Can you take bonus depreciation on rental property

Although it sounds complicated, most tax accountants and some software will do the math for you. Cost segregation studies make the most sense for landlords who are considered real estate professionals for tax purposes or expect to come in under the passive loss limits discussed below. These studies may also be worth considering if you consistently have net income from passive activities or a capital gain from the sale of a rental, since losses generated by rental properties can generally offset other passive income or gain from the sale of rental property.

We assume no liability or responsibility for any errors or omissions in this guide. Let us help you navigate this asset class by signing up for our comprehensive real estate investing guide. Depreciation is the method by which investments in capital assets are accounted for as business expenses. Bonus depreciation is a tax concept that allows for a larger than normal portion of a business asset during the first year it is placed into service, and it can be a major tax benefit to all types of small businesses, including real estate investors.

Before we get into the specifics, let's briefly discuss what depreciation is and what it means to rental real estate investors. When you buy supplies or incur general expenses for your business, those costs are typically deductible as business expenses. However, not all business expenses can be deducted like this. In general, if an expense is for something that is temporarily available or is used up immediately like our airfare example , it can be deducted all at once.

On the other hand, if an asset is expected to last for an extended period, its cost typically must be deducted a little at a time over the course of several years, a process known as depreciation. For example, if you buy an appliance for a residential rental property , the IRS defines the expected lifespan as five years.

Note that this is only for depreciation purposes -- we know some appliances can last for decades. So, depreciation rules state that you'll deduct a portion of the cost each year on your next five years of tax returns.

However, the new rules are far more generous. The goal is to encourage businesses to invest in new equipment and machinery over the next few years. It is scheduled to phase out beyond that, according to this chart:. The first thing that real estate owners need to know about bonus depreciation is that it cannot be used on rental properties themselves. Specifically, the bonus depreciation method isn't allowed on assets with a useful life of 20 years or more.

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Examples of such property include:. Important: Sec. So, you need plenty of positive business taxable income to take full advantage of this deduction. Take this into account when considering total rental property improvements depreciation. Another major change in the TCJA law affects rental loss deduction.

If your rental property generates a tax loss — and most properties do, at least during the early years — things get complicated. The passive activity loss PAL rules will usually apply. In general, the PAL rules only allow you to deduct passive losses to the extent you have passive income from other sources, such as positive income from other rental properties or gains from selling them.

Passive losses in excess of passive income are suspended until you 1 have sufficient passive income or gains, or 2 sell the property or properties that produced the losses. An excess business loss is the excess of your aggregate business deductions for the tax year over the sum of:. Your aggregate business income and gains for the tax year, plus 2.

The excess business loss is carried over to the following tax year and can be deducted under the rules for net operating loss NOL carryforwards. Important: This new rental loss deduction rule applies after applying the PAL rules.