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Quick Answer
Bonus depreciation on rental property is back at 100%, and it is now permanent for qualified property acquired and placed in service after January 19, 2025.
For international investors, two additional issues matter. Bonus depreciation applies to shorter-life components of a rental property, not the building itself. For a nonresident alien, the deduction generally becomes useful only when a valid Section 871(d) election allows the rental income to be taxed on a net basis and the applicable filing requirements are met.
Even then, passive loss rules can suspend the deduction instead of allowing it to reduce current-year taxable income. The result depends on the investor's other US passive income, the property's use, ownership structure, and the overall tax situation.
100% bonus depreciation applies to qualifying shorter-life components, not the rental building itself. Residential rental buildings generally remain on a 27.5-year schedule, while commercial buildings use a 39-year schedule.
Section 871(d) is a critical consideration for nonresident investors. It allows qualifying US rental income to be treated as effectively connected income and taxed on a net basis, subject to the applicable filing requirements.
A large first-year deduction does not automatically create a current-year tax benefit. Passive loss rules can suspend the loss when the investor does not have sufficient qualifying passive income to offset it.
The value of accelerated depreciation depends on the full investment strategy. Cost segregation, ownership structure, financing, holding period, state tax treatment, and potential depreciation recapture can all affect the outcome.
Table of Contents
What the 2025 Law Actually Changed
Bonus depreciation is an additional first-year deduction under Section 168(k) of the Internal Revenue Code. It lets a taxpayer deduct a percentage of a qualifying asset’s cost in the year it is placed in service instead of spreading that cost across its normal recovery period.
The 2017 Tax Cuts and Jobs Act set the rate at 100%, then began phasing it down. By 2025, the rate had fallen to 40%, with 20% scheduled for 2026 and zero for 2027.
The One Big Beautiful Bill Act (OBBBA) reversed that phase-down. It restored the 100% rate and made it permanent for qualified property both acquired and placed in service after January 19, 2025.
The IRS issued Notice 2026-11 in January 2026 as interim guidance. The notice confirms that the existing regulations under Treasury Regulation Section 1.168(k)-2 continue to govern, with the acquisition and placed-in-service dates updated from the 2017 rules to January 19 and January 20, 2025.
For an investor who has been reading older articles, the practical effect is that the previous phase-down no longer applies to qualifying property acquired after January 19, 2025.
Bonus Depreciation Is Automatic Unless You Elect Out
Bonus depreciation applies by default. A taxpayer who wants a smaller deduction must affirmatively elect out under Section 168(k)(7). The election is made by property class and generally applies to all qualifying property in that class placed in service during the tax year.
There is also a transitional election under Section 168(k)(10) that allows a 40% deduction instead of 100% for qualifying property placed in service during the first tax year ending after January 19, 2025.
For international investors, this makes depreciation planning especially important. A nonresident investor could receive a large first-year deduction without having sufficient US income to use it immediately. The resulting loss may be suspended under the passive activity rules, while the reduced tax basis can affect the tax consequences when the property is sold.
Bonus Depreciation Does Not Apply to Your Building
This is where most coverage of the 2025 change misleads real estate investors.
Section 168(k) covers property with a MACRS (Modified Accelerated Cost Recovery System) recovery period of 20 years or less. Residential rental property is depreciated over 27.5 years. Commercial property is depreciated over 39 years.
Both sit well outside the 20-year threshold, which means the building shell is excluded from bonus depreciation entirely. Headlines suggesting you can write off a rental property in year one are describing components, not buildings.
What Qualifies: 5, 7, and 15-Year Components
The eligible categories inside a typical rental property are:
- Five and seven-year personal property. Appliances, carpeting, window treatments, removable flooring, cabinetry, and certain fixtures.
- Fifteen-year land improvements. Driveways, parking areas, fencing, retaining walls, exterior lighting, and landscaping.
- Qualified improvement property (QIP). Interior improvements made to nonresidential real property after the building was first placed in service, generally depreciated over 15 years.
Note the last one carefully. Qualified improvement property is a nonresidential category. An investor comparing a single-family rental against a small commercial building is looking at different eligible pools, and the commercial asset has access to a category the house does not.
Why Cost Segregation Is the Prerequisite
A purchase contract does not itemize a property into asset classes. It shows one price.
A cost segregation study is the engineering-based analysis that allocates that purchase price across the building shell, the short-life components, and the land. Land is never depreciable at all.
