Bonus Depreciation Strategies for Real Estate and Business Owners

100% Bonus Depreciation Is Back, Permanently!

Bonus depreciation is one of the most powerful tax tools available to real estate investors and business owners. It allows you to deduct a large percentage (currently 100 percent) of the cost of qualifying property in the year it is placed in service, rather than spreading the deduction across the property’s full useful life. For a high-income taxpayer acquiring depreciable assets, this can mean hundreds of thousands of dollars in first-year tax savings.

The rules around bonus depreciation have changed substantially in recent years, and most online content is now out of date. Under the One Big Beautiful Bill Act (OBBBA) signed into law in July 2025, 100 percent bonus depreciation has been permanently restored for qualified property acquired after January 19, 2025. The previous phase-down schedule, which would have eliminated bonus depreciation entirely by 2027, no longer applies to new acquisitions.

This page covers what bonus depreciation actually is, what qualifies under current law, how to combine it with cost segregation for maximum effect, and the strategic considerations that determine whether (and how) to use it.

What Bonus Depreciation Is and How It Works

Bonus depreciation, also called the additional first-year depreciation deduction under IRC Section 168(k), allows taxpayers to immediately deduct a percentage of the cost of qualifying property in the year that property is placed in service. The remaining basis (if any) is then depreciated under the standard Modified Accelerated Cost Recovery System (MACRS) schedule.

When the bonus rate is 100 percent (as it currently is for property acquired after January 19, 2025), the full cost of qualifying property can be deducted in year one. This is dramatically different from standard depreciation, which spreads the deduction across 5, 7, 15, 27.5, or 39 years depending on the asset type.

A Simple Example

A business acquires $500,000 of qualifying equipment in 2026. Under 100 percent bonus depreciation, the business deducts the full $500,000 in 2026. For a taxpayer in the 37 percent federal bracket, this produces $185,000 in federal tax savings, plus state tax savings on top. Without bonus depreciation, the same $500,000 in equipment might generate only $100,000 in first-year depreciation under standard MACRS schedules.

The economic effect is significant. Bonus depreciation does not eliminate the depreciation. It accelerates the timing of when you take it. But the time value of that acceleration, combined with the ability to offset high-income years with large deductions, makes it one of the most consequential tax planning tools available.

The Current State of Bonus Depreciation Law

Understanding the current state of bonus depreciation requires understanding what changed in 2025.

The Old Phase-Down Schedule

Under the Tax Cuts and Jobs Act of 2017, bonus depreciation was set at 100 percent for property placed in service from September 27, 2017 through 2022. Beginning in 2023, the rate was scheduled to phase down by 20 percentage points per year:

2023: 80 percent
2024: 60 percent
2025: 40 percent (under prior law)
2026: 20 percent (under prior law)
2027 and after: 0 percent

For property still subject to the prior phase-down schedule (specifically, property acquired on or before January 19, 2025 even if placed in service later), these reduced rates still apply.

The OBBBA Restoration

The One Big Beautiful Bill Act, signed into law on July 4, 2025, permanently restored 100 percent bonus depreciation for qualifying property acquired after January 19, 2025. This is a permanent change, not a temporary extension. The previous phase-down schedule no longer applies to new acquisitions.

The IRS issued Notice 2026-11 in January 2026 providing interim guidance on the restored rules, confirming that the existing Section 168(k) framework continues to apply with 100 percent substituted for the prior phase-down percentages.

The Acquisition Date Matters More Than the Placed-in-Service Date

For determining which rate applies, the key date is the acquisition date (when the binding contract was signed), not the placed-in-service date. Property acquired under a binding contract dated on or before January 19, 2025 remains subject to the old phase-down rates even if it is not placed in service until later. Property acquired after January 19, 2025 qualifies for the full 100 percent rate.

This distinction matters significantly for real estate investors who entered into purchase contracts in early 2025 but did not close until later in the year. The contract date, not the closing date, determines the applicable bonus rate.

