What Is Bonus Depreciation?
Bonus depreciation is a tax incentive that allows businesses, including real estate investors, to immediately deduct a significant portion of the cost of qualifying property or improvements in the year the asset is placed in service. Instead of spreading the cost over many years through traditional depreciation schedules, bonus depreciation accelerates the deduction timeline, improving cash flow and reducing taxable income up front.
How Does Bonus Depreciation Work?
When an investor purchases an asset, such as certain improvements to a property or specific components identified through a cost segregation study, the IRS typically requires depreciation over 5, 7, 15, 27.5, or 39 years depending on the asset type.
With bonus depreciation, qualifying assets with a recovery period of 20 years or less (like land improvements, personal property, and qualified improvement property) can be partially or fully deducted in the first year. This makes cost segregation especially valuable: by reclassifying portions of a building into shorter-lived assets, you can make more of your investment bonus-depreciation-eligible.
A Quick Example:
Suppose you purchase a $1 million commercial property. A cost segregation study identifies $300,000 worth of components (like carpet, specialty lighting, or landscaping) that fall under 5, 7, or 15-year property classifications. With it now reinstated, under 100% bonus depreciation, you could deduct that entire $300,000 in the first year.
Bonus Depreciation: The Legislative Timeline
Tax Cuts and Jobs Act (TCJA) of 2017 increased bonus depreciation to 100% for assets acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.
Starting in 2023, bonus depreciation began phasing down under previous legislation:
- 80% in 2023
- 60% in 2024
- 40% in 2025
- 20% in 2026
- Previously set to expire in 2027
As of July 2025 under the passing of the “One Big Beautiful Bill,” 100% bonus depreciation is set to make a return for qualifying properties acquired and placed in service after January 19, 2025
What This Means for Real Estate Investors
At 100%, bonus depreciation can deliver substantial tax savings, especially when paired with a cost segregation study that breaks down components into shorter-lived classifications. However, the phasedown emphasizes the importance of timing and tax planning.
Here are some key takeaways:
- Act Early: If you’re considering major property acquisitions or improvements, doing so sooner allows you to maximize remaining bonus depreciation benefits.
- Work with Experts: Tax professionals and cost segregation specialists can identify hidden depreciation potential and ensure you’re fully compliant while optimizing deductions.
Where Bonus Depreciation Sits: 2026 and Beyond
With the passage of the OBBBA in July 2025, 100% bonus depreciation has been fully restored for qualifying assets acquired and placed in service on or after January 19, 2025. This change reverses the previous phase-down schedule and reinstates a powerful incentive for capital investment.
The return of full bonus depreciation greatly enhances the value of cost segregation studies. By identifying 5, 7, and 15-year property components within a building, these studies allow those components to be fully expensed in the first year under the renewed bonus depreciation rules.
As a result, many investments acquired after January 19, 2025, will now qualify for immediate, full expensing, making 2026 and beyond an ideal time to invest in commercial real estate from a tax-saving perspective. However, it must be noted that assets acquired in the original phase-out years are still subject to the reduced bonus percentages.
In Summary
Bonus depreciation just got a renewed boost in benefit for real estate investors. Acting now, whether it’s through property acquisitions, improvements, or cost segregation, can help you leverage this powerful incentive. Through savvy planning today with an expert at CSSI will position you for success tomorrow. Contact us today.
Frequently Asked Questions About Bonus Depreciation
1. What is bonus depreciation? Bonus depreciation is a tax incentive that allows property owners to immediately deduct a large percentage of the cost of eligible assets in the year they are placed in service, rather than depreciating them over many years. When combined with cost segregation, it can significantly accelerate tax savings.
2. How does bonus depreciation work with cost segregation? Cost segregation identifies property components that qualify for shorter depreciation schedules; typically 5, 7, or 15 years. Bonus depreciation can then be applied to those reclassified assets, allowing owners to deduct a substantial portion of their value in year one rather than over time.
3. What is the current bonus depreciation percentage? Bonus depreciation is at 100% since being reinstated due to the OBBBA. Assets acquired or placed in service after January 19th, 2025 qualify. However, assets acquired before then are still subject to prior phase down percentages.
4. Does bonus depreciation apply to existing properties? In many cases, yes. Through a cost segregation look-back study, eligible assets identified in prior years may qualify for bonus depreciation, potentially generating significant deductions without amending previous returns.
