In short
How a bonus depreciation real estate fund produces a year-one paper loss, which income the loss can offset under the passive rules, and what comes back at sale.
A bonus depreciation fund buys real estate, commissions a cost segregation study, and deducts the cost of the shorter-lived components in the first year. The result on your Schedule K-1 is a large paper loss in year one. Whether that loss reduces your tax this year depends on what kind of income you have, because the passive activity rules decide what it can offset. Here is how the deduction arises, where it can be used, and what comes back when the fund sells. The product page is at accelerated depreciation real estate funds.
The rule in 2026: 100 percent again
Section 70301 of Public Law 119-21 restored full expensing. IRS Notice 2026-11 states that the amendments to section 168(k) “provide taxpayers with a permanent 100 percent additional first year depreciation deduction for qualified property acquired and placed in service” after January 19, 2025. The notice also carries the acquisition-date rule: property “is not treated as acquired after the date a written binding contract is entered into for such acquisition,” so a building under contract before January 20, 2025 falls under the old phase-down. For the first tax year ending after January 19, 2025, a taxpayer may elect 40 percent instead. Our page on bonus depreciation in 2026 covers the statute in full.
Where the deduction comes from: cost segregation
A building does not qualify for bonus depreciation. Its components can. The IRS’s own Cost Segregation Audit Techniques Guide explains that a building, “termed section 1250 property,” is nonresidential real property with a 39-year recovery period or residential rental property with a 27.5-year period, depreciated straight line, while “equipment, furniture, and fixtures, termed section 1245 property,” have shorter recovery periods such as 5 or 7 years and “can be also eligible for accelerated depreciation (e.g., double declining balance, bonus depreciation, and section 179 deduction).” A cost segregation study allocates a lump-sum purchase price among those categories; the guide notes that items such as carpeting, wall coverings, partitions, millwork and lighting fixtures may be section 1245 property “depending on the particular facts and circumstances.”
The firm’s page describes its funds the same way: a cost segregation study on each acquisition breaks the asset into depreciable components, qualifying components are deducted at once, and the remaining improvements continue to depreciate in later years. See cost segregation and 1031 strategy for how a study interacts with an exchange.
Which income the loss can offset
This is the part that decides whether the fund helps you this year. Under section 469(c)(2) “the term ‘passive activity’ includes any rental activity,” and section 469(a) disallows a passive activity loss against non-passive income. A loss from the fund therefore offsets passive income: rent from other properties, income from other funds, and distributions and gains from DSTs you hold. It does not offset wages or portfolio income unless an exception applies.
Two exceptions matter. Section 469(c)(7) lifts the passive label for a real estate professional, someone who performs “more than one-half of the personal services” in real property trades or businesses in which they materially participate and “more than 750 hours” in those businesses in the year. And section 469(i) allows up to $25,000 of rental losses against other income for a taxpayer who actively participates, phasing out as adjusted gross income rises above $100,000; a limited partner in a fund rarely meets the active participation test.
Losses that are blocked are not lost. They are suspended, and section 469(g) frees them when you dispose of your entire interest in the activity. A second cap sits on top: the excess business loss limit in section 461(l), which Rev. Proc. 2025-32 sets at $256,000 ($512,000 on a joint return) for 2026; the excess becomes a net operating loss carryforward.
A hypothetical. You invest $500,000 in a fund. The fund’s study allocates 30 percent of its property cost to 5-, 7- and 15-year components, all placed in service after January 19, 2025. Your share of the year-one bonus deduction is about $150,000, before any regular depreciation on the rest.
If you have $150,000 of passive income that year, say from rentals and DST distributions, the loss shelters it. If instead your income is salary and portfolio income and you are not a real estate professional, the $150,000 is suspended and waits for passive income or a disposition. Either way, the deduction lowers your basis in the fund, which is the subject of the next section. Run your own numbers with your CPA, and see using a fund to offset passive income.
What comes back at sale: recapture
Bonus depreciation is a deferral, not a forgiveness. When the fund sells, section 1245(a)(1) treats gain on the section 1245 components as ordinary income to the extent of the depreciation taken, up to the amount realized. The building’s own depreciation is unrecaptured section 1250 gain at up to 25 percent. The year-one deduction at ordinary rates and the later recapture at ordinary rates net to a timing benefit, not a rate benefit, on the 1245 portion; the rate benefit, if any, comes from the appreciation taxed as capital gain. Section 1245(b)(4) limits recapture in a like-kind exchange to the gain recognized plus the value of non-1245 property received, which is one reason the fund’s exit strategy is worth reading in the offering documents.
A fund interest is not 1031 replacement property
A fund is a partnership, and a partnership interest is not real property under section 1031(a)(1). Exchange proceeds cannot buy it without ending the deferral on that money. The fund’s place is alongside the exchange: for the boot you decide to take, for a sale you choose not to exchange, or for a failed exchange, where the fund’s year-one loss can offset the gain the failure produced. Our pages on putting 1031 funds into a bonus depreciation fund, bonus depreciation versus a 1031 and a bonus depreciation fund after a failed exchange map those cases.
What to do now
- List your passive income for the year: rents, DST distributions, K-1 income from other funds. That figure is the loss you can actually use.
- If you expect boot or a taxable sale, ask your CPA whether the gain is passive or not; the answer decides whether the fund’s loss reaches it.
- Read the fund’s offering documents for the acquisition dates and the cost segregation approach, then request a proposal sized to the income you need to shelter.
