Bonus depreciation lets you immediately deduct a portion of qualifying property, but it interacts with a 1031 exchange in ways that surprise many investors. This guide explains the carryover-basis and excess-basis split and stresses why the applicable bonus percentage is a moving target you must verify for 2026.
General information only — not tax, legal, or financial advice. A 1031 exchange has strict, unforgiving deadlines and significant tax consequences. Work with a CPA and a qualified intermediary (QI) before you act. A REALTOR® cannot serve as your QI. Verify current IRS and California FTB rules with a licensed tax professional.
What bonus depreciation does
Bonus depreciation allows an immediate deduction of a percentage of the cost of qualifying property in the year it is placed in service, rather than depreciating it over many years. The percentage has been phased and changed multiple times under federal law, which is why no specific 2026 figure should be taken at face value here.
Bonus-depreciation percentages are set by federal law and have changed over time. Always confirm the current-year percentage with your CPA before relying on it.
The exchange complication: carryover vs excess basis
When you exchange, your replacement property's basis is split conceptually:
- Carryover basis: the continuing basis from your relinquished property, which generally keeps depreciating on its existing schedule and is typically not eligible for fresh bonus depreciation.
- Excess basis: any additional investment — new cash or new debt — above the carryover, which may be treated as newly acquired property potentially eligible for bonus depreciation, subject to current rules.
Why 2026 specifics must be verified
Federal depreciation law has been amended several times, and the bonus percentage, eligible property definitions, and election rules can differ year to year. Anything stated as a fixed 2026 rate could be wrong by the time you transact. The responsible approach is to design the strategy conceptually and let your CPA plug in the current-year numbers.
Interaction with cost segregation
Bonus depreciation and cost segregation often work together: a cost-segregation study identifies shorter-life components, and bonus depreciation may then apply to the eligible excess-basis portion of those components. The combined benefit on exchanged property is typically smaller than on an outright purchase because of the carryover-basis limitation.
See our cost-segregation combo guide for the mechanics.
Recapture down the road
Accelerated and bonus depreciation reduce your basis further, increasing potential depreciation recapture if you later sell without another 1031 exchange. Planning the eventual exit — including a possible step-up at death — is part of doing this correctly.
How Brian helps
Brian helps you identify replacement property where new investment (excess basis) is meaningful enough to benefit from accelerated and bonus depreciation, then coordinates with your CPA and cost-segregation specialist to model current-year rules.
Frequently Asked Questions
Is exchanged-in basis eligible for bonus depreciation?
Generally no. The carryover basis from your relinquished property is typically not eligible for fresh bonus depreciation; only excess basis from new money or debt may qualify, subject to current law.
What is excess basis?
It is the portion of your replacement property's cost above your carryover basis — created by adding new cash or new debt — which may be treated as newly acquired property for depreciation purposes.
What is the bonus depreciation percentage for 2026?
Bonus-depreciation percentages are set by federal law and have changed over time. Do not rely on any figure here — verify the current-year percentage with your CPA.
Does bonus depreciation work with cost segregation?
Often yes. A cost-segregation study identifies shorter-life components, and bonus depreciation may apply to the eligible excess-basis portion, subject to current rules.
Will bonus depreciation increase my future tax?
It can. Accelerating deductions lowers basis and increases potential recapture if you later sell without another exchange.
Is this tax advice?
No. This is general educational information. Verify all bonus-depreciation rules and percentages with a licensed tax professional.
