Anyone with passive income can put the deduction to work against it. Real estate professionals can put it to work against almost everything else. With 93 days left in the tax year, here’s how.
FL Real Estate Insider — Week of September 29, 2026
By Luis Noronha
100% bonus depreciation is back, and this time it has no end date. Section 70301 of the One Big Beautiful Bill Act gave taxpayers “a permanent 100 percent additional first year depreciation deduction” for qualified property acquired and placed in service after January 19, 2025. That’s the IRS’s own wording, in the interim guidance it issued this year. (IRS — Notice 2026-11)
No phasedown. No sunset.
In my view, for real estate investors this is one of the most useful provisions in the tax code — and it reaches more of your income than its reputation suggests. So the question for this issue is simple: have you planned to use it this year?
What actually changed
Under the 2017 tax law, bonus depreciation was phasing down 20 points a year. OBBBA replaced that phasedown with a permanent 100% for property acquired after January 19, 2025 — “acquired” meaning the written binding contract was signed after that date. (IRS — Notice 2026-11)
It applies to property with a recovery period of 20 years or less. (26 U.S.C. § 168(k)(2)(A)) The apartment building itself is depreciated over 27.5 years, and land isn’t depreciable at all. (IRS — Publication 527) The opportunity is in everything inside and around the building that wears out faster: Publication 527 lists appliances, carpets and furniture at 5 years, and roads, shrubbery and fences at 15. (IRS — Publication 527)
A cost segregation study is how those components get identified — and once they are, bonus depreciation writes them off in year one instead of over decades.
Two details widen the opportunity:
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Used property qualifies, not just new. Used property can qualify as long as the buyer hadn’t used it before and the purchase meets the related-party and other acquisition rules. (26 U.S.C. § 168(k)(2)(A)(ii), (E)(i)) The short-lived components of a 1980s apartment building qualify just as they would in a new one.
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Leverage multiplies the deduction. Depreciation runs on basis, and basis includes what you borrowed. The IRS’s own example: buy a building for $20,000 cash, assume an $80,000 mortgage, and “your basis is $100,000.” (IRS — Publication 551) The deduction is computed on the bank’s money too.
Who benefits: anyone with passive income
Rental real estate is a passive activity by default. (IRS — Publication 925) That sounds like a limitation. For a lot of investors, it’s the opportunity: a passive loss offsets passive income — and passive income includes more than rent.
Here’s the part that widens it. Publication 925 says passive activity income “includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity.” (IRS — Publication 925)
That covers:
- Net rental income from buildings you already own.
- Rental income passed through on K-1s from other real estate partnerships where you’re a limited partner.
- The gain when you sell a rental property or a passive deal interest.
That last one is the year-end play. If you’re selling a rental or exiting a passive investment in 2026, bonus depreciation from a new acquisition placed in service this year can offset the passive gain from that sale, as long as you also hold the new property as a passive investor.
Gains on stocks and bonds are a different category — the IRS treats them as portfolio income — so the real estate gain is the one to pair with the deduction. (IRS — Publication 925)
And the loss you can’t use this year isn’t lost. It carries forward to future years and is generally allowed in full in the year you dispose of your entire interest in a fully taxable sale to an unrelated party. (IRS — Publication 925) My read, and it’s opinion: for a limited partner, that makes bonus depreciation a deduction you bank now and spend against the passive income your real estate holdings produce later.
Who benefits most: real estate professionals
For people who qualify as real estate professionals, the same deduction can reach wages, business income and other nonpassive income, up to the limit below.
A rental activity stops being passive when you “materially participated as a real estate professional.” (IRS — Publication 925) To qualify, more than half of your working hours must be in real property businesses where you materially participate, and those hours must exceed 750 a year — and you must also materially participate in the rental itself. Developers, builders, brokers and full-time operators are the most likely to clear it, though an employee’s hours count only if they own more than 5% of the employer. On a joint return, each spouse’s hours count separately for the test, but your spouse’s participation does count toward material participation in the rental. (IRS — Publication 925)
Short-term rental operators have a second route. An activity where “the average period of customer use of the property is 7 days or less” isn’t treated as a rental activity at all, so the ordinary material-participation tests apply instead. (IRS — Publication 925)
How much can it offset? For 2026, net business losses can offset up to $256,000 of other income — $512,000 on a joint return (IRS — Rev. Proc. 2025-32, § 4.31), with anything above that carrying forward.
The Florida angle
Florida “does not impose personal income tax.” (Florida Department of Revenue — Tax Information for New Residents) For a Florida resident, the federal return is the whole calculation — no separate state depreciation schedule to reconcile.
Depreciation is also part of why the largest allocators are paying attention. U.S. family offices have doubled their real estate allocation to 20% over three years. “There is just not enough supply, especially in multifamily housing,” UBS’s Daniel Scansaroli told Modus, which added that depreciation and U.S. tax benefits have made the asset class even more attractive. (Modus — UBS 2026 Global Family Office Report) I wrote about that divergence in August and argued both reasons favor new construction. On supply, I still think so. On tax, my updated view is broader: bonus depreciation reaches the short-lived components of an existing building just as it does a new one.