What Qualifies for Bonus Depreciation

Not all property qualifies for bonus depreciation. The basic eligibility requirements under Section 168(k):

Qualified Property Categories

To qualify, property must generally meet all of the following:

Recovery period of 20 years or less under MACRS (this excludes the building structure itself for residential and commercial real estate, which has 27.5 or 39 year recovery periods)
New or used property (the rule that bonus depreciation applied only to new property was eliminated under TCJA in 2017)
First use by the purchasing taxpayer for used property (the taxpayer cannot have previously used the property)
Acquired and placed in service during the qualifying period

Asset Types That Qualify

Common categories of property eligible for bonus depreciation include:

Personal property with 5 or 7 year recovery periods (machinery, equipment, computers, vehicles, office furniture)
Qualified Improvement Property (QIP) with a 15 year recovery period (interior improvements to nonresidential buildings)
Land improvements with a 15 year recovery period (parking lots, fencing, sidewalks, landscaping)
Qualified sound recording productions (added under OBBBA, with specific eligibility rules)
Certain longer-life property under specific elections

What Does Not Qualify

The building structure itself for residential rental (27.5 year recovery) and commercial real estate (39 year recovery) does not qualify for bonus depreciation. This is why cost segregation is so important: it identifies the portions of a real estate purchase that can be reclassified into shorter-life categories that DO qualify.

Real estate held by partnerships in which the operator is also a tenant has limited bonus depreciation availability under the “related party” rules. Property used predominantly outside the United States generally does not qualify. Property used by tax-exempt entities or governments also faces restrictions.

Combining Bonus Depreciation with Cost Segregation

For real estate investors, bonus depreciation reaches its full power when combined with a cost segregation study. The two strategies work together to dramatically accelerate the depreciation deductions available in the first few years of property ownership.

How Cost Segregation Works

A cost segregation study, conducted by qualified engineers and tax professionals, examines a property and reclassifies portions of the basis from long-life real property (27.5 or 39 years) into shorter-life categories:

5-year property: Carpeting, decorative lighting, specialized electrical, certain plumbing components
7-year property: Certain fixtures and equipment
15-year property: Land improvements such as parking lots, fencing, and landscaping

For a typical commercial property, cost segregation studies often identify 20 to 35 percent of the purchase price as falling into these shorter-life categories. For a $3,000,000 commercial property, that means $600,000 to $1,050,000 of basis becomes eligible for the shorter-life depreciation schedules.

The Bonus Depreciation Multiplier

Because the shorter-life categories identified by cost segregation are all under 20 years, they ALL qualify for bonus depreciation. Under current 100 percent bonus depreciation rules, the entire reclassified portion can be deducted in year one.

A concrete example: A real estate investor acquires a $3,000,000 commercial property in 2026. A cost segregation study identifies $900,000 (30 percent) as falling into 5, 7, and 15 year categories. Under 100 percent bonus depreciation, the investor claims the full $900,000 as a first-year deduction. For a high-income investor in the 37 percent federal bracket plus state tax, this produces approximately $300,000 to $400,000 in tax savings in year one.

Without cost segregation, the same $3,000,000 property would generate only about $77,000 in first-year depreciation (based on a 39-year straight-line schedule on the building portion). The combination of cost segregation plus bonus depreciation makes the difference between marginal first-year tax benefit and transformational tax savings.

When Cost Segregation Makes Sense

Cost segregation studies typically cost $5,000 to $15,000 depending on property size and complexity. They make economic sense when:

The property is held for income production (not primary residence use)
The purchase price exceeds approximately $500,000
The investor has sufficient taxable income to absorb the accelerated deductions
The property will be held for at least 3 to 5 years (to capture the deductions before potential recapture)

For high-income investors meeting these criteria, the after-tax return on a cost segregation study often exceeds 10:1 in year one.

Strategic Considerations for Using Bonus Depreciation

Bonus depreciation is powerful, but it is not always the optimal choice. Several strategic considerations affect when and how to use it:

Use It in High-Income Years

Bonus depreciation creates a deduction. A deduction is only as valuable as the tax bracket it offsets. Taking a $500,000 deduction in a year when your marginal rate is 37 percent saves $185,000. Taking the same deduction in a year when your marginal rate is 24 percent saves only $120,000.

For taxpayers with variable income, timing bonus depreciation to coincide with high-income years produces the best results. Acquiring depreciable property in a year that already includes a large business sale, a property gain, or unusually high W-2 income often makes the math work even better.

Bonus Depreciation Can Create or Increase a Net Operating Loss

Unlike Section 179 expensing (which is limited to taxable business income), bonus depreciation can create or increase a Net Operating Loss (NOL). An NOL can be carried forward indefinitely under current law (subject to an 80 percent of taxable income limit), providing future tax shielding.

This creates planning opportunities for taxpayers who expect significantly higher income in future years. Accelerating depreciation now to create an NOL, then using that NOL to shield future high-income years, is a legitimate planning strategy when properly executed.

