Since 2022, property investors have faced a 20% annual decrease in available bonus depreciation, understanding that it will be completely phased out by the beginning of 2027. However, the law has again changed, and 100% bonus depreciation is back, which is great news for real estate investors running cost segregation studies.
What is Bonus Depreciation?
Bonus depreciation is a tax treatment that anyone can utilize to further accelerate the depreciation of their asset purchases. IIt allows them to write off a percentage of qualifying assets in the first year of ownership, which can defer taxable income into the future.
Intro to Bonus Depreciation
Bonus depreciation is an election on your tax return that allows you to claim a percentage as an expense of your investment in the first year of ownership. When you invest in assets, depreciating them isn’t optional; it’s required. However, capturing bonus depreciation is. Capturing this deduction allows you to recoup your investment faster, instead of spreading your depreciation deductions over a longer period of time.
As an example, if you claimed 60% bonus depreciation on your acquired asset in 2024, you will still need to depreciate the other 40% across its appropriate depreciable life.
The Tax Cuts and Jobs Act of 2017
The jump that bonus depreciation took from 50 to 100 percent on 9/27/2017 was great news for investors. In addition, for the first time in history, bonus was now available on “used” property. Previously, only newly-constructed assets had been eligible for bonus.
However, in 2017, the Act, the biggest tax overhaul since the Tax Reform Act of 1986, was passed. As part of the act, bonus depreciation was scheduled to decrease by 20% annually, starting in 2023, until it was completely phased out in 2027.
The One Big Beautiful Bill Act of 2025
However, Congress and President Trump have moved to repeal this process and as a part of the The One Big Beautiful Bill Act (OBBBA), bring back 100% bonus depreciation permanently. This means no more annual decreases, and an immediate and full restoration of the 100% bonus depreciation for investment properties. This restoration is being implemented retroactively for property acquired and placed in service on or after January 19, 2025.
What Qualifies for Bonus Depreciation?
Not all acquired assets qualify for bonus depreciation, they must meet certain criteria to be eligible.
Assets Eligible for Bonus Depreciation
For assets to qualify for bonus, they must have a depreciable life of 20 years or less. In addition, they must be used at least 50% professionally for business (they can also be used up to 50% personally, such as vehicles, laptops, or photo cameras).
It is important to note that it isn’t the year you purchase property that is important, it is the year you put it in service (open for business, rented, etc.).
Bonus Depreciation for Commercial Real Estate
Although commercial and residential real estate investments meet the second criteria above, they have depreciable lives of 39 and 27.5 years, respectively. Therefore, bonus is not available for these types of assets. However, if you complete a cost seg study on these properties, the reclassified personal property generally will meet the first criteria above as well, so bonus would be available for these reclassified assets. After you’ve completed your cost segregation study, you’ll have your qualifying assets’ cost bases – it’s this figure that can have bonus depreciation applied.
Assuming that you’ve completed a cost seg study on your property, that was placed in service after January 20 of this year, and as a result of the Big, Beautiful Bill passing, you will be able to claim 100% bonus on these personal property assets. Now that you know what qualifies, let’s take a look at how it benefits you as a real estate investor.
Cost Segregation and Bonus Depreciation
Cost segregation studies are performed to accelerate the depreciation of real estate assets, and bonus accelerates it even faster. When you complete a cost seg study, pieces of your asset will end up with a depreciable life span of 5-15 years, meaning that it is fully eligible for 100% bonus depreciation. Since you’re leveraging cost seg to accelerate depreciation, bonus makes this strategy even more valuable.
The Effect of 100% Bonus Depreciation on a Cost Seg Study
Here’s an example of what the a result of the OBBBA would look like to you as a real estate investor:
Let’s say that you purchased, and placed in service, a commercial property on 4/30/2025 for $1,000,000, and you determine that the land is worth $200,000, leaving you with an $800,000 depreciable asset.
For this example, let’s assume that your cost seg study reclassified $140,000 as a 5-year tangible personal property and $100,000 as 15-year property.
So, now, this $240k of your $800,000 investment is eligible for bonus depreciation. Since the BBB expanded bonus from 40% to 100% as of 1/19/2025, this is what the OBBBA means to you, the real estate investor:
What Could You Do with Additional Depreciation Deductions?
This example shows that an additional $124,200 of depreciation deductions are available to you this year. Assuming your effective tax rate is 35% (federal plus state), and you can use these additional deductions, that means you’ll defer $43,470 in additional tax liability on your 2025 tax return.
Cost segregation allows you to accelerate the depreciation on your qualifying assets and save money on your taxes. The OBBBA boosting bonus depreciation from 40% to 100% amplifies these savings even more. What would you do with an additional $43,470 to invest this year?
How to Capture 100% Bonus Depreciation on Commerical Real Estate
Since you can’t claim bonus depreciation on Section 1250 assets (buildings), you must complete a cost segregation study on your property to segregate your 1245 property out of your 1250 property, if you want to take advantage of the 100% bonus deduction. Your newly reclassified 1245 property will then be eligible for 100% bonus depreciation.
Complete a Cost Seg Study on the Property
When you complete a cost seg study on your commercial property, generally, about a quarter to a third of it will be reclassified as tangible personal property with depreciable lives of 5-15 years, typically.
IRS Form 4562
To capture your depreciation deductions, you must fill out the IRS Form 4562. However, of the six sections, you won’t need to fill out all of them – only sections II through IV. Part II is specifically for claiming bonus depreciation, part III includes all of your depreciable assets, whether they are being accelerated or not. Lastly, part IV is where you come up with the total dollar amount.
Property Placed in Service From 1/1/25 to 1/18/25
The OBBBA reinstates 100% bonus depreciation retroactively to January 19 of this year and not January 1. Those first weeks of this tax year will remain at a 40% bonus. Although this may be a disappointment for some real estate investors, it is an important detail that you must be aware of, since it’s the date you place your property in service that is relevant to bonus.
Property Placed in Service on or After 1/19/2025
Fortunately, that period of time isn’t very long. Even if you purchased property during those ~3 weeks, it’s all about when you put your property in service. If that happens to be January 19 or later, you can claim 100% bonus depreciation.
FAQs
Is Bonus Depreciation Going Back to 100%?
Yes. The One Big Beautiful Bill Act has reinstated 100% bonus depreciation permanently. This restoration is being implemented retroactively for property acquired and placed in service on or after January 19, 2025.
How Does Bonus Depreciation Compare to the Section 179 Deduction?
Bonus depreciation has no dollar cap when you capture it, while Section 179 is limited to an annual cap. In addition, bonus depreciation can create a loss shown on your taxes that year and can be carried forward into the following years, while Section 179 can’t. Generally, in years with less than 100% bonus, the typical strategy would be to first take the Section 179 deduction up to the cap, and then use bonus depreciation on the remainder of your assets.
Does AMT Qualify for Bonus Depreciation?
Yes. 100% bonus depreciation can be claimed for both regular tax and Alternative Minimum Tax (AMT). Bonus depreciation isn’t limited under AMT either.
Is Bonus Depreciation Subject to Recapture?
Yes. When you sell a property on which you claimed any depreciation, that depreciation is taxed as regular income at your effective rate. However, this tax rate has a cap of 25%.