Plan the exit, too
One thing to build into the model from day one. When you sell, gain on the personal-property components — appliances, carpets, furniture, which are § 1245 property — is taxed as ordinary income up to the depreciation taken (IRS — Publication 544), and depreciation on real property comes back largely as unrecaptured § 1250 gain at a maximum 25% rate. (IRS — Topic 409)
Randall Weaver, a CPA at Trout CPA who has worked with real estate investors and developers for more than 20 years, frames it well: cost segregation “changes when depreciation deductions are claimed,” and it “can be useful from a cash flow perspective.” The question he poses is whether “the earlier deduction is worth more than the later tax cost.” (Trout CPA — Cost Segregation Is a Timing Strategy, Not a Tax Loophole, September 14, 2026) In my view, for an investor with the income to absorb it, it usually is — a dollar of tax deferred for years is capital working in the meantime.
The December 31 checklist
None of this is tax advice. Take it to your CPA before you act on any of it.
- Confirm the acquisition date. Acquired after January 19, 2025, under a binding contract signed after that date.
- Get it placed in service. Depreciation starts when property is “ready and available” for its use. (IRS — Publication 527) Closed but not rentable until January means a 2027 deduction.
- Commission a documented study. The IRS audit guide tells examiners to “view this approach with caution” when a study rests on industry averages rather than documentation. (IRS — Cost Segregation Audit Technique Guide, Publication 5653) Ask for a study built on documentation, not averages.
- Match the loss to your income. Passive gains or rental income this year? Real estate professional hours? Short-term rental? Know which bucket you’re in before you invest.
- Log your hours now. The IRS accepts “an appointment book, calendar, or narrative summary.” (IRS — Publication 925) Hours written down in October are far easier to defend than hours rebuilt in April.
- Model the exit. Recapture belongs in the return from day one.
From the Developer’s Seat
This section is my position as an operator. The sections above are the IRS’s.
The homes and townhomes Lana builds to sell are inventory, not rental property, so they produce no depreciation — which is part of why we’re now exploring a second lane: existing apartment buildings of up to 100 units, buildings that are already rentals, where the opportunity is operational. I think about those deals through five levers that compound: monthly cash flow, depreciation, principal paid down by rent, appreciation from fixing what’s broken operationally, and leverage — none guaranteed, and leverage cuts both ways at today’s rates. Bonus depreciation is the lever that works from year one, and my rule is that it strengthens a deal that already works on its operations rather than rescuing one that doesn’t; “value-add” should mean better operations, not the fee-and-eviction playbook I wrote about in Wall Street Landlords. Which brings me back to the question I opened with: have you planned to use this benefit this year — and what passive income or gain on your 2026 return could it shelter?
If you’re an accredited investor, how we think about underwriting deals like these — the levers, the assumptions and the downside cases — is laid out in the Lana Investor Memo.
→ Request access at coastal-living-collection.com (accredited investors only).
Until next week,
Luis
Sources
- IRS — Notice 2026-11, Interim Guidance on Additional First Year Depreciation Deduction under § 168(k) — permanent 100% for property acquired and placed in service after January 19, 2025 (OBBBA § 70301); replacement of the TCJA phasedown of 20 percentage points annually; written-binding-contract acquisition rule.
- 26 U.S.C. § 168 (Cornell LII) — § 168(k)(2)(A) recovery period of 20 years or less; § 168(k)(2)(A)(ii) and (E)(i) used-property acquisition requirements; 27.5-year residential rental recovery period.
- IRS — Publication 527, Residential Rental Property — land not depreciable; 27.5-year recovery; 5-year appliances, carpets, furniture; 15-year roads, shrubbery, fences; “ready and available” placed-in-service rule.
- IRS — Publication 551, Basis of Assets — cost basis includes debt obligations; $20,000 cash + $80,000 assumed mortgage = $100,000 basis.
- IRS — Publication 925, Passive Activity and At-Risk Rules — rental activity passive unless real estate professional; definition of passive activity income, including gain on disposition, and exclusion of portfolio income (interest, dividends, and gain on property held for investment); carryforward and release on fully taxable disposition to an unrelated party; 750-hour and more-than-half tests; joint-return spouse rules; 7-day average customer use; proof of participation.
- IRS — Rev. Proc. 2025-32, § 4.31 — 2026 excess business loss threshold, $256,000 ($512,000 joint).
- IRS — Publication 544, Sales and Other Dispositions of Assets — § 1245 gain treated as ordinary income to the extent of depreciation.
- IRS — Topic No. 409, Capital Gains and Losses — unrecaptured § 1250 gain, maximum 25% rate.
- IRS — Publication 5653, Cost Segregation Audit Technique Guide (Rev. 2-2025) — caution on “rule of thumb” studies.
- Trout CPA — Cost Segregation Is a Timing Strategy, Not a Tax Loophole (Randall Weaver, CPA, September 14, 2026)
- Florida Department of Revenue — Tax Information for New Residents (GT-800025) — Florida does not impose personal income tax.
- Modus — Allocation Alterations, Dollar Fears and Fewer Direct Investments (May 29, 2026) — Daniel Scansaroli, UBS; U.S. family-office real estate allocation doubled over three years to 20%; supply quote.
- Prior published in this newsletter: Family Offices Are Cutting Real Estate Allocations. In the U.S., They Just Doubled Down. (August 4, 2026) · The Fed Raised Rates 12–0. Florida’s Million-Dollar Home Sales Were Already Up 8.8%. (September 21, 2026) · Wall Street Isn’t Raising Your Rent. It’s Keeping You a Renter. (May 4, 2026)
