100% Bonus Depreciation is Now Permanent: What IRS Notice 2026-11 Means for Rental Property Investors
The Biggest Tax Change for Real Estate Investors in Years
For years, rental property investors watched 100% bonus depreciation slowly phase out under the Tax Cuts and Jobs Act schedule. The rate dropped from 100% in 2022 to 80% in 2023, then 60% in 2024, and 40% in 2025. Many investors were bracing for 20% in 2026 before it disappeared entirely. That storyline is over.
The One Big Beautiful Bill Act (OBBBA) permanently restored 100% additional first-year depreciation under IRC Section 168(k) for qualifying property acquired and placed in service after January 19, 2025. This is not a temporary extension or a phase-in. It is a permanent change to the tax code, and it fundamentally transforms the economics of cost segregation for every rental property investor in the country.
On January 14, 2026, the IRS issued Notice 2026-11 to provide interim guidance on exactly how to apply the new rules. If you own or are planning to purchase rental property, understanding what this notice says and what it means for your tax strategy is essential reading right now.
What IRS Notice 2026-11 Actually Says
Notice 2026-11 provides practical guidance for taxpayers navigating the transition from the old TCJA phase-down rules to the new OBBBA permanent rules. The core message is straightforward: for property placed in service after January 19, 2025, taxpayers should continue applying the existing Section 168(k) regulations, but with updated acquisition date thresholds. Specifically, references in the regulations to "September 27, 2017" are replaced with "January 19, 2025," and references to "September 28, 2017" are replaced with "January 20, 2025."
This matters because the existing regulations contain years of detailed guidance on what qualifies for bonus depreciation, how to compute it, and what elections are available. Rather than rewriting all of those rules from scratch, the IRS is telling taxpayers to use the familiar framework but apply it to the new effective date. The existing Treasury regulations under Section 1.168(k)-2 remain operative; only the key dates change.
The notice also addressed one of the most practically important planning strategies available to investors who own or are renovating property: the component election.
The Component Election: A Critical Planning Tool
One of the most valuable provisions clarified by Notice 2026-11 is the continued availability of the component election under Treas. Reg. Section 1.168(k)-2(c). Here is why this matters so much.
Suppose you started a significant renovation or construction project before January 20, 2025, the OBBBA cutoff date. Under a strict reading of the law, the entire project might fail to qualify for 100% bonus depreciation because construction began before the cutoff date. The component election solves this problem. It allows taxpayers to claim 100% bonus depreciation on individual components of a larger self-constructed project, as long as those specific components were acquired or the construction of those specific components began after January 19, 2025.
In practical terms, if you were renovating an apartment building and a substantial amount of work occurred after January 20, 2025, including new electrical wiring, HVAC equipment, flooring, or landscaping improvements, each of those components can be analyzed separately. The ones that qualify under the new date threshold are eligible for immediate 100% expensing, even if the broader project predates the cutoff.
For investors who undertook major renovations in 2025, this is potentially a very large opportunity. A cost segregation study that layers component-level analysis on top of the property-level analysis can identify exactly which pieces qualify and document the basis for each deduction in a way that will hold up under IRS scrutiny.
How This Changes the Math on Cost Segregation
The combination of 100% permanent bonus depreciation and a cost segregation study is the most powerful first-year tax deduction available to rental property investors. Here is a concrete illustration of what the numbers can look like.
Consider a long-term rental property purchased for $600,000, with $480,000 allocated to the depreciable building after land value is excluded. A cost segregation study typically identifies somewhere between 20% and 35% of the depreciable building value as components eligible for 5-year, 7-year, or 15-year recovery periods rather than the standard 27.5-year residential schedule. For this property, assume the study identifies $150,000 in bonus-eligible components: roughly $80,000 in 5-year personal property like appliances, carpeting, and certain fixtures; $30,000 in 7-year property; and $40,000 in 15-year land improvements such as parking areas, fencing, and landscaping.
Under the old TCJA phase-down rules with a 20% bonus rate in 2026, the first-year bonus deduction on those components would have been $30,000. Under the OBBBA, the entire $150,000 is deductible in year one. At a combined federal and state marginal tax rate of 40%, the difference is $48,000 in additional first-year tax savings. That is real money, and it comes on top of the accelerated MACRS depreciation the investor captures on those same components over the applicable recovery period.
For a short-term rental investor who qualifies for the STR exception under IRC Section 469 and materially participates in the activity, those losses are non-passive and can offset W-2 income, business income, or other active income dollar for dollar. The result in the right circumstances is a six-figure tax reduction in the year of purchase.
What Property Qualifies for 100% Bonus Depreciation
Not every asset in a rental property qualifies for bonus depreciation. Understanding what does and does not qualify is one of the primary reasons a professional cost segregation study is more valuable than a rough back-of-envelope estimate.
Property that generally qualifies includes assets with a MACRS recovery period of 20 years or fewer. In the context of a residential rental property, this typically means personal property items (5-year and 7-year assets) like furniture, appliances, specialty plumbing, accent lighting, certain flooring, and similar tangible personal property. It also includes 15-year land improvements such as driveways, parking lots, sidewalks, fencing, landscaping, outdoor lighting, and swimming pools.
