Selling a furnished rental splits into two transactions the moment you close — one for the real estate, which your 1031 exchange can shelter, and one for the furniture, fixtures, and equipment, which it cannot. That second transaction triggers depreciation recapture, and the bill can be steep. Bonus Depreciation under the One Big Beautiful Bill Act is the most direct tool available to offset it.
Why FF&E Is Now Outside the Exchange
Before 2018, personal property rode along inside a Section 1031 exchange without distinction. The Tax Cuts and Jobs Act ended that. Since January 1, 2018, Section 1031 applies to real property only — the building, the land, and what is legally attached to them. Everything else in the deal — beds, refrigerators, window units, washers, dryers — is FF&E, and FF&E is personal property. When you sell, the portion of the sales price attributable to the FF&E is treated as a separate sale, entirely outside the exchange. Whatever tax is due on that separate sale must be paid now, not deferred.
What Depreciation Recapture Means for FF&E
Each year you held the rental, you deducted depreciation on the FF&E — a paper loss that lowered your taxable income and, dollar for dollar, lowered your basis in those assets. When you sell, the IRS takes some of that benefit back. The portion of your gain that came from depreciation you already claimed is “recaptured.” On personal property like furniture and equipment — Section 1245 property — recapture is taxed as ordinary income, at rates up to 37%, though never more than the depreciation you actually took. A 1031 exchange defers recapture right along with the rest of the gain on real estate, but since FF&E no longer qualifies, its recapture is exposed and taxable in the year of sale.
How Bonus Depreciation Enters the Picture
Here is where the OBBBA changes the math. Normally you write off the cost of shorter-lived property a little at a time over several years. Bonus Depreciation lets you write off the entire cost in the first year instead. Under the One Big Beautiful Bill Act, that deduction is 100% and permanent for property placed in service after January 19, 2025. It applies to the shorter-lived assets — furniture, fixtures, equipment, and certain improvements — not to the building itself, which is real property and depreciates on the slow schedule.
The practical effect: when you buy your replacement property and it comes with FF&E, you can elect to expense the full cost of that FF&E in year one. That first-year deduction generates a loss — or at minimum reduces your taxable income — in the same year you recognize the recapture from selling the relinquished FF&E. The deduction on the new FF&E can offset, or even eliminate, the recapture tax on the old FF&E.
Used Property Qualifies — Which Matters for Almost Every Deal
Most furnished rentals are not bought new. The OBBBA does not require new property. Used FF&E qualifies for 100% Bonus Depreciation as long as three conditions are met: the property is new to you, you bought it from someone unrelated to you, and your basis in it is what you paid — not a carryover basis from a prior owner. In a typical rental acquisition, all three conditions are satisfied. The seller of the replacement property is an unrelated third party, the FF&E is property you have never owned before, and you are paying fair market value for it.
The Mechanics in Plain Terms
When you close on your replacement property, allocate the purchase price between the real estate and the FF&E — the same allocation exercise you performed on the sale side. The real estate portion flows into your 1031 exchange. The FF&E portion is a separate purchase, and if the property was placed in service after January 19, 2025, you can deduct 100% of that cost in the year of purchase. Set that deduction against the ordinary income generated by recapture on the FF&E you just sold, and the two positions can net to near zero.