Depreciation 101 for 2026

Accelerated Depreciation, Section 179, and 1031 Exchanges in the New Tax Landscape

Depreciation remains one of the most powerful tax planning tools available to real estate investors and business owners. When used strategically, it can significantly reduce taxable income and strengthen cash flow. It can also accelerate deductions into the years when they provide the greatest value. 

Recent legislation under the One Big Beautiful Bill Act restored 100% bonus depreciation, dramatically expanding opportunities for investors to front-load deductions through cost segregation studies and other accelerated strategies. At the same time, Section 179 limits have increased significantly, allowing businesses to immediately expense larger amounts of qualifying property. 

It is also important to note that the energy-efficient commercial building deduction under Section 179D is currently scheduled to expire for projects that begin construction after June 30, 2026. 

Understanding how these provisions interact (particularly when properties are later sold or exchanged) can make a substantial difference in long-term tax outcomes. 

What Depreciation Actually Does

Depreciation allows taxpayers to recover the cost of business or income-producing property over time. According to IRS Publication 946, depreciable property must: 

• Be owned by the taxpayer 
• Be used in a trade or business or for income production (residential rental properties count!) 
• Have a determinable useful life 
• Be expected to last more than one year 

Most real estate is depreciated over long periods of time (27.5 years for residential property and 39 years for commercial property). However, many components within a building qualify for much shorter recovery periods. 

Through cost segregation, these components can be separated from the building structure and depreciated more quickly, accelerating tax deductions into earlier years of ownership. 

Accelerated Depreciation: 5-Year and 15-Year Property 

Under the Modified Accelerated Cost Recovery System (MACRS), certain assets qualify for shorter depreciable class lives. 

5-Year Property
• Appliances 
• Dedicated electrical systems 
• Removable flooring 
• Equipment and machinery 

15-Year Property
• Parking lots and paving 
• Sidewalks and curbs 
• Landscaping 
• Site utilities 

A cost segregation study identifies these components and reclassifies them out of 39-year property into shorter-lived categories. 

With 100% bonus depreciation restored, most 5- and 15-year assets can now be fully deducted in the year they are placed in service. This is a significant strategic tax advantage. 

Section 179 Expensing 

Section 179 allows businesses to elect to immediately expense qualifying assets rather than depreciating them over time. 

Recent legislation significantly increased the available limits. 

2025 Section 179 Limits
Maximum deduction: $2,500,000 
Phaseout begins: $4,000,000 
Complete phaseout: $6,500,000 

2026 Section 179 Limits (inflation adjusted)
Maximum deduction: $2,560,000 
Phaseout begins: $4,090,000 
Complete phaseout: $6,650,000 

Qualifying property generally includes:
• Tangible personal property 
• Certain nonresidential building improvements 
• “Off-the-shelf" software 
• Heavy vehicles and equipment 

While Section 179 is elective and limited by taxable income, bonus depreciation applies automatically unless taxpayers choose to opt out. 

Depreciation Recapture and why it Matters

Accelerating depreciation can significantly improve early-year cash flow, but it also affects what happens when a property is sold. 

Depending on how long you hold a property, you may be subject to depreciation recapture when it is sold. In simple terms, the IRS may require you to pay tax on some of the depreciation deductions you previously claimed. The tax treatment depends on the type of property involved and the length of time you owned it. 

Section 1245 property 
Personal property and land improvements that can be depreciated using accelerated methods. 

Section 1250 property 
Real property depreciated using straight-line methods. 

Cost segregation increases the portion of a property classified as Section 1245 property, which can result in a greater amount of depreciation recapture being taxed at ordinary income rates. 

Example: How Depreciation Strategy Affects Recapture

Assume the following:
Purchase price: $1,000,000 (excluding land) 
Cost segregation identifies $200,000 of 5- and 15-year assets 
Remaining $800,000 is 39-year property 

The property is sold after 5 years for $1,200,000. 

Three different depreciation approaches produce very different tax outcomes. 

Straight-Line Depreciation Only
Total depreciation over five years: $128,205 

Because all depreciation is Section 1250 property, the recapture is taxed at 25%, and it can generally be fully deferred through a properly structured 1031 exchange. 

Cost Segregation Without Bonus Depreciation
Total depreciation over five years increases to approximately $269,064. 

However, about $166,500 becomes Section 1245 property, which is subject to ordinary income recapture. 

If the property is exchanged, the investor must replace at least the same amount of Section 1245 property to fully defer the tax. 

Cost Segregation With 100% Bonus Depreciation
Bonus depreciation allows the entire $200,000 of shorter-life assets to be deducted in year one. 

Total depreciation increases to about $302,564 over five years. 

While this maximizes early-year deductions and improves cash flow, it also increases potential Section 1245 recapture. That recapture may not be fully deferred unless the replacement property includes sufficient Section 1245 assets. 

Side by Side Comparison

Key Planning Considerations for 2026 

Several important themes are shaping depreciation planning RIGHT NOW: 
• 100% bonus depreciation has returned (permanently), increasing the value of cost segregation studies. 
• Section 179 limits are significantly higher, allowing more immediate expensing for qualifying assets. 
• Cost segregation can dramatically improve early-year cash flow, but may increase recapture exposure later. 
• A 1031 exchange does not automatically defer Section 1245 recapture unless sufficient 1245 property is replaced. 
• Performing a cost segregation study on replacement property is often essential to preserve full deferral. 

While this maximizes early-year deductions and improves cash flow, it also increases potential Section 1245 recapture. Because that recapture may not be fully deferrable unless the replacement property includes sufficient Section 1245 assets, investors should carefully plan ahead. Consider consulting a qualified tax professional like Veritax Advisors, before completing a sale or 1031 exchange.  

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