Depreciation is the deduction most rental property owners understand the least, even though it's often the single largest write-off on the return. The rules changed significantly in 2025, and a lot of the guidance still circulating — including some of our own older content — reflects the old phase-down schedule rather than what's actually in effect now.
The 27.5-Year Baseline Every Rental Gets
Every residential rental property depreciates the building portion of its value on a straight-line basis over 27.5 years. This has been stable law for a long time and wasn't touched by recent legislation. Commercial property uses a 39-year schedule instead.
Land itself is never depreciable — only the structure. When you buy a rental property, you have to allocate the purchase price between land and building, usually based on the county assessor's land-to-building value ratio at the time of purchase. This matters more than people realize: two identical purchase prices with different land allocations produce meaningfully different annual depreciation deductions.
What Changed: 100% Bonus Depreciation Is Back, Permanently
Bonus depreciation lets you deduct the full cost of certain property in the year you place it in service, instead of spreading it over its normal depreciation schedule. Under the 2017 tax law, bonus depreciation was scheduled to phase down — 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026 before disappearing entirely.
That phase-down no longer applies. The One Big Beautiful Bill Act, signed into law in July 2025, permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. There's no scheduled reduction this time — it's not a temporary rate that reverts in a few years, it's the standing rule going forward.
The building structure itself still doesn't qualify for bonus depreciation directly — it's on the 27.5-year schedule regardless. Bonus depreciation applies to property with a recovery period of 20 years or less, which the building itself doesn't have. This is where cost segregation comes in.
Buying a rental or already holding one? Find out whether a cost segregation study would pay off for your property and your income before you commit to one.
Cost Segregation Is What Makes the New Rule Useful
A cost segregation study is an engineering-based analysis that breaks a rental property's purchase price into components with different depreciation lives instead of treating the whole building as one 27.5-year asset. Appliances, carpeting, and certain fixtures often qualify for 5-year treatment. Land improvements — fencing, landscaping, paving, parking areas — often qualify for 15-year treatment. Anything reclassified into a 20-year-or-shorter category is now eligible for the full 100% bonus depreciation in the first year.
In practice, a cost segregation study on a typical rental property often reclassifies somewhere in the range of 20-30% of the building's value into these shorter categories, though the exact percentage depends heavily on the property type and its specific components. That reclassified portion, instead of depreciating over 27.5 years, gets deducted entirely in year one.
This isn't required — you can simply depreciate the whole building on the standard 27.5-year schedule and never do a cost segregation study. But for an investor with a large enough property and a tax situation where a big first-year deduction is genuinely useful, the math has become considerably more favorable since the phase-down was reversed.
The Passive Loss Limit That Catches Most Landlords
Depreciation is powerful, but it's also frequently limited by the passive activity loss rules. Rental real estate is generally considered a passive activity, meaning losses from it can typically only offset other passive income, not your W-2 wages or other active income.
There's a partial exception: if you actively participate in managing the property, you can deduct up to $25,000 of passive rental losses against non-passive income each year. This allowance phases out as your modified adjusted gross income rises between $100,000 and $150,000, and disappears entirely above $150,000. If your income is above that range and you're not a qualifying real estate professional, a large depreciation deduction from cost segregation may generate a loss that gets suspended rather than used immediately — still valuable, but not the immediate cash benefit you might be expecting.
Real estate professional status, which requires meeting specific hour and participation thresholds, removes this limitation entirely for qualifying owners — but it's a genuinely high bar, not something to assume applies to your situation without actually running the numbers against the requirements.
What Depreciation Costs You at Sale
Every dollar of depreciation you claim reduces your cost basis in the property, which increases your taxable gain when you eventually sell. This is depreciation recapture, and it's taxed differently depending on what kind of property generated it.
Depreciation recaptured from the building structure itself — unrecaptured Section 1250 gain — is taxed at a maximum federal rate of 25%. Depreciation from personal property components reclassified through cost segregation is recaptured as ordinary income, which can run considerably higher depending on your bracket.
This is the same recapture consideration that matters if you're weighing a 1031 exchange down the road — the bigger your accumulated depreciation, the more recapture exposure you're carrying, and the more that shapes whether deferring the gain through an exchange makes sense versus selling outright.
A Practical Example
Say you buy a Seattle-area rental for $700,000, with the county assessment putting roughly $500,000 of that in the building and $200,000 in land. On the standard 27.5-year schedule, that's about $18,180 a year in straight-line depreciation, every year, for as long as you hold the property.
If a cost segregation study reclassifies 25% of that building value — $125,000 — into 5- and 15-year components, that entire $125,000 becomes deductible in year one under 100% bonus depreciation, on top of the depreciation on the remaining $375,000 still running on the standard schedule. The first-year deduction is dramatically larger than the standard approach alone produces — but the tradeoff is a bigger recapture bill down the line and, depending on your income, a deduction that might get suspended under the passive loss rules rather than used right away.
Whether that tradeoff makes sense depends entirely on your income situation, how long you plan to hold the property, and whether you have other passive income to absorb a large loss. It's a calculation worth running before the purchase closes, not after.
Whether a cost segregation study is worth it comes down to your specific income situation and how long you're planning to hold — not a rule of thumb. That's the modeling we walk through with Seattle-area rental owners before recommending anything, rather than assuming it's automatically worth doing.