This week, I’m breaking down one of the most misunderstood — and most powerful — tax strategies in real estate: bonus depreciation.
A surprising number of investors either missed it in 2025… or never knew it existed at all.
The good news? 2026 still offers a full-strength opportunity to use it correctly.
Below is a clear, straightforward breakdown of what it is, how it works, who it benefits, and why it’s such a game-changer when used properly.
When you buy real estate, the IRS doesn’t let you write off the full purchase price in year one.
Instead, residential property is depreciated over 27.5 years.
So a $1,000,000 property might generate roughly:
Helpful… but not exactly a needle-mover for high earners.
Your property isn’t one asset. It’s a collection of many components — and most don’t last 27.5 years.
Think:
These all wear out much faster.
The IRS allows you to break a property into categories:
This is done through a cost segregation study.
Bonus depreciation lets you:
👉 Write off 100% of those shorter-life assets in year one
Instead of spreading deductions over 5, 7, or 15 years… you take them immediately.
That’s what creates those significant first-year write-offs you hear about.
And yes — those results are often accurate when executed correctly.
Here’s where things get interesting...
Most long-term rentals are considered passive income, meaning:
👉 Depreciation usually can’t offset W-2 or business income
Short-term rentals (STRs) are different.
If structured correctly, they can be treated as active (non-passive) income
Which means depreciation can offset:
This is why STRs have become a go-to strategy for:
Your property must have:
👉 Average guest stay ≤ 7 days (or 30 days or less with significant services, but 7 is the clean rule)
This is what separates STRs from traditional rentals.
You (or your spouse) must be actively involved.
You need to meet one of the IRS material participation tests, most commonly:
👉 100+ hours AND more than anyone else involved
OR
👉 500+ hours total
Examples of qualifying activity:
👉 You do NOT have to self-manage everything — but you must be meaningfully involved.
See above
If one spouse materially participates, the household can often benefit — even if the other spouse earns most of the income.
This is a major reason STRs are popular with:
Let’s keep it simple:
With 100% bonus depreciation:
👉 $240,000 deduction in year one
At a 40% tax rate:
👉 ~$96,000 in tax savings
That’s not a rebate. That’s not deferred.
That’s money you never paid in taxes.
And now you can:
This isn’t just a tax play — it’s a timing advantage.
You’re essentially:
You’re reinvesting money that would’ve gone to the IRS — at the exact moment it matters most.
This strategy tends to hit hardest for:
Not all STR markets are equal.
Nashville offers:
When you combine:
👉 Strong STR market 👉 With a booming economy
You're getting tax benefits, potential cash flow, and you're positioned in a market that will likely appreciate over time.
This is exactly how many of my clients are approaching real estate now.
Not just buying properties — but building intentional portfolios while maximizing tax benefits.
At The Costigan Group, we focus on:
Bonus depreciation is powerful timing tool built into the tax code.
And with 100% still in place for 2026, we’re in one of the strongest planning windows in years.
Used correctly, the difference between:
👉 Knowing about this vs 👉 Actually executing it
…can easily be six figures per property.
I am not a CPA or tax attorney. This article is for educational purposes only and should not be considered tax, legal, or accounting advice. Always consult your CPA and qualified tax professionals before making decisions related to bonus depreciation, cost segregation, or short-term rental classification.
Rabello Group
4025 Hillsboro Pike 601
Nashville, TN 37215