Without a study, there is no identified 5, 7, or 15-year basis for bonus depreciation to attach to, and the entire building defaults to 27.5 or 39-year straight-line treatment.
That makes cost segregation the gating step rather than an optional enhancement. It also carries a real cost, which is why the analysis tends to make economic sense on higher-value properties and rarely pencils on a modest single-family rental.
Cost segregation, depreciation schedules, and their application to foreign-owned rental property are covered in rental property depreciation for foreign nationals.
The Two Dates That Decide Whether You Qualify
Eligibility turns on two separate tests, and the property has to pass both.
- Acquisition. The property must be acquired after January 19, 2025.
- Placed in service. The property must be placed in service after January 19, 2025.
Passing one is not enough. An investor who signed a purchase contract in November 2024 and completed renovations in August 2025 has satisfied the placed-in-service test but failed the acquisition test. That property falls under the prior phase-down schedule, which means 40% for a 2025 placed-in-service date, 20% for 2026, and zero from 2027 onward.
For investors dealing with a property acquired before January 20, 2025, the placed-in-service year therefore matters. The later the property is placed in service, the lower the applicable bonus depreciation percentage under the prior schedule.
If You Signed the Purchase Contract Before January 20, 2025
Acquisition date is generally determined by the written binding contract rule. Property is treated as acquired no later than the date the taxpayer entered a written binding contract for its acquisition, not the date of closing.
For an international buyer, that distinction can cost real money. A contract signed in December 2024 with a February 2025 closing produces a 2024 acquisition date under this rule, even though the deed transferred in 2025.
For self-constructed property, the timing generally follows when physical work begins or when the taxpayer has incurred more than 10% of the expected total cost.
The timing of a purchase can also create financing pressure. Buyers working toward a specific closing date need enough time for appraisal scheduling, rate-lock decisions, and document review, particularly on foreign national files.
Steven Glick
Director of Mortgage Sales · HomeAbroad
When a closing date is tight, appraisal scheduling, rate-lock windows, and document collection can quickly affect the timeline. Foreign national files may require additional documentation, so starting the financing process early gives everyone more room to keep the closing on track.
Used Property, Renovations, and the Prior-Use Test
Used property can qualify. The requirement is that the property is new to the taxpayer, meaning it was not used by that taxpayer at any point before acquisition, and that it was not acquired from a related party or in a transaction where basis carries over from the seller.
An investor who bought a property in 2023 and completes a substantial renovation in 2026 may have newly acquired components that qualify on their own, even though the building itself was acquired long before the cutoff.
The renovation components are tested on their own acquisition and placed-in-service dates.
Why Bonus Depreciation Is Worth Nothing Without a Section 871(d) Election
Everything above applies to any US taxpayer. This section is where the analysis changes for nonresident investors, and it is central to understanding why bonus depreciation may have little immediate value without the proper tax treatment.
Rental income received by a nonresident alien is generally subject to a 30% federal tax rate on gross income when it is not effectively connected with a US trade or business, although a lower treaty rate may apply. Deductions generally are not allowed against this type of income.
Section 871(d) allows a nonresident alien who holds US real property for the production of income to elect to treat that real-property income as effectively connected income. When the election is timely made, the investor can claim deductions attributable to the real-property income, and the resulting net income is taxed at graduated rates.
Two points are worth stating precisely:
- Section 871(d) is an election made with the IRS. It is separate from a tax treaty position.
- The election applies broadly to US real property held for the production of income. It generally remains in effect for later tax years unless revoked.
For a foreign investor considering bonus depreciation, this distinction matters because depreciation is a deduction. If the rental income remains subject to the gross-income tax regime, there is generally no deduction against that income to which bonus depreciation can be applied.
Once the Section 871(d) election is properly in place and the applicable filing requirements are met, the investor can evaluate depreciation as part of the net-income calculation.
The broader deduction picture is covered in the guide to rental property tax deductions for foreign owners.
The 16-Month Deadline That Cancels Every Deduction
Section 874(a) of the Internal Revenue Code sets a filing rule that has no equivalent for domestic investors.
A nonresident alien who files a return more than 16 months after the original due date generally loses the right to claim deductions for that year. Relief exists only through a waiver granted at the discretion of the IRS.
