UPDATE (July 2026): After this article was published, the One Big Beautiful Bill Act restored permanent 100% bonus depreciation for qualified property acquired — or, for self-constructed property, begun — after Jan. 19, 2025 (IRS Notice 2026-11 provides interim guidance). The phase-down analysis below remains correct only for property acquired on or before that date. If your property was acquired or construction began after Jan. 19, 2025, see our explainer on the acquired-date test — your rate is 100%, not 20%.
The Phase-Down Schedule Every Investor Must Know
When Congress passed the Tax Cuts and Jobs Act in December 2017, it supercharged bonus depreciation by raising the rate to 100% and expanding eligible property to include used assets for the first time.
For cost segregation, this was transformative: short-life components identified in a study could be fully expensed in Year 1 rather than depreciated over 5 or 15 years.
But that 100% rate was never permanent. Under IRC §168(k)(6), bonus depreciation phases down according to a statutory schedule based on the year property is placed in service:
- 2022 and prior: 100%
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027 and beyond: 0% (bonus depreciation expires entirely)
"The additional first year depreciation deduction is equal to the applicable percentage of the adjusted basis of qualified property... For property placed in service after December 31, 2025, and before January 1, 2027, the applicable percentage is 20 percent." — IRC §168(k)(6)(A), as amended by the Tax Cuts and Jobs Act of 2017
* * *
What 20% Bonus Means in Practice
Consider a $10 million commercial office building placed in service in 2026. A cost segregation study identifies 25% of the depreciable basis — $2,500,000 — as 5-year and 15-year property. Here is how the Year 1 deduction compares under each bonus rate:
- 100% bonus (2022): Full $2,500,000 deducted in Year 1
- 60% bonus (2024): $1,500,000 in Year 1; $1,000,000 over MACRS schedule
- 20% bonus (2026): $500,000 in Year 1; $2,000,000 over MACRS schedule
- 0% bonus (2027): Nothing accelerated; full $2,500,000 spread over 5–15 years
At a 37% federal marginal rate, the difference between the 2026 and 2027 Year 1 tax benefit on that $10M building is approximately $370,000 — the tax on $1,000,000 of additional Year 1 deductions that disappear when bonus expires.
The Time Value of Money Argument
Even at 20%, bonus depreciation has significant value because it accelerates the deduction. A dollar of tax savings today is worth more than a dollar of tax savings three years from now. At a 7% discount rate — a reasonable hurdle rate for real estate investors — a $1 million deduction taken today is worth approximately $816,000 if deferred five years. The present value of that gap is real money.
IRS Notice 2019-08 provided additional guidance on how the bonus depreciation rules interact with the placed-in-service date, confirming that the relevant year is the year the property is placed in service, not acquired or contracted.
"Property is placed in service when it is in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity." — Treasury Regulation §1.168(k)-2(b)(5)
* * *
Congress Did Extend It — For Post-Jan. 19, 2025 Acquisitions
[Updated July 2026] When this article first ran, no extension had been enacted. That changed: the One Big Beautiful Bill Act restored permanent 100% bonus depreciation for qualified property acquired after Jan. 19, 2025 (construction start controls for self-constructed property, per IRC §168(k)(2)(E)(i)). The critical nuance is that the restoration is not retroactive to earlier acquisitions: property acquired under a binding contract on or before Jan. 19, 2025 remains on the phase-down schedule above — which is why the 20%-in-2026 math in this article still governs many properties placed in service this year.
Action Items for 2026
For property owners with existing holdings, a cost segregation study can still generate meaningful savings in 2026 even at 20% bonus. The residual MACRS depreciation on reclassified components — the 80% that isn't bonus-eligible this year — will accelerate over 5 or 15 years rather than 39 years, providing ongoing benefits regardless of bonus rates.
For investors closing on acquisitions or completing construction in 2026, placing property in service before year-end ensures eligibility for the 20% rate. Waiting until 2027 provides zero bonus benefit.
The bottom line: 2026 is not 2022, but it is far better than 2027. Act accordingly — run your property's numbers to see what a study captures at your rate.