The building structure itself, which depreciates over 27.5 years for residential property or 39 years for commercial property, does not qualify for bonus depreciation. Qualified improvement property, meaning interior improvements to a nonresidential building placed in service after the building was first placed in service, has a 15-year recovery period under the CARES Act technical correction and does qualify. This is an important distinction for investors who purchase commercial mixed-use properties or who make improvements to existing commercial structures.
Real property with a recovery period greater than 20 years is excluded from bonus depreciation under IRC Section 168(k)(2)(A)(i). This is why proper component-level analysis done by a qualified engineer matters: the engineer's determination of what constitutes a structural component versus tangible personal property is the foundation of the entire deduction.
Retroactive Studies and Look-Back Claims
One of the questions we hear most often from investors who purchased property before the OBBBA's effective date is whether they missed the boat. The answer depends on when the property was placed in service.
Properties placed in service after January 19, 2025 are fully eligible for 100% bonus depreciation on all qualifying components, regardless of whether a cost segregation study has already been filed. If you purchased a rental property in 2025 or 2026 and have not yet done a cost segregation study, you have not missed anything. The full 100% rate still applies.
For property placed in service before January 20, 2025, the old TCJA rules determine the applicable bonus rate. A look-back study using IRS Form 3115 can still capture accelerated depreciation that was not claimed in prior years, and in many cases the MACRS acceleration alone (without bonus depreciation) is worth thousands of dollars in present-value tax savings. But the 100% bonus rate under the OBBBA will not apply retroactively to property that was placed in service before the cutoff date.
If you completed a cost segregation study in 2024 or early 2025 when the bonus rate was lower, it may be worth revisiting with your CPA to see whether any components were placed in service after January 19, 2025, and therefore qualify for the higher permanent rate under the OBBBA.
State Tax Conformity: An Important Caveat
Federal bonus depreciation rules do not automatically apply at the state level. States choose whether to conform to federal depreciation rules, and many do not. This is one of the most commonly overlooked aspects of cost segregation planning.
States like California, Illinois, and New Jersey have historically decoupled from federal bonus depreciation entirely. This means that while you take a $150,000 first-year deduction on your federal return, your state return may require you to add back all or part of that deduction and use a much slower depreciation schedule for state tax purposes. In high-tax states, this mismatch can create a state tax bill that partially offsets the federal savings.
Whether this makes cost segregation less attractive depends on your specific situation. In most cases, the federal savings are large enough to justify the study even if the state requires an addback. But the analysis should be done explicitly with your CPA, and your cost segregation study should document the state-specific treatment clearly so there are no surprises at filing time.
Some states that have historically conformed to federal bonus depreciation rules may need to update their conformity statutes to reflect the OBBBA change. Your tax advisor should confirm the current conformity status for any states where your rental properties are located before you count on state-level deductions matching your federal figures.
Elections Available Under IRS Notice 2026-11
The new rules are not take-it-or-leave-it. Taxpayers retain the ability to make certain elections that can be strategically useful in specific circumstances.
For property placed in service in the first tax year ending after January 19, 2025, a taxpayer may elect to use a 40% bonus rate instead of the full 100%. For most investors, electing out of 100% bonus makes no sense. But there are scenarios where it could be beneficial: if the investor has large net operating loss carryovers that already shelter income, if state addback rules create a near-term cash flow problem, or if the investor wants to preserve depreciation deductions for future years when they expect to be in a higher bracket.
A taxpayer may also elect to treat specified plants as eligible for bonus depreciation, which is relevant for certain agricultural investors. And the component election described earlier, which must be made on the taxpayer's return for the year the property is placed in service and is irrevocable once made, is among the most significant planning tools clarified by the notice.
These elections require careful coordination between your cost segregation provider and your CPA. The study itself should identify the qualifying components and provide the documentation needed to support whichever elections you decide to make.
What This Means for Your 2025 and 2026 Tax Returns
If you placed a rental property in service in 2025 and have not yet filed your 2025 return, you should order a cost segregation study before filing. The full 100% bonus rate applies, and the first-year deduction will be substantially larger than it would have been under the old phase-down schedule. Do not leave that money on the table.
If you are purchasing a rental property in 2026, the same logic applies. The study should ideally be completed before year-end so that the asset identification, recovery period classifications, and placed-in-service dates are all properly documented in the study report, which your CPA will use when preparing Schedule E or the applicable partnership or S-corp return.
If you already filed your 2025 return without a cost segregation study, it may be possible to file an amended return or a Form 3115 to claim the missed depreciation, depending on the circumstances. This is a conversation to have with your CPA before the extended filing deadline passes.
The Bottom Line
The permanent restoration of 100% bonus depreciation is not a footnote. It is the most significant improvement to real estate tax law in years, and combined with a properly executed cost segregation study, it puts more money in rental property investors' pockets in year one than any time since 2022. IRS Notice 2026-11 confirms the mechanics and gives investors and their advisors the roadmap they need to implement the strategy correctly.
If you own rental property placed in service after January 19, 2025, and have not yet done a cost segregation study, the window to maximize your first-year deduction is right now. Stratum delivers engineering-based, IRS audit-ready cost segregation studies in 14 business days, and our studies include full component-level documentation that supports the elections available under Notice 2026-11. Get a free estimate today and see exactly how much the permanent bonus depreciation change puts back in your pocket.