A missed filing does not simply delay the deduction into a later year. It can prevent the investor from claiming those deductions for that year. An investor who paid for a cost segregation study, generated a large first-year bonus depreciation deduction, and then filed 18 months late may lose the ability to claim the deduction.
Critical Filing Rule: The 16-month deadline matters. A late Form 1040-NR filing can prevent a nonresident alien from claiming deductions for that year unless the IRS grants a waiver. Investors relying on depreciation deductions should work with a qualified US tax professional to meet the applicable filing deadline.
You Need an ITIN Before Any of This Works
To file Form 1040-NR, a nonresident alien needs an Individual Taxpayer Identification Number, or ITIN. This is a tax processing number the IRS issues to people who have a US filing obligation but are not eligible for a Social Security Number.
The application takes time, and the timing question that matters is whether the ITIN will be in hand early enough to file inside the 16-month window described above. Start the ITIN application before the first filing deadline so you have time to complete the process.
The Passive Loss Problem: Why a Large Deduction Often Produces No Refund
Here is the outcome that surprises international investors most.
Rental activity is passive under Section 469. Passive losses offset passive income. Anything left over is suspended and carried forward to a future year rather than refunded.
For a US investor, there is usually something for a rental loss to work against: salary, business income, a portfolio. For a nonresident alien whose only US-connected income is the rental property itself, there is frequently nothing.
The sequence plays out like this:
- The investor pays for a cost segregation study.
- The study identifies short-life components.
- Bonus depreciation produces a large first-year deduction.
- The property posts a paper loss.
- There is no other US passive income for that loss to offset.
- The loss suspends and carries forward.
- The property’s tax basis is permanently reduced.
The refund does not arrive. The suspended loss can be used in future years against passive income, and generally becomes fully available on a taxable disposition of the entire interest. Meanwhile, the reduced basis is already locked in, which can increase the taxable gain on sale.
Does the Short-Term Rental Argument Work for Nonresidents?
There is a well-known position in US real estate tax planning built around short-term rentals.
Under the Section 469 regulations, a rental where the average period of customer use is seven days or fewer is not treated as a rental activity for passive loss purposes. If the owner materially participates, losses from that activity can be treated as nonpassive.
The structural logic is sound. The practical obstacle for a nonresident is material participation.
Material participation is measured by documented hours of personal involvement in the activity. An owner living abroad who uses a full-service property manager faces a harder evidentiary position than a domestic owner managing the property themselves. Time zones, travel, and the delegation of day-to-day operations all work against the hours test.
This is a question for a qualified US tax adviser who works with cross-border clients, and the answer depends entirely on the facts of how the property is actually run. It is not a strategy this article can recommend.
Professional Consultation
Short-term rental treatment and material participation are highly fact-specific. A nonresident investor should review the property’s use, management arrangement, and personal involvement with a qualified US tax adviser before relying on this approach.
What Accelerated Depreciation Costs You When You Sell
Depreciation is not forgiven at sale. It comes back, and how it comes back depends on which assets generated it.
Straight-line building depreciation | Accelerated component depreciation | |
|---|---|---|
Property class | Section 1250 | Section 1245 |
Recaptured as | Unrecaptured Section 1250 gain | Ordinary income |
Federal rate | Capped at 25% | Your ordinary graduated rate |
Created by | Standard 27.5 or 39-year schedule | Cost segregation plus bonus depreciation |
That table contains the central trade-off of this entire topic. Accelerating depreciation converts a future liability that is capped at 25% into one taxed at ordinary rates, which on a Form 1040-NR can reach the top graduated bracket.
Two further points:
- Recapture is calculated on depreciation that was allowed or allowable. Declining to claim a deduction you were entitled to does not avoid recapture on it. It just means you paid more tax during ownership for nothing.
- Nonresident aliens are generally not subject to the 3.8% Net Investment Income Tax that applies to this type of gain for many US taxpayers.
The mechanics are covered in full in the guide to depreciation recapture for foreign investors.
How This Interacts With FIRPTA Withholding at Closing
FIRPTA, the Foreign Investment in Real Property Tax Act, requires the buyer to withhold a portion of the gross sale price when a foreign person sells US real property. The rate is tiered at 0%, 10%, or 15% depending on the sale price and the buyer’s intended use of the property.
Two things matter here.
First, FIRPTA withholding is a deposit against your final tax liability, not the liability itself. The actual tax is calculated on your nonresident return.
