Bonus Depreciation Is Back at 100%: What It Means for 1031 and DST Investors

If you’ve been researching a 1031 exchange in 2026, you may have heard that “bonus depreciation is back.” You’re not imagining it. A tax provision that had been winding down for years was fully restored in 2025, and it changes the math on how much of your rental income you can shelter after you reinvest. For investors moving into a Delaware Statutory Trust (DST), it also changes what to ask a sponsor before you commit your exchange proceeds.

So what actually changed, and does it matter for you? In short: qualifying property placed in service after January 19, 2025 can once again be depreciated 100% in its first year, and that benefit can flow through to certain passive real estate investments, including DSTs. Here’s how it works, with an example, and the honest limits.

What “100% Bonus Depreciation” Actually Means

Depreciation is the deduction the IRS lets real estate owners take each year to account for wear on a building. Normally it’s slow: residential rental property depreciates over 27.5 years, and commercial property over 39 years. That steady schedule is called straight-line depreciation.

Bonus depreciation is different. It lets an owner deduct the entire cost of certain shorter-life assets in the year the property is placed in service, instead of spreading it out. It only applies to assets with a tax life under 20 years, such as flooring, cabinetry, appliances, specialized lighting, and land improvements like parking lots and landscaping. The building’s core structure (the 27.5- or 39-year portion) does not qualify.

Under the 2017 Tax Cuts and Jobs Act, bonus depreciation was set at 100% and then scheduled to phase down: 80% in 2023, 60% in 2024, and lower after that. The One Big Beautiful Bill Act (OBBBA), enacted in July 2025, reversed that phase-down and made 100% bonus depreciation permanent for qualifying property placed in service after January 19, 2025.

Where Cost Segregation Comes In

To use bonus depreciation, you first have to know which parts of a property qualify. That’s the job of a cost segregation study, an engineering-based analysis that breaks a building into its components and reassigns the shorter-life pieces into 5-, 7-, and 15-year categories instead of lumping everything into the 27.5- or 39-year building life.

Once those components are identified, 100% bonus depreciation can be applied to them in year one. On many properties, the reclassified portion lands somewhere in the range of 20% to 35% of the building’s cost, though the actual figure depends entirely on the property type and the study. That’s a large first-year deduction pulled forward from what would otherwise be decades of slow write-offs.

How This Connects to Your 1031 Exchange

Importantly, the OBBBA did not change the rules for 1031 like-kind exchanges. The 45-day identification window, the 180-day closing deadline, and the requirement to reinvest into like-kind real property are all unchanged.

What changed is the replacement-property side. Cost segregation and 1031 exchanges are often used together: after you complete an exchange, a cost segregation study on the replacement property can layer accelerated depreciation on top of the tax deferral the exchange already provides. The 1031 exchange defers the gain on the property you sold; bonus depreciation on the new property can help shelter the income it produces going forward. A 1031 exchange carries over your old, reduced basis, and cost segregation applied to exchanged property has its own technical rules, so this is a place to lean on your CPA.

What This Means Inside a DST

Many 1031 investors move into a DST specifically to stop actively managing property. Here’s the part that’s easy to miss: because DST investors own a beneficial interest in the underlying real estate, depreciation, including bonus depreciation from a cost segregation study run at the DST level, generally passes through to investors in proportion to their interest.

In plain terms, a DST that performs cost segregation on its properties may pass a share of first-year depreciation through to you, which can offset some of the passive income the DST distributes. This is one reason two DSTs holding similar assets can produce very different after-tax experiences.

A Simple Example

Suppose you complete a 1031 exchange and invest $500,000 into a DST. Assume a cost segregation study identifies 25% of the underlying real estate value as bonus-eligible, short-life property. Your share of that reclassified basis would be roughly $125,000, and 100% bonus depreciation could allow much of it to be deducted in the first year, passing through to your return.

These numbers are illustrative only. Real allocations depend on the specific properties, the cost segregation study, your basis after the exchange, and your personal tax situation. Depreciation you take now also increases the depreciation recapture you may owe later if the asset is eventually sold outside of an exchange. The benefit is timing, not elimination.

Questions Worth Asking a DST Sponsor

Has a cost segregation study been performed on the DST’s properties, and what depreciation is expected to pass through? How will that depreciation be reported to me? And how does the projected depreciation interact with the income the DST expects to distribute? These are fair, specific questions, and a credible sponsor should be able to answer them clearly.

The Bottom Line

The return of permanent 100% bonus depreciation is one of the more meaningful tax developments for real estate investors in years. For someone completing a 1031 exchange, it doesn’t change the exchange rules, but it can change how much of your future income is sheltered, particularly when paired with a cost segregation study. Inside a DST, that benefit can pass through without you managing anything. The catch is that bonus depreciation shifts tax to the future rather than erasing it, and the real numbers hinge on your specific basis and property. Plan for it before you exchange, not after.

Considering a 1031 exchange or a DST and want to understand how depreciation would work in your situation? Talk to a Specialist about your exchange options and how the current bonus depreciation rules might apply. You can also explore the free 1031 Deadline Calculator.

*This article is for informational and educational purposes only and is not tax, legal, or investment advice. My1031Options.com is an educational resource published by Medalist Diversified, Inc. (NASDAQ: MDRR), a publicly traded company and DST sponsor. This is not an offer to sell or a solicitation of an offer to buy any security. Securities are offered only by means of a Private Placement Memorandum (PPM) and only to accredited investors as defined in Rule 501 of Regulation D under the Securities Act of 1933. All investments involve risk, including the possible loss of principal. Consult your own CPA, tax attorney, and qualified financial professional before selling investment property or executing a 1031 exchange.