Bonus Depreciation Real Estate Guide

Bonus depreciation is back at 100%, and this time it's permanent.

If you own investment real estate or are considering a purchase in 2026, this changes the math significantly.

After years of phasing down under the 2017 Tax Cuts and Jobs Act, the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, restored 100% bonus depreciation and made it permanent under federal law.

For STR and real estate investors, this is one of the most meaningful tax developments in years, and it affects how you should think about acquisitions, renovations, and cost segregation going forward.

Tennessee STR Investment Strategy

What Is Bonus Depreciation?

Bonus depreciation is a tax provision that allows investors to immediately deduct a percentage of the cost of qualifying assets in the year they are placed in service, rather than depreciating them gradually over their standard useful life.

In real estate, this applies to personal property and land improvements identified through a cost segregation study. Instead of depreciating a hot tub over 5 years or a fence over 15 years, bonus depreciation lets you deduct the full qualified percentage in year one. At 100%, that means a full immediate deduction, which can dramatically reduce taxable income in the year of purchase.

The Full Timeline, Where Things Stood and Where They Are Now

Bonus depreciation went through a significant phase-down before being fully restored. Here is the complete timeline:

Tax Period 2023

Bonus Depreciation Rate 80% | Phasing down under TCJA
Tax Period 2024

Bonus Depreciation Rate 60%| Continued phase-down
Tax Period Jan 1-19, 2025

Bonus Depreciation Rate 40% | Final weeks of phase-down period
Tax Period After Jan 19, 2025

Bonus Depreciation Rate 100% | OBBBA restores full bonus depreciation
Tax Period 2026 and beyond

Bonus Depreciation Rate 100% | Currently permanent under federal law

The IRS released interim guidance in early 2026 confirming the implementation details. Note that transition elections are available allowing some taxpayers to elect lower percentages for certain 2025 property, so consult a qualified CPA if you placed assets in service during the transition window.

What 100% Bonus Depreciation Means for STR Investors

For Airbnb and short-term rental investors, the restoration of 100% bonus depreciation significantly increases the value of a cost segregation study. Here is what changes:

Short-life assets can be fully expensed in year one

Personal property classified as 5- or 7-year assets and land improvements classified as 15-year assets identified in a cost seg study can generally be deducted in full in the year the property is placed in service.
Qualified Improvement Property (QIP) qualifies

QIP, which includes interior improvements to nonresidential buildings, is eligible for 100% bonus depreciation. This matters for investors who renovate or improve commercial or mixed-use properties.

Bonus depreciation can create or increase paper losses

For investors who materially participate in their STR activity or who qualify as Real Estate Professionals (REPS), these losses can offset active and W-2 income directly, not just passive income. This is where the strategy becomes most powerful for high-income earners.
2026 acquisitions and renovations carry significant deduction potential

Any property purchased or major renovation completed in 2026 is fully eligible for 100% bonus depreciation on qualifying components. The timing advantage that existed in 2017-2022 is back.

Real Examples, What This Looks Like in Practice

Here is how 100% bonus depreciation plays out for two common investment profiles in the Tennessee STR market:

Example 1 - Smoky Mountain Cabin Purchase (2026)

Investor purchases a $750,000 Gatlinburg cabin. A cost segregation study identifies $200,000 in personal property and land improvements eligible for bonus depreciation. At 100%, the investor can deduct the full $200,000 in year one, in addition to standard depreciation on the remaining structure. For an investor who qualifies under the STR loophole or REPS, that deduction offsets active income directly.
Example 2 - Nashville STR Property (2026)

Investor purchases a $950,000 Nashville group travel property. Cost segregation identifies $250,000 in qualifying components. At 100% bonus depreciation, the full $250,000 is deductible in year one. Combined with standard depreciation on the remaining structure, the total first-year depreciation deduction can exceed $280,000, a materially different outcome than the 20% rate that would have applied under the old TCJA phase-down.

These examples assume the investor qualifies under the short-term rental loophole or as a real estate professional. Results vary by individual tax situation, always consult a qualified CPA.

Furnishings and Appliances, Don't Overlook These

One of the most commonly missed opportunities in STR investing is the depreciation available on furnishings and appliances purchased to set up a rental property. These items are personal property and at 100% bonus depreciation can be fully deducted in year one.

Furniture and Decor Beds, sofas, tables, chairs, and decorative items used in the rental all qualify as 5-year personal property, fully deductible in year one. Appliances Refrigerators, washers, dryers, dishwashers, and kitchen equipment qualify for 5-year depreciation and are fully eligible for bonus depreciation. Electronics and Entertainment Smart TVs, gaming consoles, sound systems, and other electronics placed in service as part of the rental qualify. Hot Tubs and Outdoor Equipment Hot tubs are among the highest-value items in an STR property and qualify as personal property, fully deductible in year one under current law.

Investors who purchase a fully furnished STR property or who furnish one from scratch often find that furnishings alone represent $30,000-$80,000 in bonus-eligible assets. Keeping detailed records of every purchase with receipts is essential for supporting these deductions.

Land Improvements, The 15-Year Asset Category

Land improvements are a separate category from both the building structure and personal property. They depreciate over 15 years under standard depreciation and are eligible for 100% bonus depreciation under current law, meaning a full deduction in year one.

• Driveways, parking areas, and access roads

• Landscaping, retaining walls, and grading

• Outdoor decks, patios, and fire pit areas

• Fencing and exterior lighting

• Septic systems and private utility connections

For cabin properties specifically, land improvements can represent a meaningful percentage of total value, particularly on properties with significant outdoor infrastructure. A cost segregation study will identify and quantify these components as part of the full analysis.

Important Caveats to Know

100% bonus depreciation is a powerful tool, but there are important details that affect how and when it applies:

Placed in service, not just purchased The asset generally must be placed in service, meaning ready and available for use, not just purchased or under contract. Timing your closing and setup matters. Buildings themselves still do not qualify The building structure itself, depreciated over 27.5 or 39 years, does not qualify for bonus depreciation. Only certain components identified through a cost segregation study qualify. This is why cost seg is essential to capturing the benefit. Tennessee state tax treatment may differ Tennessee follows federal depreciation rules differently for state income tax purposes in some cases. State treatment can diverge from federal, so your total deduction picture may look different at the state level. Confirm with a CPA who understands Tennessee-specific rules. Transition elections for 2025 property Taxpayers who placed assets in service during the 2025 transition window have the ability to elect lower bonus depreciation percentages for certain property. If this applies to you, review your options with a qualified tax professional.

Work With an Investment-Focused Realtor

Most agents don't talk about cost segregation. Karen does.

She works with clients who are building real estate portfolios with tax efficiency in mind, and that means understanding which properties generate the strongest depreciation, not just the strongest revenue.

She can connect you with CPAs who specialize in STR and real estate investor tax strategy, and help you find properties that are positioned to perform on every dimension.

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