Tax reform for rental property owners now runs on a more generous but more conditional framework: the One Big Beautiful Bill Act, signed in 2025, made the 20% qualified business income deduction permanent, restored 100% bonus depreciation for property acquired after January 19, 2025, and reset the excess business loss thresholds. Bigger write-offs are back on the table. The rules that decide whether you actually get to use them — passive activity limits, the trade-or-business test, and loss caps — did not soften.
What the 2025 Law Changed
Several of the Tax Cuts and Jobs Act provisions that mattered most to landlords were on a timer. The 20% pass-through deduction under Section 199A was set to expire after December 31, 2025. Bonus depreciation had already begun phasing down, hitting 80% in 2023, 60% in 2024, and 40% in 2025.1Internal Revenue Service. Tax Cuts and Jobs Act: A Comparison for Businesses
The One Big Beautiful Bill Act reversed the phase-down and made the QBI deduction permanent. It restored 100% bonus depreciation for eligible property acquired after January 19, 2025, and reset the Section 461(l) excess business loss thresholds to a lower base amount that is then indexed for inflation.2Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill Standard depreciation schedules were left alone: residential rental property still recovers over 27.5 years, nonresidential real property over 39.3Internal Revenue Service. Publication 527 (2025), Residential Rental Property
Writing Off Improvements Faster
100% Bonus Depreciation Is Back
Section 168(k) lets you deduct the full cost of qualifying assets in the year you place them in service. With bonus depreciation restored to 100%, that deduction is no longer being whittled down annually.2Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill Used property qualifies too, as long as it is new to you.
The practical effect shows up when you buy a rental and commission a cost segregation study. If the study identifies $200,000 in personal property and land improvements — appliances, carpeting, parking lot paving, landscaping — you can deduct the full $200,000 in year one instead of spreading it over five, seven, or fifteen years. The building itself keeps its 27.5-year or 39-year schedule.
Section 179 as the Controlled Alternative
Section 179 lets you expense qualifying equipment and certain building improvements in the year they go into service. For 2026, the maximum deduction is $2,560,000, with the phase-out beginning once total qualifying purchases exceed $4,090,000.4Internal Revenue Service. Rev. Proc. 2025-32 Unlike bonus depreciation, Section 179 can only take taxable income down to zero. It cannot create or increase a loss.
For nonresidential rental property, Section 179 covers specific improvements made after the building was originally placed in service: roofs, heating and ventilation, air conditioning, fire protection and alarms, and security systems. Qualified improvement property — interior improvements to nonresidential buildings — also qualifies. Residential rental buildings themselves do not qualify, though the appliances and personal property inside them do.
The choice matters when you want to control the size of a loss. Bonus depreciation has no income floor and can push you into the red. Section 179 cannot. If your rental income is modest and you would rather not trigger the excess business loss cap, Section 179 gives you the shut-off valve.
The 20% Pass-Through Deduction for Landlords
Section 199A allows eligible taxpayers to deduct up to 20% of qualified business income from pass-through entities — sole proprietorships, partnerships, S corporations, and certain trusts.5Office of the Law Revision Counsel. 26 U.S. Code 199A – Qualified Business Income The One Big Beautiful Bill Act made the deduction permanent. For a rental owner, it can carve up to a fifth off the tax owed on net rental profits, but only if the rental activity is a trade or business.
For 2026, the deduction phases in limits based on taxable income. Below $201,750 for single filers and $403,500 for joint filers, the full 20% applies without restriction. Above $276,750 single and $553,500 joint, wage and capital limitations kick in and can reduce or eliminate the deduction.4Internal Revenue Service. Rev. Proc. 2025-32 The OBBBA also added a $400 minimum deduction for taxpayers with at least $1,000 in QBI who materially participate in their business.
The Rental Safe Harbor
The real question for landlords is whether the rental clears the trade-or-business bar. Revenue Procedure 2019-38 sets out a safe harbor built for that purpose.6Internal Revenue Service. Rev. Proc. 2019-38 Meet it, and the IRS treats your rental as a qualified business for Section 199A. Miss it, and you are left arguing facts and circumstances under Section 162.
The safe harbor requires three things each year:
- Separate books and records for each rental enterprise, tracking income and expenses individually.
- At least 250 hours of rental services per year for the enterprise. For enterprises that have existed four years or longer, 250 hours in at least three of the last five years.
- Contemporaneous documentation of those hours, including dates, descriptions, and time spent on each task.
