Can I Take Bonus Depreciation on a Used Property?
Yes. This is one of the most consequential changes in recent depreciation law and one of the most persistently misunderstood. Before 2017, bonus depreciation applied only to original use property. Since then, used property qualifies as long as it is new to the taxpayer.
That single change is why cost segregation studies on existing buildings became so much more valuable than they used to be.
The Requirement Is First Use by You
Under IRC Sec. 168(k)(2)(E)(ii), used property qualifies if the taxpayer did not previously use the property and it was not acquired from a related party or in certain carryover basis transactions.
The property does not have to be new. A 1974 apartment building purchased in 2026 contains five-year and 15-year components that are new to you, and those components qualify for bonus depreciation in full.
This is the mechanism behind essentially every cost segregation study on an acquisition. The study identifies the personal property and land improvement components within the purchase price, and those components are bonus eligible because you are the first owner to place them in service in your hands.
The Related Party Rules
Property acquired from a related party does not qualify. Related parties are determined under IRC Sec. 267 and IRC Sec. 707(b), which reach family members, controlled entities, and partnerships or corporations with common ownership above the relevant thresholds.
Buying a rental from your father, or transferring a property from one entity you control to another, does not produce bonus eligible components. The prior owner's use is attributed to you.
This catches investors restructuring their holdings. Moving a property from an individual name into an LLC the individual owns is a non-event with no new basis and no bonus depreciation. Selling a property between two LLCs both owned by the same person is a related party transaction.
Property acquired in a transaction with carryover basis, including gifts under IRC Sec. 1015 and most tax-free reorganizations, also fails the test because basis carries over rather than being newly determined.
The 1031 Exchange Complication
In a like-kind exchange, replacement property basis has two components. Carryover basis from the relinquished property, and excess basis to the extent the replacement property cost exceeds the relinquished property's basis plus boot.
Carryover basis is not bonus eligible, because it is not newly acquired basis. Excess basis generally is, and a cost segregation study can identify bonus eligible components within it.
An investor exchanging a property with $180,000 of remaining basis into a $1,400,000 replacement has roughly $1,220,000 of excess basis. A study on that excess basis at a 25% reclassification rate produces $305,000 of bonus eligible property.
This is meaningful and routinely missed. Many preparers treat exchanged-into property as having no cost segregation opportunity at all, which is wrong whenever the replacement is more expensive than the relinquished property's basis.
The Current Rate
Bonus depreciation was scheduled to phase down after 2022, dropping to 80% in 2023, 60% in 2024, and 40% in 2025.
The One Big Beautiful Bill Act enacted in 2025 restored 100% bonus depreciation permanently for qualifying property acquired and placed in service after January 19, 2025.
That means a study run today on qualifying components produces a full first-year deduction rather than a phased one. It also means the urgency that drove year-end decisions during the phase-down has eased, which changes the timing calculus for owners who were rushing to beat a declining rate.
Property acquired under a binding contract before the effective date may still fall under the prior phase-down schedule, so acquisition dates matter and should be checked rather than assumed.
What Components Actually Qualify
Bonus depreciation applies to property with a recovery period of 20 years or less. In a building, that means five-year personal property, seven-year property, and 15-year land improvements.
It does not apply to the 27.5-year or 39-year building structure. That portion depreciates on its normal schedule regardless.
Qualified improvement property under IRC Sec. 168(e)(6) carries a 15-year life and is bonus eligible, which is why interior renovations of nonresidential buildings recover so quickly.
A typical study on a residential rental reclassifies 20% to 28% into these categories. A study on a specialized commercial property can reach 40% or more.
Worked Example: Used Fourplex
An investor buys a 1978 fourplex in 2026 for $1,180,000. Land is allocated at $195,000, leaving $985,000 depreciable.
The building is nearly fifty years old and every component in it has been used continuously since construction. None of that matters. The investor did not previously use the property and did not acquire it from a related party.
A cost segregation study identifies five-year property of $167,450 and 15-year land improvements of $88,650, together 26% of depreciable basis.
All $256,100 is bonus eligible at 100% and deductible in the first year. The remaining $728,900 of structure depreciates over 27.5 years, adding roughly $26,505.
First-year depreciation is approximately $282,605 against $35,818 on a straight-line schedule. At a 35% marginal rate, that is roughly $86,400 of additional tax deferral in year one on a fifty-year-old building.
Frequently Asked Questions
Does bonus depreciation apply to used property?
Yes. Since the 2017 law change, used property qualifies under IRC Sec. 168(k)(2)(E)(ii) as long as you did not previously use it and did not acquire it from a related party. This is why cost segregation on existing buildings became so much more valuable.
Can I take bonus depreciation on a property I bought from a family member?
No. Property acquired from a related party under IRC Sec. 267 or Sec. 707(b) is excluded, and the prior owner's use is attributed to you. This also blocks transfers between entities you control and property received by gift with carryover basis.
What is the bonus depreciation rate right now?
100%, restored permanently by the One Big Beautiful Bill Act for qualifying property acquired and placed in service after January 19, 2025. Property under a binding contract before that date may still fall under the prior phase-down schedule, so acquisition dates matter.
Can I use bonus depreciation on property I acquired in a 1031 exchange?
On the excess basis, yes. Carryover basis from the relinquished property is not bonus eligible, but any excess basis where the replacement cost exceeds the relinquished basis plus boot generally is. This is commonly overlooked on exchange acquisitions.
Which parts of a building qualify?
Only components with a recovery period of 20 years or less: five-year personal property, seven-year property, and 15-year land improvements, plus qualified improvement property. The 27.5-year or 39-year structure itself is never bonus eligible.
Related Reading
Age of the Building Is Irrelevant
If you bought it and you did not previously use it, the components are bonus eligible. Send us the closing statement and we will size the study.
Prefer to talk first? Call (631) 614-5762 or email team@aetaxadvisors.com.