Updated for 2026
The phase-down everyone wrote about is over. 100% bonus depreciation is back, and it is permanent — but only for property acquired after January 19, 2025. Property acquired before that date and placed in service in 2025 is still stuck at 40%. The acquisition date, not the in-service date, is what decides.
- Depreciation is cost × rate, and the rate comes from three choices: the recovery period, the method, and the convention.
- Residential rental property is 27.5 years; nonresidential real property is 39 years; both use the mid-month convention.
- Land is never depreciable. Splitting the purchase price between land and building is the first real decision you make.
- Section 179 for 2026: $2,560,000, phasing out above $4,090,000 of additions.
Depreciation looks like an accounting formality until you notice that it is often the largest deduction on a real estate return, and that almost none of it is optional. You do not get to skip it. If you fail to claim it, you still reduce your basis by the amount you were allowed, and you pay the recapture anyway.
So it is worth being able to do the arithmetic yourself, at least well enough to check whether the number on your return looks right.
The three choices that produce the rate
Every depreciation calculation under MACRS — the system in IRS Publication 946 — comes down to answering three questions in order.
1. How long is the recovery period? This is set by what the asset is, not by how long you expect to keep it.
| Property | Recovery period | Convention |
|---|---|---|
| Residential rental buildings | 27.5 years | Mid-month |
| Nonresidential real property — offices, retail, warehouses | 39 years | Mid-month |
| Land improvements — fencing, paving, landscaping | 15 years | Half-year or mid-quarter |
| Appliances, carpet, furniture | 5 years | Half-year or mid-quarter |
| Office furniture and fixtures | 7 years | Half-year or mid-quarter |
| Computers and vehicles | 5 years | Half-year or mid-quarter |
| Land | Never | — |
2. Which method? Real property uses straight line — the same amount every year. Shorter-lived personal property normally uses the 200% declining balance method, which front-loads the deduction and switches to straight line when that produces more.
3. Which convention? The convention decides how much of the first year you get. Real property uses mid-month: the asset is treated as placed in service in the middle of the month it actually was, so a building placed in service in September gets 3.5 months of depreciation in year one, not four. Personal property normally uses half-year — six months regardless of when in the year you bought it — unless more than 40% of your additions land in the final quarter, in which case the mid-quarter convention applies to everything you placed in service that year.
The mid-quarter trap. One large December purchase can pull every other asset you bought that year onto the mid-quarter convention and cut the first-year deduction on all of them. It is worth checking in November, not April.
What this looks like on an actual return
If you read nothing else, read this. One rental property, first year.
A residential rental bought for $500,000 and placed in service in September. The county assessment puts 20% of the value on the land.
| The arithmetic | |
|---|---|
| Purchase price | $500,000 |
| Less land — not depreciable | ($100,000) |
| Depreciable basis in the building | $400,000 |
| Recovery period | 27.5 years |
| A full year of depreciation | $14,545 |
| First year — mid-month, September, so 3.5 of 12 months | $4,242 |
| Every year after, until year 28 | $14,545 |
At a 35% marginal rate that full-year figure is about $5,100 of tax a year, on a building you did not spend a dollar on that year. Over the 27.5-year life the building shelters $400,000 of income. That is the whole case for owning real estate through the tax code rather than around it.
The one-line version. Take out the land, divide the rest by 27.5, and prorate the first year from the middle of the month you put it in service. Figures are illustrative and rounded.
The method is chosen once and then follows the property. Class life, convention and placed-in-service date are set in the first year; correcting them later means an accounting-method change. How the firm works with real estate investors.
Bonus depreciation: what actually changed
This is the part most articles still have wrong, because the law reversed direction. Publication 946 states it plainly: P.L. 119-21 “reinstated the 100% special depreciation allowance for certain qualified property acquired and placed in service after January 19, 2025.”
The old schedule — 80%, then 60%, then 40%, then nothing — has not been repealed retroactively. It still governs property you acquired before January 20, 2025.
| When you acquired it | Bonus rate |
|---|---|
| After January 19, 2025 | 100%, permanent |
| Before January 20, 2025, placed in service during 2025 | 40% (60% for long production period property and certain aircraft) |
Two consequences follow. A binding written contract signed in 2024 can leave an asset on the old 40% rate even though it was installed in 2026 — so the contract date matters and is worth having in the file. And because bonus applies to property with a recovery period of 20 years or less, it never touches the building itself. It reaches the 5, 7 and 15-year components, which is exactly why a cost segregation study is worth more now than it was two years ago.
