Bonus depreciation for rental property owners
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. Residential real estate has a depreciation period of 27.5 years, and nonresidential real property is depreciated over a 39-year lifespan. When depreciating real estate, you'll need to use the straight-line method and take equal depreciation each year.
Having said that, the bonus depreciation rules can benefit real estate investors in other ways. While it cannot be used to depreciate real property, it can be used for many types of assets and improvements that are common in real estate investing. For example, real property improvements (like landscaping) have a depreciation period of 15 years and qualify for bonus depreciation.
In other words, if you spend $10,000 on landscaping for a rental property, you can use bonus depreciation to deduct the entire cost in the year you spend the money. Just to name a few other types of property that can qualify for immediate expensing, real estate investors could potentially expense furniture, appliances, and other property improvements.
Another important point is that the property doesn't necessarily need to be new when you acquire it -- used items can be depreciated in this manner as well, which is another favorable change to the law resulting from the Tax Cuts and Jobs Act.
To qualify, the property must have been both acquired and placed in service after September 27, 2017, and there are certain IRS rules that need to be followed, like you can't have used the property before acquiring it and you can't have acquired the property from a related party.
The bottom line
Bonus depreciation can allow rental property owners to deduct the entire cost of certain capital investments all at once, maximizing their federal income tax deductions for the current tax year. However, there's a tradeoff -- namely, that your deductions will be lower in subsequent years -- so be sure to weigh the pros and cons before deciding, and consult with an experienced tax professional to help you make the best choice.