Qualifying services include advertising vacancies, negotiating leases, screening tenants, collecting rent, managing repairs, and supervising contractors.7Internal Revenue Service. IRS Finalizes Safe Harbor to Allow Rental Real Estate to Qualify as a Business for Qualified Business Income Deduction Two categories are excluded outright: property you use as a personal residence under Section 280A(d), and property rented under a triple net lease where the tenant covers taxes, insurance, and maintenance on top of rent.6Internal Revenue Service. Rev. Proc. 2019-38
A rental that misses the safe harbor is not automatically disqualified. The IRS has said a rental can still qualify if it independently meets the Section 162 trade-or-business definition.8Internal Revenue Service. Qualified Business Income Deduction That test has no bright lines, which is why the safe harbor is the safer path for anyone who can hit the 250 hours.
Why Your Rental Losses May Sit Unused
Rental real estate is treated as a passive activity by default, no matter how many hours you put in.9Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited Passive losses can only offset passive income. They cannot reduce wages, business profits from a non-passive source, or investment returns. A $40,000 paper loss driven by depreciation just sits there — carrying forward but not helping this year — unless one of two exceptions applies.
The $25,000 Active Participation Allowance
If you actively participate in managing your rental — approving tenants, authorizing repairs, setting rent — you can deduct up to $25,000 in rental losses against non-passive income each year.10Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited Active participation is a lower bar than material participation. Using a property manager does not disqualify you, provided you keep authority over major decisions.
The allowance is income-tested. It shrinks by 50 cents for every dollar of adjusted gross income above $100,000 and disappears entirely at $150,000.10Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited Those thresholds have never been adjusted for inflation. Above $150,000 AGI, the allowance is gone.
Real Estate Professional Status
The larger exception is qualifying as a real estate professional under Section 469(c)(7). Clear that bar and your rental activity is no longer automatically passive, so rental losses can offset any type of income without a dollar cap.9Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
Two tests, both in the same tax year:
- More than 50% of your personal services across all trades and businesses must be performed in real property trades or businesses where you materially participate.
- More than 750 hours of services during the year in those real property activities.
On a joint return, only one spouse needs to satisfy both tests. That spouse’s W-2 hours in an unrelated field count toward the 50% denominator, which is why real estate professional status is very hard to reach for anyone holding a full-time non-real-estate job.
Clearing the professional test alone is not enough. You still have to materially participate in each rental activity, or elect to group all your rentals as a single activity and materially participate in the group. Without that, the rental stays passive.9Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited Losses suspended under the passive rules are not lost — they carry forward and release when you sell the property or generate enough passive income to absorb them.
Loss Caps and NOL Carryforwards
Section 461(l) limits how much business loss you can use to offset non-business income in one year. For 2026, the threshold is $256,000 for single filers and $512,000 for joint filers, following the OBBBA reset and inflation adjustment.4Internal Revenue Service. Rev. Proc. 2025-32 Business deductions in excess of business income plus that threshold are disallowed for the current year.
Disallowed losses convert to a net operating loss carryforward.11Internal Revenue Service. Excess Business Losses The carryforward has its own ceiling. For losses arising in tax years beginning after 2017, an NOL can offset only 80% of taxable income in the year you use it.12Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction Most taxpayers cannot carry the loss back. The result: the remaining 20% of taxable income is always taxed no matter how large your accumulated NOL.
Two layers of restriction — the annual excess loss cap and the 80% NOL usage limit — mean an investor with large depreciation-driven losses cannot always wipe out a tax bill in one year. The losses do reduce future taxes, but on a stretched schedule. Running projections before placing major assets in service is the way to avoid a filing-time surprise.
Business Interest: When It Matters
Section 163(j) caps business interest deductions, but for most rental owners it does not apply. The limitation kicks in only for taxpayers whose average annual gross receipts over the prior three years exceed $32 million for tax years beginning in 2026.4Internal Revenue Service. Rev. Proc. 2025-32 Below that, mortgage and loan interest on rental property is fully deductible without running the Section 163(j) calculation. Operations above the threshold can elect to be treated as an excepted real property trade or business, uncapping interest but forcing them onto the Alternative Depreciation System and off bonus depreciation for their real property.13eCFR. 26 CFR 1.163(j)-9 – Elections for Excepted Trades or Businesses
1031 Exchanges Still Defer the Gain
The most powerful deferral tool for rental owners survived the TCJA, though it narrowed. Section 1031 like-kind exchanges now apply only to real property.14Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips Equipment and vehicles no longer qualify. Swapping one rental for another does — an apartment building for a warehouse, raw land for a strip center — and the trade defers all capital gains and depreciation recapture indefinitely.
The deadlines are strict. Once you close on the sale of the relinquished property, you have 45 days to identify potential replacement properties in writing and 180 days to close on the acquisition.15Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment Miss either and the exchange fails, leaving the full gain taxable. The property must be held for investment or business use rather than for resale, and U.S. real property cannot be exchanged for foreign real property.
Stacked with restored bonus depreciation, 1031 exchanges let investors trade into larger properties, reset the depreciable basis, and push tax due out to some later transaction. If the property is held until death, heirs take a stepped-up basis and the deferred gain disappears.