Section 179, and when to use it instead
Section 179 lets you expense qualifying property outright rather than depreciate it. For 2026, from Rev. Proc. 2025-32:
| 2026 | |
|---|---|
| Maximum section 179 deduction | $2,560,000 |
| Phase-out begins once additions exceed | $4,090,000 |
| Cap on a sport utility vehicle | $32,000 |
With 100% bonus available again, section 179 matters less than it did — but not none. Bonus applies to a whole asset class whether you want it or not unless you elect out; section 179 is elected asset by asset, so it is the finer instrument when you want some of the deduction this year and some later. Section 179 also cannot create a loss, while bonus can. That single difference decides most cases.
What to do about it
- Fix the land allocation properly at purchase. Every year of depreciation for the next three decades runs off that one split. The county assessment ratio is the usual starting point; an appraisal is better and is worth it on a large building.
- Do not skip depreciation to keep income up. Basis is reduced by the amount allowed or allowable. Skipping it means paying recapture on a deduction you never took.
- Check the acquisition date before assuming 100%. On anything contracted for in 2024, the old 40% rate may still apply.
- Watch the fourth quarter. If more than 40% of the year’s personal property additions land in the last three months, the mid-quarter convention applies to all of them.
- Consider cost segregation on anything above about $500,000. Moving 20–30% of a building into 5, 7 and 15-year classes, where 100% bonus now applies, is the single largest lever available on a rental.
- Remember what is waiting at the end. Depreciation on real property comes back as unrecaptured section 1250 gain, taxed at up to 25% when you sell.
Frequently asked questions
How do I calculate depreciation on a rental property?
Take the purchase price, subtract the value of the land, and divide the rest by 27.5 for a residential rental. That gives a full year. In the first year you prorate from the middle of the month it was placed in service, because real property uses the mid-month convention. A $500,000 property with $100,000 of land gives a $400,000 basis, $14,545 a year, and $4,242 in a first year starting in September. Improvements you make later are depreciated separately, on their own schedules, starting when they are placed in service.
Is bonus depreciation still being phased out?
No, and this is the change most write-ups have not caught up with. P.L. 119-21 reinstated the 100% special depreciation allowance permanently for qualified property acquired and placed in service after January 19, 2025. The old step-down still applies to property acquired before January 20, 2025 — such property placed in service during 2025 is limited to 40%, or 60% for long production period property and certain aircraft. What decides which rule applies is the acquisition date, not the date the asset went into service.
Can I depreciate land?
No. Publication 946 puts it directly: you cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. This is why the split between land and building at purchase is the most consequential number in the whole calculation — it is fixed for the life of the asset and every future year’s deduction depends on it. Land improvements are different: fencing, paving and landscaping are depreciable over 15 years.
What happens if I never claimed depreciation?
You still pay for it. Basis is reduced by depreciation allowed or allowable, so the recapture on sale is computed as though you had taken it whether you did or not. Missed depreciation is generally recovered by filing Form 3115 to change your accounting method and claiming the cumulative catch-up in one year, rather than by amending old returns. It is a common and fixable problem, but it does not fix itself.
Should I use section 179 or bonus depreciation?
Bonus is the default now that it is back at 100%: it applies automatically to whole classes of property unless you elect out, and it can create a loss. Section 179 is elected asset by asset, which makes it the right tool when you want part of the deduction now and part later, but it cannot take you below zero taxable income from the business. For 2026 the section 179 ceiling is $2,560,000, phasing out once additions pass $4,090,000. Most taxpayers who can use bonus use bonus, and reach for 179 only to fine-tune.
What is the mid-quarter convention and will it catch me?
It applies when more than 40% of the year’s personal property additions, measured by basis, are placed in service in the last three months of the tax year. When it applies, every asset placed in service that year — not just the fourth-quarter ones — is treated as placed in service at the midpoint of its own quarter, which sharply reduces the first-year deduction on everything bought earlier. Real property is excluded from the test. The practical defense is to run the numbers in November, while a purchase can still be moved either side of year end.
Related reading
- Real estate CPA services for investors — the four things that decide the tax bill.
- Depreciation recapture when you sell
- Cost segregation for a short-term rental
- 100% bonus depreciation is back, and now permanent
- Bonus depreciation vs. section 179
- Real estate investors and the One Big Beautiful Bill Act
- The SALT deduction cap: what it is now and who loses it
- Short-term rental CPA services
Not sure your depreciation schedule is right
We check the land allocation, the in-service dates and the conventions, and tell you whether a cost segregation study would pay for itself on your building. We can work with you in any state, and most of our clients have never been to the office.
This article is general information, not advice for a particular taxpayer. Figures apply to the 2026 tax year. Primary sources: IRS Publication 946 (how to depreciate property), 26 U.S.C. § 168, 26 U.S.C. § 179, and Rev. Proc. 2025-32 for the 2026 section 179 amounts.
