Cap rate (capitalization rate) is net operating income divided by purchase price. It tells you the unleveraged return a property generates. A $300,000 property producing $18,000 NOI has a 6% cap rate. It's the most common metric for comparing rental properties because it strips out financing and gives you an apples-to-apples comparison.

What is a good cap rate for rental property?

For residential rentals, 5-8% is generally considered solid. Above 8% is excellent but often comes with higher risk (rougher neighborhoods, older buildings, declining markets). Below 5% is common in expensive metros where investors rely more on appreciation than cash flow.

How is cap rate different from cash-on-cash return?

Cap rate ignores financing — it measures the property's return as if you paid all cash. Cash-on-cash return measures your actual return on the cash you invested, factoring in your mortgage. A property with a 6% cap rate could yield a 12% cash-on-cash return with leverage.

What is the 1% rule in real estate?

The 1% rule says monthly rent should be at least 1% of the purchase price. A $200,000 property should rent for at least $2,000/month. It's a quick screening tool — many successful rentals don't pass the 1% rule, especially in higher-priced markets.

What is the BRRRR strategy?

BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. You buy a distressed property below market value, renovate it, rent it out, then do a cash-out refinance based on the new appraised value to pull out most or all of your original capital and repeat the process.

Where does CapRateCity get its data?

Our city-level data draws from publicly available sources including U.S. Census Bureau population and income figures, Zillow Home Value Index for median prices, HUD Fair Market Rents, and state/county tax assessor records. Data is updated periodically.

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Bonus Depreciation 2026: What Real Estate Investors Need to Know

The most powerful first-year deduction in real estate is still around — but it's been phasing down. Here's where it stands now and how to use it before it shrinks further.

By NumbersLab · 8 min read

Bonus depreciation is one of the most generous provisions in the entire tax code for real estate investors. When it works, it lets you immediately expense a substantial portion of certain components of a property in the year you place it in service, rather than spreading the deduction over 5, 7, 15, or 27.5 years. For investors who can pair it with cost segregation and a non-passive activity, year-one paper losses can wipe out hundreds of thousands of dollars of W2 or business income. The catch: the percentage that qualifies for bonus has been falling every year since 2023, and the path forward keeps changing as Congress argues over extensions.

This article is general education only — not tax advice. Bonus depreciation rates change with legislation. Confirm the current applicable rate with your CPA before relying on any specific number for planning.

What bonus depreciation actually is

Section 168(k) of the Internal Revenue Code allows taxpayers to deduct an additional first-year depreciation allowance — "bonus depreciation" — for qualified property placed in service during the year. The bonus is on top of regular MACRS depreciation. For property eligible for 100% bonus, the entire cost is deducted in year one. For property eligible at a phased-down rate, you deduct the percentage immediately and depreciate the rest under standard schedules.

Year-1 deduction = Bonus % × Cost + Standard MACRS on remainder

The phase-down schedule

The 2017 Tax Cuts and Jobs Act made bonus depreciation 100% for property placed in service from late 2017 through 2022. Then the phase-down kicked in:

2023: 80% bonus depreciation
2024: 60%
2025: 40%
2026: 20% (under original TCJA schedule)
2027 and beyond: 0% (without legislative extension)

Congress has repeatedly debated extending or restoring 100% bonus. As of this article's writing in 2026, certain restoration provisions have been part of competing legislative packages. Confirm the current effective rate and any retroactive provisions with your CPA — the law can change mid-year and even apply retroactively to prior years.

The phase-down has made timing matter. A property placed in service December 31 vs January 1 can produce dramatically different year-one deductions if the bonus rate steps down at year-end.

What qualifies for bonus depreciation

Bonus depreciation applies to "qualified property" with a recovery period of 20 years or less. In real estate, that means:

5-year property: appliances, carpet, removable cabinetry, decorative lighting, certain furniture (in furnished STRs).
7-year property: certain office equipment and machinery.
15-year land improvements: parking lots, sidewalks, fences, landscaping, exterior lighting, signage.

The building structure itself — 27.5-year residential or 39-year commercial — does not qualify for bonus depreciation. That's why cost segregation matters: it's the engineering study that pulls qualifying components out of the 27.5-year building bucket and into the 5/7/15-year buckets where bonus applies.

