Bonus depreciation is an additional first-year depreciation allowance that lets businesses and investors immediately deduct the cost of eligible property rather than depreciating it over its normal asset life. It was introduced under earlier tax legislation and dramatically expanded by the Tax Cuts and Jobs Act of 2017, which raised the bonus rate to 100% for qualifying assets placed in service after September 27, 2017.
The mechanics are straightforward. If a 5-year asset (such as carpet, appliances, or certain equipment) costs $50,000, normal depreciation would spread that over 5 years at $10,000 per year. With 100% bonus depreciation, the full $50,000 is deductible in the year you placed the asset in service. The time value of money makes early deductions worth far more than deductions spread over a decade.
The TCJA set 100% bonus depreciation through 2022. Starting in 2023, the bonus rate began phasing down by 20 percentage points per year: 80% in 2023, 60% in 2024, 40% in 2025 (under the old schedule), 20% in 2026, and 0% in 2027. This phase-down significantly reduced the attractiveness of cost segregation strategies for properties placed in service in 2024 and early 2025.
At 60% bonus (2024 rate), a $200,000 reclassified asset pool would produce $120,000 in bonus depreciation and $80,000 spread over the remaining asset lives. Useful, but a pale shadow of 100% bonus. The phase-down created a strong incentive to wait, lobby for new legislation, or structure acquisitions carefully — and that wait paid off with the OBBBA.
The One Big Beautiful Bill Act, signed into law in 2025, restored 100% bonus depreciation for qualifying property placed in service on or after January 20, 2025. The restoration applies to property with a depreciable life of 20 years or less — the same categories that benefited under the TCJA. This covers all 5-year personal property and 15-year land improvements identified in a cost segregation study.
The OBBBA made the 100% bonus rate permanent rather than subject to another sunset, addressing one of the main planning uncertainties investors faced. For real estate investors, this is a landmark change. The window to take maximum advantage opened immediately upon enactment, and properties acquired since January 20, 2025 can take full 100% bonus on all qualifying cost seg components. Investors who acquired properties in 2024 at the 60% bonus rate may want to consult with their CPA about any retroactive election opportunities.
The combination of cost segregation and 100% bonus depreciation is the most powerful legal tax acceleration strategy available to real estate investors. Here is the sequence: first, a cost seg study identifies which components of your property qualify for 5-year or 15-year depreciation. Second, bonus depreciation applies, allowing 100% of those components to be deducted immediately. Third, the remaining structural components continue on the standard 27.5-year schedule.
On a $1,000,000 property where 30% is reclassified to short-life assets ($300,000), 100% bonus depreciation means a $300,000 first-year deduction on those components alone — plus the standard year-one depreciation on the remaining basis. At a 37% marginal rate, this produces $111,000 in federal tax savings from the reclassified components in year one. Without cost seg, those same components would produce only $60,000 in deductions spread over 5 years.
The tax benefit of bonus depreciation is directly tied to when you place the property in service. "Placed in service" means the property is ready and available for use — typically the closing date on an acquisition. An investor who closes on December 28 captures the full year-one bonus depreciation for that tax year. An investor who closes on January 3 of the following year must wait an entire year to report the deduction.
For year-end closings, the practical advice is to ensure your cost seg study is completed and your property is operational before December 31. Many investors deliberately time acquisitions to December for this reason. Additionally, since the OBBBA pegged eligibility to January 20, 2025, any qualifying property placed in service from that date forward should receive 100% bonus. If you acquired property between January 1 and January 19, 2025, the phase-down rate (40% under original TCJA schedule) may apply — consult a tax professional for your specific situation.
Worked Example
The cost seg study identifies $130,000 in 5-year personal property (furniture, appliances, décor) and $52,000 in 15-year land improvements (pool area, outdoor kitchen, parking). With 100% bonus depreciation under the OBBBA, the investor claims the full $182,000 in the year of purchase. The remaining $338,000 in structural basis produces a standard year-one deduction of $12,291 ($338,000 ÷ 27.5). Total year-one depreciation is $194,291. The investor actively participates in the STR and materially participates under the 500-hour test, so the loss offsets W-2 income. At a 35% marginal rate, the federal tax savings in year one is approximately $68,002.
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