Second, the withholding is based on gross sale price, while your actual liability depends on adjusted basis. An investor who accelerated a large amount of depreciation has a lower basis and a higher real liability, which narrows the gap. An investor who did not may find the withheld amount substantially exceeds what is owed, which is the situation Form 8288-B withholding certificates exist to address.
For the full sale-side picture, see the guides to FIRPTA withholding rules and capital gains tax on US real estate.
State Taxes: Federal and State Rules Can Differ
Bonus depreciation is a federal provision. States decide separately whether to follow the federal treatment, require an add-back, or use their own depreciation rules.
For an international investor, this can change the timing and size of the state-level tax benefit. A 100% federal deduction does not automatically produce a 100% state deduction. State treatment should be verified for the property and ownership structure before the investor factors the deduction into the deal analysis.
How Your Ownership Structure Changes the Answer
The same property produces different results depending on how it is held. At concept level:
- Direct individual ownership. Simplest to file. The Section 871(d) election, passive loss limits, and 1040-NR filing all apply directly to the individual.
- US LLC treated as a disregarded entity. For income tax purposes, generally treated the same as direct ownership by a single foreign owner, with separate filing and reporting obligations attaching to the entity itself.
- US partnership with foreign partners. Section 1446 withholding applies to effectively connected income allocable to foreign partners, which changes cash flow timing even where the deduction is available.
- Foreign corporation used as a blocker. Income is taxed at the corporate rate, and a branch profits tax may apply on top, subject to treaty modification. The passive loss analysis is different at the corporate level.
Structure choice pulls in two directions at once, and this is the part investors most often get wrong. The structure that is most efficient for income tax may be the least efficient for US estate tax exposure, where the nonresident alien federal exemption is only $60,000.
Choosing a holding structure is a decision for a cross-border tax adviser and, where relevant, a US estate planning attorney. This article does not recommend one.
When a foreign national buys through an LLC, the loan file may require additional entity documents and verification. Individual vesting can be more straightforward, but the right setup depends on how the property is being financed and held.
How Financing Changes the Math
Depreciation is calculated on the property’s cost basis, not on the amount of cash the investor puts into the deal. That means financing does not reduce the property’s depreciable basis simply because the investor contributes less cash upfront.
For example, a $600,000 property financed with a mortgage still has a $600,000 purchase price for purposes of determining its initial tax basis, subject to the applicable allocation for land and other nondepreciable costs.
Leverage changes something else: how much capital the investor has tied up in the property. An investor who finances part of the purchase may preserve cash for additional acquisitions, reserves, renovations, or other investments.
HomeAbroad finances international and nonresident investors buying US property through two main routes:
- DSCR loans: DSCR stands for Debt Service Coverage Ratio, a measure comparing a property’s rental income to its mortgage payment. A DSCR loan qualifies the borrower primarily on the property’s rental performance rather than on personal income documentation, which suits investors whose income sits outside the US.
- Full Documentation Loans: These consider the borrower’s foreign income, assets, and credit profile, using International Credit Reports or approved alternative credit evidence where an established US credit history does not exist.
Current terms, including down payment, loan-to-value limits, reserves, and DSCR requirements, depend on the borrower, the property, the state, and the loan program. Speak to a HomeAbroad loan specialist for terms that apply to your situation.
Lucas Hernandez
Mortgage Loan Originator,
HomeAbroad
NMLS #2171747Financing can allow international investors to spread their capital across multiple properties instead of tying up all of their cash in one purchase. The right choice between cash and financing comes down to the investor’s liquidity needs, portfolio goals, and how much leverage they are comfortable carrying.
Deciding Whether to Accelerate: A Framework
Work through these questions in order. Each answer changes how much value accelerated depreciation may provide.
1. Do both dates clear January 19, 2025? Check the written binding contract date, not just the closing date. If the acquisition falls before the cutoff, the property may be subject to the prior bonus depreciation schedule rather than the 100% rate.
2. Is the property large enough for a cost segregation study to be economic? The study is a real cost against an uncertain benefit. On a modest single-family rental, the potential tax benefit may not justify the study cost.
3. Is the Section 871(d) election in place, and will the return be filed within 16 months? These requirements determine whether a nonresident alien can claim deductions against qualifying rental income. Missing the applicable filing deadline can prevent the investor from claiming those deductions for the year unless the IRS grants a waiver.
