Yes, bonus depreciation can create a loss. Bonus depreciation has no taxable income ceiling, so when it deducts the full cost of reclassified components in year one, a rental or business property can report negative taxable income even while it collects positive cash flow. The harder question for most owners is whether they can use that loss this year or have to carry it forward.
As co-founder of Seneca Cost Segregation and a real estate investor myself, I’ve watched plenty of owners celebrate a six-figure first-year deduction and then learn from their CPA that most of it will sit unused for a while. Working with investors and their CPAs, what we see consistently is that the loss is real, but the tax code decides when it counts.
Below, I walk through how bonus depreciation produces the loss, what a typical rental example looks like, the rules that determine whether you can use it, and how to plan the deduction so it lands in a year where it does real work.
TL;DR — Can Bonus Depreciation Create a Loss
- ●A study plus bonus can flip a profitable rental into a tax loss: in our illustrative $800,000 rental, $40,000 of net income becomes a $180,909 loss in year one.
- ●Bonus depreciation can push income below zero: Section 179 stops at business taxable income, while bonus has no such cap.
- ●Your status decides what you keep this year: the same loss can be fully usable, worth $15,000, or fully suspended depending on passive rules and income.
- ●Unused passive losses are not wasted: they carry forward and are generally released in full when you sell the property in a fully taxable sale.
- ●Big nonpassive losses face a 2026 cap: business losses above $256,000 ($512,000 joint) become an NOL that offsets up to 80% of future taxable income.
- ●You control the timing by class: electing out of bonus for a property class preserves regular depreciation for later years when the loss would otherwise sit idle.
How Bonus Depreciation Creates a Tax Loss
The loss appears when depreciation and other expenses exceed the income the property produces.
Add 100% bonus on the components a study pulls out of the building, and the year-one deduction can run several times a rental’s net operating income.
Why Section 179 Cannot Do the Same
Section 179 expensing has a ceiling tied to your income. Under IRS Publication 946, the deduction is limited to taxable income from the active conduct of any trade or business, and any amount above that limit carries to the next year as Section 179 expense.
Bonus depreciation carries no such restriction. The full allowance comes off in the year the property is placed in service, regardless of whether it drives your taxable income below zero.
Where a Cost Segregation Study Fits
The building shell is 27.5- or 39-year property, so it never qualifies for bonus on its own. A study identifies the 5-, 7-, and 15-year components inside the purchase price, and those classes fall within the 20-year limit for bonus eligibility.
For property acquired and placed in service after January 19, 2025, that allowance is 100%, with “acquired” set by the binding written contract date. Our breakdown of bonus depreciation under the Big Beautiful Bill covers the transition rates for earlier contracts.
Model a Bonus Depreciation Loss on a Rental Property
Here is a hypothetical residential rental.
Assume $800,000 of depreciable basis (land already excluded), placed in service in January, with $40,000 of net rental income before depreciation. Assume a study moves 25% of the basis, or $200,000, into components that qualify for building component reclassification.
The same $180,909 loss plays out very differently depending on who owns the property. Here is how it lands for three single filers in a 2026 tax year, each with no other passive income or business losses.
Which Rules Decide Whether You Can Use the Loss
A loss passes through several filters before it reduces your tax, and the order matters.
Per the Instructions for Form 461, you apply the at-risk rules first, the passive activity loss rules next, and the excess business loss rules last. Partners and S corporation shareholders check their basis before any of those.
Basis and At-Risk Limits Come First
Owners who hold property through a partnership, multi-member LLC, or S corporation can only deduct losses up to their basis. For S corporation shareholders, losses above stock and debt basis carry forward indefinitely until basis is restored.
The at-risk rules rarely block typical rental financing. Qualified nonrecourse financing secured by the real property, such as a conventional loan from a bank, generally counts as an amount at risk.
Passive Activity Rules Decide Most Rental Outcomes
Rental activity is generally passive, so a rental loss can only offset passive income unless an exception applies. IRS Publication 925 allows owners who actively participate to deduct up to $25,000 of rental loss against other income, reduced by 50% of modified AGI above $100,000 and gone at $150,000.
A belief we hear often from clients and their CPAs is that a suspended passive loss means the study was wasted. The reality of how the passive rules work is that the deduction is deferred, kept on the books, and applied the moment you have passive income or sell.
The Excess Business Loss Cap Applies Next
Losses that clear the passive rules still face a ceiling. For tax years beginning in 2026, Revenue Procedure 2025-32 sets the excess business loss threshold at $256,000, or $512,000 on a joint return.
