100% Bonus Depreciation Is Back: What Real Estate Investors Need to Know

After a four-year phasedown that cut the benefit by 20% per year, 100% first-year bonus depreciation has been restored for qualifying property placed in service on or after January 20, 2025. For real estate investors with a cost segregation study in hand, the first-year tax impact can be dramatic.

What Bonus Depreciation Is and Why It Matters

Under IRC § 168(k), certain property that qualifies for accelerated MACRS depreciation — including the 5-year, 7-year, and 15-year property identified in a cost segregation study — can be fully deducted in the year it is placed in service, rather than spread across its MACRS life.

This means that if your cost segregation study identifies $600,000 in 5, 7, and 15-year property in a $2 million building, 100% bonus depreciation allows you to deduct the full $600,000 in year one — compared to a MACRS schedule that would spread that deduction across 5 to 15 years.

The Phasedown and Its Restoration

The Tax Cuts and Jobs Act of 2017 established 100% bonus depreciation for qualified property placed in service after September 27, 2017. But the law also included a sunset provision: starting in 2023, the bonus rate began declining by 20 percentage points per year:

• 2022: 100%
• 2023: 80%
• 2024: 60%
• 2025 (pre-restoration): 40% scheduled

Legislation effective January 20, 2025 restored 100% bonus depreciation for qualifying property placed in service on or after that date. Properties placed in service in calendar year 2024 remain at the 60% rate; properties placed in service on or after January 20, 2025 qualify for the full 100%.

How Cost Segregation Multiplies the Benefit

Bonus depreciation only applies to property in the qualifying accelerated classes — it does not apply to the 39-year building structure. Without a cost segregation study, most of your property's value sits in the 39-year class and receives no bonus treatment at all.

A cost segregation study is what creates the bonus-eligible pool. Here's how the math works on a $3 million commercial office building with a 32% reclassification rate:

• Depreciable basis: $3,000,000
• Reclassified to 5/7/15-year classes: $960,000
• 100% bonus depreciation deduction: $960,000 in year one
• Tax savings at 37% marginal rate: approximately $355,000
• Without cost segregation: year-one deduction under straight-line 39-year ≈ $77,000

The difference — $883,000 in additional first-year deductions — exists entirely because the cost segregation study identified and reclassified those components. The bonus depreciation rule is the accelerant; cost segregation is the fuel.

Who Benefits Most Right Now

The restored 100% rate creates urgency for property owners who:

• Acquired or placed a property into service on or after January 20, 2025
• Are completing new construction that will be placed in service in 2025 or 2026
• Have not yet had a cost segregation study performed on a recently acquired property
• Have a significant tax liability that can absorb large first-year deductions

The 100% rate is not permanently guaranteed. The legislative history of IRC § 168(k) includes multiple phasedowns and restorations. Property owners who have been waiting to commission a cost segregation study have an incentive to act now while the full benefit is available.

Opting Out Is Also a Valid Strategy

Not every owner wants to take 100% bonus depreciation in year one. Investors who expect their marginal tax rate to increase significantly in future years may prefer to spread deductions forward. The election to opt out of bonus depreciation is made on a class-by-class basis on Form 4562. Your CPA should model both approaches. Our feasibility analysis includes a scenario showing the NPV impact of each option.