OBBBA Cost Segregation: 100% Bonus Depreciation in 2026
The One Big Beautiful Bill Act (OBBBA) restored 100% bonus depreciation for residential rental property placed in service after January 19, 2025, and that single date changes the cost segregation math for every return filed in 2026.
- OBBBA cost segregation rules restore 100% bonus depreciation for residential rentals placed in service after January 19, 2025.
- A $500,000 short-term rental with 25% reclassified assets nets $46,250 more in year-one deductions at a 37% tax bracket versus the old phase-down schedule.
- Property placed in service earlier in 2025, before OBBBA's signing date, still runs on the 40% phase-down rate, not 100%.
- Owners who never ran a study on a property they've owned for years can catch up missed depreciation with Form 3115 instead of amending old returns.
Why this matters
Before OBBBA, bonus depreciation was on a sunset schedule: 100% through 2022, then stepping down to 80%, 60%, 40%, and eventually 0% by 2027. Anyone who ran the numbers on a cost segregation study in early 2025 was working off a 40% rate for that year.
OBBBA reset the clock. For residential rental property, including Airbnb and VRBO units, placed in service after January 19, 2025, bonus depreciation is back to 100%. That means every dollar of reclassified 5-year, 7-year, and 15-year property is deductible in year one instead of spread across a multi-year phase-down. The 100% bonus depreciation rules for 2026 apply whether the property was bought last month or ten years ago and just went into service as a rental.
The math only works if the reclassification happens first. Bonus depreciation doesn't apply to the standard 27.5-year residential building shell. It applies to the components a cost segregation study pulls out of that shell: carpet, cabinetry, appliances, parking areas, and site improvements.
What you'll need
- Your property's exact placed-in-service date, meaning the day it was ready and available for tenants or guests, not the closing date
- Prior-year depreciation schedules if the property has been owned for more than a year
- An engineering-based cost segregation study that itemizes building components into 5-year, 7-year, 15-year, and 27.5-year buckets
- Documentation of material participation hours if you're using the reclassified losses to offset W-2 income through the short-term rental loophole
- A CPA who will file the resulting numbers on Form 4562, and Form 3115 if you're catching up prior years
The steps
1. Pin down your placed-in-service date
This date, not your purchase date, decides which bonus depreciation rate applies. Property placed in service after January 19, 2025 gets 100% bonus depreciation under OBBBA. Property placed in service earlier in 2025, before the law was signed, is stuck on the old 40% phase-down rate for that tax year.
Common mistake: treating the closing date on the HUD-1 as the placed-in-service date. For a rental, the clock starts when the unit is actually rent-ready or listed on Airbnb or VRBO, which is often weeks or months after closing.
2. Order or update your cost segregation study
A cost segregation study is what identifies the components eligible for bonus depreciation in the first place. On a typical residential rental, 20% to 45% of the depreciable basis gets reclassified out of the 27.5-year schedule into 5, 7, and 15-year buckets. A flat-fee engineering-based study runs $2,200 and typically produces a 100-plus page audit-ready report in 3 to 5 business days with no site visit required.
Expected outcome: a line-by-line breakdown of your building's components with dollar values assigned to each class life, ready to hand to your CPA.
3. Recalculate the bonus depreciation math for your bracket
Here's the math on a $500,000 short-term rental, assuming a cost segregation study reclassifies 25% of the depreciable basis, or $125,000, and the owner sits in the 37% tax bracket.
Under OBBBA's 100% bonus depreciation, the full $125,000 is deductible in year one. At 37%, that's $46,250 off the tax bill in the year the property goes into service.
Under the pre-OBBBA phase-down, only 40% of that $125,000, or $50,000, would have been immediately deductible in 2025, worth $18,500 at the same bracket. The OBBBA bonus depreciation rules for rental property add $27,750 to the first-year deduction on the exact same property, purely from the change in law.
4. Check whether the short-term rental loophole applies to your income
Reclassified losses only offset W-2 wages if the property qualifies as a short-term rental and you materially participate under IRS rules, generally more than 100 hours and more than any other individual involved with the property. Review the 100-hour material participation test before assuming the losses will hit your W-2 income instead of staying passive.
5. Apply the deduction against ordinary income
For owners who clear the material participation bar, the accelerated depreciation flows through Schedule E and offsets W-2 wages dollar for dollar in the year it's taken, not just other passive rental income. This is the mechanism that makes the short-term rental loophole valuable for high W-2 earners in 2026.
6. File the right form: current year vs. catch-up
If the property was placed in service in 2026, the reclassified depreciation goes straight onto the current year's Form 4562. If you've owned the property for years and never ran a study, the missed depreciation gets corrected through Form 3115, a change in accounting method, not an amended return. This lets you catch up years of missed deductions in a single filing.