Net business losses above that amount are disallowed for the year and treated as an NOL carryover.
What Happens to a Loss You Cannot Use This Year
A disallowed loss keeps its value; what changes is the year you get to use it.
Suspended Passive Losses Wait for Passive Income or a Sale
Disallowed passive losses carry forward on Form 8582 and offset passive income in later years, including income from other rentals. When you dispose of your entire interest in a fully taxable sale to an unrelated buyer, the remaining suspended losses are generally allowed in full.
Our explainer on the depreciation recapture tax rate covers how the gain side is taxed.
Net Operating Losses Offset Up to 80% of Future Income
A loss that clears the passive rules but exceeds your income, or trips the excess business loss cap, becomes an NOL. Under the Instructions for Form 172, NOLs from tax years after 2020 generally cannot be carried back and instead carry forward.
When the NOL is used, the deduction for post-2017 losses is limited to 80% of taxable income in that year.
When the Loss Can Offset Your Other Income
Some owners can use a bonus-driven rental loss against wages, business income, or investment income in the same year.
- ●Real estate professionals: more than half of your working hours and more than 750 hours a year in real property trades or businesses, plus material participation in the rental, make the loss nonpassive.
- ●Short-term rental owners: a property with an average guest stay of 7 days or less is not treated as a rental activity, so material participation can make the loss nonpassive. Our guide to short-term rental bonus depreciation covers the details.
- ●Active participants under $150,000 of modified AGI: up to $25,000 of loss can offset other income, phasing out between $100,000 and $150,000.
Each path has its own documentation demands, and our page on whether cost segregation can offset W-2 income walks through the record-keeping that holds up.
How to Plan Around a Bonus Depreciation Loss
A loss that will sit idle for years may be worth reshaping before the return is filed.
Model the Loss Before the Return Is Filed
Ask your CPA to run your projected income, passive position, and basis with and without the study’s bonus amounts. Our team sends the study in a format built for that handoff, and the article on CPA integration of cost segregation results shows how the schedules flow into the return.
Elect Out of Bonus by Class When the Loss Would Sit Idle
Publication 946 lets you elect out of bonus for any class of property, such as all 15-year property placed in service that year. Those assets then depreciate on their regular MACRS schedule, spreading deductions into years when you expect more income.
The election covers the entire class for the year and cannot be revoked without IRS consent. Model it before you commit.
Match the Loss to Your Hold and Exit
Owners planning a long hold usually benefit from claiming the loss early, since suspended amounts carry forward and release at sale. Owners expecting passive income from a new acquisition or a sale in the next few years can plan the study so the deduction lines up with that income.
Mistakes to Avoid With Bonus Depreciation Losses
Each of these comes up when owners see their first study-driven loss.
- ●Assuming the loss offsets your salary automatically: most rental losses are passive, so a high earner without REP or STR status may use none of it this year. Confirm your status before counting on the refund.
- ●Treating a suspended passive loss like an NOL: passive losses carry forward under different rules and release on a full disposition. Track them separately on Form 8582.
- ●Ignoring basis in an LLC or S corporation: a loss larger than your basis is disallowed even if every other test is met. Review capital accounts and debt basis before year-end.
- ●Electing out of bonus without modeling it: the class-wide election is hard to undo. Run both scenarios with your CPA first.
- ●Forgetting your state return: many states decouple from federal bonus depreciation, so the state loss can be much smaller than the federal one. Ask your CPA to model your state separately.
- ●Overlooking recapture at sale: bonus on personal property is generally recaptured as ordinary income when you sell. Plan the exit alongside the deduction.
Frequently Asked Questions
Below are the questions owners ask most often once a study shows a loss on paper.
How Seneca Helps You Plan the Deduction
A loss is only worth planning around if the numbers behind it stand up. Our in-house engineering team builds every study from component-level cost support, our Head of Engineering signs off on each report, and audit defense is included, backed by 10,200+ properties assessed with zero IRS audits lost. Run your property through our cost segregation calculator to see how large the first-year deduction could be.
Conclusion
Bonus depreciation can create a loss, and on a well-documented rental it often does. The deduction itself is the easy part; the passive, basis, and excess business loss rules decide the year it actually reduces your tax.
Owners who model the loss before filing tend to get the most from it, whether that means claiming it now, electing out by class, or timing it to a sale. When you want to see the numbers for your own property, a free estimate from our team is a good place to start.