4. Is there US-source passive income for the loss to offset, now or realistically within the hold period? A single leveraged rental with no other US passive income may result in suspended losses rather than an immediate tax benefit.
5. Is the expected hold long enough that the deferral value exceeds the potential tax cost on exit? Some accelerated components can generate Section 1245 ordinary-income recapture when sold. A short hold can reduce the period over which the initial tax deferral provides value.
Where this lands, stated plainly: for a nonresident investor holding a single leveraged rental, with no other US passive income and a likely exit inside five years, accelerating depreciation may produce less overall value than the first-year deduction suggests. The deduction may be suspended, the basis is reduced, and some depreciation-related gain can be subject to ordinary-income recapture on exit.
That is not a universal answer. An investor with several US properties producing passive income, one planning a long hold, or one whose asset is large enough that a study is clearly economic, may reach the opposite conclusion for good reasons. The point is that “100% bonus depreciation is back” is a fact about the law, not a recommendation about your property.
Steven Glick
Director of Mortgage Sales · HomeAbroad
When an investor is working with both a mortgage team and a US tax adviser, keeping the documentation organized and clearly separated by purpose helps the process run smoothly. Our role is to collect and review the documents needed for financing while the tax adviser handles the tax side
Make Bonus Depreciation Part of the Bigger Investment Decision
100% bonus depreciation can create a meaningful first-year deduction, but the tax benefit depends on how the property is acquired, depreciated, financed, operated, and eventually sold. For foreign investors, Section 871(d), passive-loss rules, filing requirements, and the property’s ownership structure can all affect the outcome.
The financing decision matters too. HomeAbroad helps foreign nationals and international investors finance eligible US investment properties through DSCR Loans and Full Documentation Loans. DSCR financing can qualify primarily on the property’s rental income, while Full Documentation Loans consider the borrower’s financial profile and supporting documentation.
If you’re evaluating a US rental property, our loan specialists can help you understand the financing options available for the transaction. For depreciation, Section 871(d), and other tax decisions, work with a qualified US tax professional who understands cross-border real estate.
Explore your financing options with HomeAbroad and see how the right financing structure can fit into your overall investment strategy.
Frequently Asked Questions
Can I take bonus depreciation on a rental property?
Yes, but not on the building. Bonus depreciation applies to property with a recovery period of 20 years or less, which excludes the 27.5-year residential and 39-year commercial building shell. It applies to 5, 7, and 15-year components identified through a cost segregation study.
Is 100% bonus depreciation permanent?
Yes, under the One Big Beautiful Bill Act, for qualified property both acquired and placed in service after January 19, 2025. The previous phase-down schedule, which had reached 40% for 2025, no longer applies to qualifying property.
Do I need a Section 871(d) election to claim bonus depreciation?
In practical terms, yes. Without the election, a nonresident alien is taxed at a flat 30% on gross rental income with no deductions available, so there is nothing for a depreciation deduction to reduce. The election moves you to net taxation on Form 1040-NR, where deductions apply.
What happens if I never claimed depreciation I was entitled to?
Recapture is still calculated. The IRS measures it on depreciation that was allowed or allowable, so declining to claim the deduction during ownership does not remove the liability at sale. It only means you paid more tax along the way without receiving the benefit.
Can I use bonus depreciation on a short-term rental as a nonresident?
Potentially, but the difficulty is material participation rather than the depreciation rules themselves. Short-term rentals with an average customer stay of seven days or fewer are not treated as rental activities for passive loss purposes, so material participation can make losses nonpassive. Documenting sufficient hours of personal involvement is harder for an owner living abroad who uses a property manager. Review this with a cross-border tax adviser.
Does bonus depreciation reduce my FIRPTA withholding?
No. FIRPTA withholding is calculated on the gross sale price at a tiered rate of 0%, 10%, or 15%, and does not account for your basis or your depreciation history. It is a deposit against your final liability. Accelerated depreciation lowers your basis, which raises your actual tax and narrows the gap between the withheld amount and what you owe.
Does my home country’s tax treaty change any of this?
Treaties can affect several aspects of US taxation, but Section 871(d) is an election made with the IRS rather than a treaty benefit, and treaties generally do not reduce FIRPTA withholding for individual nonresident alien sellers. Treaty positions are specific to the country and the provision, and need to be confirmed for your facts.
