Real Estate Tax Incentives Investors Are Watching in 2025–2026

Bonus Depreciation, Cost Segregation, and the “Short-Term Rental” Rules — explained clearly (without the hype)

If you invest in real estate (or you’re considering your first out-of-state acquisition in Northeast Pennsylvania), taxes will impact your returns just as much as purchase price, rent, and renovation budgets.

This post is designed to be informative and easy to understand—and to help you ask smarter questions with your CPA. Revolve Real Estate is not a tax advisor, CPA firm, or law firm. Nothing below is tax, legal, or accounting advice. It’s a framework for education and planning, and you should always confirm your strategy with a qualified tax professional.

The big headline: 100% bonus depreciation is back (for certain assets)

Bonus depreciation (technically “additional first-year depreciation” under IRC §168(k)) generally allows a taxpayer to deduct a large portion—sometimes all—of the cost of certain qualifying property in the first year rather than depreciating it over many years.

Before 2025, bonus depreciation was phasing down (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, then scheduled to end).

What changed in 2025

Multiple tax and legal summaries report that the One Big Beautiful Bill Act (signed July 4, 2025) restored 100% bonus depreciation for qualifying property acquired and placed in service after a key January 2025 effective date, with transitional rules available for certain timing situations.

Plain-English takeaway: If you buy and “place in service” a property (or improvements) in the right window, you may be able to take a much larger first-year deduction—but the details matter.

Why real-estate investors care: bonus depreciation usually shows up through cost segregation

A building itself is typically depreciated over a long schedule (commonly 27.5 years for residential rental property and 39 years for commercial). But not everything inside and around a building is “the building.”

A cost segregation study is a formal process that identifies components that can be depreciated faster (often 5-, 7-, or 15-year property). The IRS has detailed guidance describing the core idea: separating assets into shorter-life property vs. longer-life building components.

What this can look like in real life

Depending on the property, items such as certain finishes, appliances, specialty electrical, carpeting, landscaping/site improvements, and other components may fall into shorter recovery categories—and those categories may be bonus-eligible when the rules apply. (This is exactly why investors pair bonus depreciation with cost segregation.)

Important concept (and a common misconception): Cost segregation and bonus depreciation generally accelerate depreciation—they don’t create infinite deductions. If you pull more depreciation into Year 1, you’ll usually have less depreciation left in later years.

A simplified example: NYC high-income buyer + Scranton investment property

Let’s use a clean, illustrative model to show why investors care. (Real outcomes vary based on financing, other deductions, passive-loss limitations, state conformity, and your filing profile.)

Scenario assumptions (example only):

• NYC resident with $500,000 W-2 income

• Buys a $300,000 rental in Scranton

• A cost seg study identifies $30,000 of shorter-life components (5/7/15-year categories), and $270,000 remains long-life building basis

• Combined marginal tax rate assumption: ~45% (rough estimate for high-income NYC taxpayers; your CPA will compute your actual marginal impact)

Scenario A: No bonus depreciation (spread out)

• Short-life depreciation (simplified): $30,000 / 5 = $6,000

• Long-life building depreciation: $270,000 / 27.5 ≈ $9,818

• Total Year-1 depreciation ≈ $15,818

• Estimated tax impact: $15,818 × 45% ≈ $7,118

Scenario B: With 100% bonus depreciation (when eligible)

• Bonus depreciation (short-life portion): $30,000 in Year 1

• Plus long-life building depreciation: ≈ $9,818

• Total Year-1 depreciation ≈ $39,818

• Estimated tax impact: $39,818 × 45% ≈ $17,918

What changed? Year 1 has more tax relief up front—but you may have less depreciation later because you used it early.

The “Airbnb loophole” explained responsibly: it’s about passive vs. non-passive classification

You’ll hear people say “STR loophole.” The real issue is whether an activity is treated as a rental activity (often passive) or a trade/business (potentially non-passive if you materially participate).

The IRS discusses passive activity rules broadly (including rentals) in Publication 925.

The 7-day rule (in plain English)

Under Treasury regulations, if the average period of customer use is 7 days or less, the activity may be treated as not a rental activity for passive activity purposes.

Material participation matters

To treat the activity as non-passive, you generally need to meet material participation tests (such as participating more than 500 hours in the year, or meeting other tests like the “100 hours and more than anyone else” test).

Why investors care: If structured correctly and legitimately documented, this can affect whether losses/deductions can offset other income—but this is also where documentation, facts, and audit risk become real.

Depreciation recapture: the part TikTok forgets

Accelerating depreciation can improve early-year cash flow, but depreciation can impact taxes when you sell, including “unrecaptured Section 1250 gain,” which the IRS notes is generally taxed at a maximum 25% rate (depending on facts and overall tax posture).

Translation: Early tax savings can be powerful, but the endgame matters. Your CPA should model hold period, exit strategy, and likely recapture outcomes.

Our Revolve approach: investor-first diligence, then CPA execution

At Revolve, our job isn’t to “sell a tax strategy.” Our job is to help investors:

• Buy the right asset (neighborhood, rentability, condition, and exit liquidity)

• Underwrite realistically (true expenses, capex reserves, and compliance costs)

• Identify what questions to ask your CPA (bonus depreciation eligibility timing, cost seg feasibility, passive loss rules, entity structure considerations)

• Flag local constraints early (licensing, zoning, use permissions, and neighborhood enforcement realities)

A simple investor workflow we recommend

1. Confirm the intended use (LTR vs. STR vs. mid-term) before you choose a neighborhood.

2. Verify local compliance (zoning + licensing). This is non-negotiable.

3. Underwrite the deal with conservative assumptions (especially if STR is not clearly permitted).

4. Loop in a real-estate-savvy CPA early to model:

   • bonus depreciation timing and elections

   • cost segregation ROI

   • passive vs. non-passive classification and documentation requirements

   • exit planning and potential recapture exposure