7. Avoid budgeting on the old phase-down schedule
The most common mistake in 2026 is running numbers off memory: 40% bonus depreciation for 2025, 20% for 2026, 0% by 2027. That schedule no longer applies to property placed in service after January 19, 2025. Budgeting on outdated phase-down percentages under-states the deduction by tens of thousands of dollars on a mid-size rental.
“If your placed-in-service date lands before January 19, 2025, you're stuck with the old phase-down rate, not the new 100% rule.”
Get your OBBBA savings estimate
A free manual estimate shows what 100% bonus depreciation is worth on your property.
Troubleshooting
- Property placed in service in early 2025, before OBBBA passed. It still qualifies for the 40% bonus depreciation phase-down rate for that tax year, not 100%. Run the math both ways with your CPA before assuming full expensing.
- You already filed a 2025 return assuming 40%. Once the study is complete, Form 3115 or an amended return can capture the difference in a later filing year.
- Land value is inflating your depreciable basis. Land itself never depreciates, but land improvements like driveways, fencing, and landscaping are separate assets that also qualify for bonus depreciation once identified.
- The STR doesn't clear material participation. Without more than 100 hours and more involvement than anyone else on the property, losses stay passive and can't offset W-2 income regardless of the depreciation amount.
- Your state doesn't conform to federal bonus depreciation. A number of states decouple from IRC Section 168(k) and require an add-back on the state return, which shrinks the total benefit below the federal number.
Tools and resources
- A property basis worksheet and prior depreciation schedule, which your CPA or the study provider will need before starting
- The IRS Cost Segregation Audit Technique Guide, which examiners use to review studies for engineering support
- A record of average outcomes across short-term rental owners, since results vary by property type, size, and reclassification percentage
- Time logs proving material participation hours if the deduction is meant to offset W-2 wages
What to do next
If you've owned a residential rental for more than a year and never had a cost segregation study done, the bigger opportunity might not be a new property at all. It's catching up depreciation you already missed on the one you have.
FAQ
What does OBBBA mean for cost segregation?
OBBBA, the One Big Beautiful Bill Act, restored 100% bonus depreciation for residential rental property placed in service after January 19, 2025. This means reclassified building components from a cost segregation study are fully deductible in year one instead of following the prior phase-down schedule.
Is bonus depreciation 100% in 2026?
Yes, for residential rental property placed in service after January 19, 2025, bonus depreciation sits at 100% in 2026. Property placed in service before that date follows the earlier phase-down rate for the year it went into service.
Does OBBBA apply to property bought before 2025?
OBBBA's 100% bonus depreciation rate applies based on the placed-in-service date, not the purchase date. A property bought years ago that hasn't had a cost segregation study can still capture the reclassified depreciation, just calculated against its original placed-in-service date and the rate in effect then.
Can I do a cost segregation study on a property I've owned for years?
Yes, a cost segregation study can be run on a property owned for years, and missed depreciation is typically caught up using Form 3115 rather than amending every prior return. This lets an owner capture years of under-claimed deductions in a single current-year filing.
How much can bonus depreciation save on a $500,000 short-term rental?
On a $500,000 short-term rental with 25% of the basis reclassified through cost segregation, that's $125,000 in accelerated depreciation. At a 37% tax bracket, 100% bonus depreciation under OBBBA is worth $46,250 in year-one tax savings.
What is the short-term rental loophole and does OBBBA affect it?
The short-term rental loophole lets qualifying STR owners use accelerated depreciation losses to offset W-2 income, provided they materially participate in the property. OBBBA doesn't change the material participation rules, but it does increase the size of the deduction available once those rules are met.
Do I need Form 3115 to catch up missed depreciation?
Form 3115 is the standard route for catching up depreciation missed on a property owned for more than a year, since it's treated as a change in accounting method rather than an error requiring amended returns. A CPA typically files it alongside the current year's return.
Does 100% bonus depreciation apply to land improvements?
Yes, land improvements identified in a cost segregation study, such as driveways, fencing, and landscaping, qualify for the same 100% bonus depreciation rate as other reclassified components when placed in service after January 19, 2025.
One last thing
The 25 to 45% reclassification range in a typical study isn't the same across every property type. Properties with more finishes per square foot, like a fully furnished short-term rental with multiple bathrooms and outdoor living space, tend to land on the higher end of that range, while a bare long-term rental with minimal upgrades sits lower. The placed-in-service date decides the rate, but the property itself decides how much gets reclassified in the first place.