Used property qualifies (a big change)

Pre-2017, bonus depreciation only applied to brand-new property. The TCJA expanded it to used property as well, as long as the buyer hadn't previously used the asset and didn't acquire it from a related party. For real estate investors this is huge — a 30-year-old apartment complex bought at market price has the same access to bonus depreciation as new construction.

A real example: $1M property with cost seg + bonus

Property: $1,000,000 small multifamily. Land allocation $150,000. Depreciable basis $850,000.
Cost seg study finds: $130,000 of 5-year property and $80,000 of 15-year land improvements. The remaining $640,000 stays as 27.5-year building structure.

Year-1 deductions at 60% bonus (2024 rate, illustrative):
– Bonus on $130K of 5-yr: $78,000 immediate. Plus regular MACRS on remaining $52K: ~$10,400.
– Bonus on $80K of 15-yr: $48,000 immediate. Plus regular MACRS on remaining $32K: ~$1,600.
– Standard depreciation on $640K building (half-year convention): ~$11,600.
Total year-1 deduction: approximately $149,600. Compare to $30,900 without cost seg or bonus — a five-fold increase.

At a 35% combined federal/state marginal rate, that's roughly $52,000 of immediate tax savings vs $11,000 — a $41,000 swing.

The 2026 calculation

At the originally scheduled 2026 rate of 20%, the same property's year-1 numbers would be smaller, but cost seg still helps because 5/7/15-year MACRS depreciates faster than 27.5-year regardless of bonus. The benefit just gets spread over more years. If Congress restores 100% bonus retroactively (as has been proposed), the math snaps back to the 2018-style payoff.

Who can actually use the deduction

Generating a giant paper loss only matters if you have income to deduct it against. Bonus depreciation creates a passive loss in standard rental activity — and passive losses cannot offset W2 income for non-real-estate-professionals.

The three paths to making bonus depreciation actually offset ordinary income:

Real estate professional status: 750+ hours and more than half your work time in real estate.
The STR loophole: average stay of 7 days or fewer plus material participation.
Other passive income: if you have other passive activities throwing off income, bonus losses can offset that.

Section 179 vs bonus: what's the difference?

Section 179 is similar but more limited. It has a dollar cap (around $1.16M for 2024, indexed) and is limited to taxable income from active trades or businesses. Bonus depreciation has no income limit and no dollar cap, but applies only to qualifying property by class life. For most rental real estate investors, bonus is the more relevant tool. Section 179 occasionally helps with large equipment purchases tied to a business activity.

Recapture: the catch on the back end

Aggressive bonus depreciation lowers your basis dramatically. When you sell, the depreciation is recaptured at ordinary rates up to 39.6% on Section 1245 property (the 5- and 7-year items) and at up to 25% on Section 1250 property (the 27.5-year building portion). A $130K bonus deduction taken in year one comes back as up to $51K of ordinary income on sale.

The escape hatch: 1031 exchange. Done correctly, it defers all of that recapture into the replacement property, where you can run another cost seg study and start the cycle over. Many career real estate investors never pay tax on these gains during their lifetime, and heirs receive a stepped-up basis that wipes the deferred liability.

Planning around the phase-down

If bonus depreciation continues to phase down (or is reset to a lower rate), there are a few practical moves:

Place property in service before year-end if a step-down is coming on January 1.
Consider a look-back cost seg study on properties bought in earlier high-bonus years (2018–2022) to "catch up" missed depreciation via Form 3115.
Layer cost seg even when bonus is low — accelerated MACRS still helps.
Coordinate purchases with W2 income spikes (large bonuses, equity vesting) so the deduction lands when your marginal rate is highest.

Run the math before assuming benefit

Bonus depreciation is a tax accelerator, not a deal validator. A property that doesn't pencil on cap rate and cash flow is still a bad deal even with $100K of paper losses. Run cash flow first using our cap rate calculator and cash-on-cash calculator. Use mortgagemathlab.com to confirm financing assumptions. Estimate after-tax effects with takehometax.com. Then layer in the bonus depreciation benefit on top.

Run cash flow on your next deal →

Reminder: not tax advice. Bonus depreciation rates change with legislation — verify the current rate with your CPA and confirm whether any pending or retroactive changes apply to your situation.

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