Pub 544). See selling a rental property.

California differences

California's conformity date moved to January 1, 2025 (SB 711), but California did not adopt OBBBA, and it has never allowed bonus depreciation.

ItemFederalCalifornia
Bonus depreciation100% for property acquired after January 19, 2025Not allowed (R&TC 17250(a)(11))
§ 179 limit, tax year 2025$2,500,000, phase-out from $4,000,000$25,000, phase-out from $200,000
§ 179 for qualified real propertyNonresidential property onlyCalifornia does not conform
Qualified improvement propertyNonresidential interiorsR&TC 17250(a)(7): § 168(e)(6) does not apply
Where the difference is figuredForm 4562FTB 3885A

Assets you write off with bonus depreciation federally are depreciated over their normal recovery periods for California. Your California basis, and your California gain on a sale, can therefore differ from federal. The full comparison is in California vs. federal tax rules for rental property.

What to do next

  1. List assets bought for the rental with their purchase and placed-in-service dates, and any binding contract dates near January 19, 2025.
  2. Sort them by class: building and improvements (27.5 years) versus 5-, 7- and 15-year items.
  3. Ask your CPA whether to take, reduce or elect out of bonus for the year, and whether your rental is a trade or business for § 179.
  4. If you are considering cost segregation, ask the preparer how the study supports each allocation.
  5. Keep separate federal and California depreciation schedules.

For the basics of basis and the 27.5-year schedule, start with rental property depreciation. You can model cash flow with the rental cash flow calculator.

Frequently asked questions

Can I take bonus depreciation on a rental house?

Not on the building itself. The building and its 27.5-year improvements have a recovery period longer than 20 years, so they are not qualified property. Shorter-lived items used in the rental, such as appliances, carpeting, furniture and fences, can qualify, subject to the acquisition-date rules above.

Is 100% bonus depreciation permanent?

Under current law, yes. OBBBA removed the phase-down and the 2027 deadline, and Notice 2026-11 calls it a permanent 100 percent deduction for qualified property acquired after January 19, 2025. Congress can change the law again, so check the rule for the year the property is placed in service.

What rate applies to property I bought before January 20, 2025?

It stays under the older phase-down rules. For qualified property acquired after September 27, 2017 and before January 20, 2025 and placed in service in 2025, the 2025 Form 4562 Instructions give 40%. Ask your preparer about the rate for any such property placed in service in a later year.

Does cost segregation always lower my taxes?

No result is guaranteed. Cost segregation is a recognized practice, and the IRS examines studies with its own audit guide, but the outcome depends on your property and the quality of the study. On a sale, gain on § 1245 items is treated as ordinary income to the extent of depreciation allowed or allowable.

Does California follow federal bonus depreciation?

No. R&TC 17250(a)(11) says § 168(k) does not apply for California, and the FTB says California does not conform to the OBBBA change. Items you expense with bonus federally are depreciated normally for California, and the difference is figured on FTB 3885A.

This is general information, not tax or legal advice. Tax rules change and depend on your facts; talk to a CPA or enrolled agent before acting.

McKee Properties manages rentals from its Coronado office; contact us with questions about your property.

Sources

Verified October 19, 2026.

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