The Elect-Out Option

Taxpayers can elect out of bonus depreciation for any class of property. This may be beneficial when:

You want to preserve deductions for future high-income years rather than use them now
State tax conformity issues create complications (some states do not conform to federal bonus depreciation rules)
You have an NOL situation where additional deductions would not produce immediate benefit
You are concerned about state-level recapture rules in a state where you may eventually sell

The Reduced-Rate Election (New Under OBBBA)

The OBBBA introduced a one-time transition election allowing taxpayers to claim 40 percent bonus depreciation (instead of 100 percent) on most qualifying property for the first taxable year ending after January 19, 2025. For long-production-period property and certain aircraft, the reduced rate is 60 percent.

This election lets taxpayers smooth their deductions across multiple years rather than front-loading everything into the transition year. It is most useful for taxpayers who would otherwise create unnecessary NOLs or who want to preserve deductions for future planning needs.

State Tax Conformity

Not all states conform to federal bonus depreciation rules. States like California, Florida, and New York have historically decoupled from bonus depreciation, meaning the federal deduction is added back for state tax purposes. For investors in non-conforming states, the federal tax savings still apply, but state tax planning needs separate consideration.

The Recapture Trade-Off

Accelerated depreciation creates correspondingly larger recapture exposure when the property is sold. The 5, 7, and 15 year property reclassified through cost segregation is taxed as Section 1245 recapture at ordinary income rates (up to 37 percent federally) at sale, compared to the 25 percent rate that applies to standard Section 1250 real property.

For investors who plan to hold property long-term or who plan to use 1031 exchanges to defer the gain (and the recapture) indefinitely, this trade-off is generally favorable. For investors who plan to sell in the near term without a 1031, the recapture math needs to be modeled carefully. See our page on depreciation recapture strategies for more.

Common Scenarios for Bonus Depreciation Planning

“I am acquiring a commercial property and want to maximize first-year deductions.”

A cost segregation study combined with 100 percent bonus depreciation is the standard approach. For a property over $500,000 in purchase price, the study cost is dwarfed by the first-year tax savings. The strategy works best when you have sufficient income in the year of acquisition to absorb the accelerated deductions.

“I am a high-income earner with one or more rental properties and want to offset W-2 income.”

The combination of bonus depreciation plus cost segregation produces large deductions, but those deductions are passive by default and cannot offset W-2 income. You need to qualify for Real Estate Professional Status or use the short-term rental loophole to make the deductions non-passive. See our page on tax strategies for high-income real estate investors for the full discussion.

“I am a business owner planning to acquire equipment or vehicles.”

Business equipment, machinery, and vehicles with 5 or 7 year recovery periods all qualify for 100 percent bonus depreciation. For a business with strong taxable income, acquiring this equipment in the same year as the income event maximizes the deduction value. Consider whether Section 179 expensing or bonus depreciation produces the better result based on your taxable income, NOL position, and state tax situation.

“I am facing a large taxable event from a property sale or business sale.”

Acquiring depreciable property (real estate or business equipment) in the same year as the taxable event can offset the gain. The strategy works particularly well when combined with the recapture-deferral benefits of a 1031 exchange on the gain side and the new depreciation on the acquisition side. Planning must happen before year-end of the gain recognition year.

“I have variable income and am not sure when to acquire.”

Time acquisitions to coincide with high-income years. If you expect a particularly high-income year coming up, planning equipment or property acquisitions for that year (rather than spreading them across multiple years) often produces better total tax outcomes.

Mistakes to Avoid

A few common mistakes can substantially reduce the benefit of bonus depreciation:

Treating bonus depreciation as automatic. It is the default for qualifying property, but elections (including the elect-out and reduced-rate elections) require timely action. The wrong election (or the failure to make a beneficial election) can leave significant value on the table.
Failing to do a cost segregation study on substantial property purchases. For real estate purchases over $500,000, skipping cost segregation typically means leaving $50,000 to $400,000 of first-year deductions on the table. The study cost is small relative to the tax savings.
Ignoring the acquisition date rule. Property acquired under a binding contract on or before January 19, 2025 is subject to the old phase-down schedule, not 100 percent. The contract date, not the closing date, determines eligibility.
Forgetting state conformity issues. Some states do not conform to federal bonus depreciation rules. Failing to account for state add-backs can produce unexpected state tax bills.
Underestimating recapture exposure at sale. Accelerated depreciation creates accelerated recapture at sale. For properties that will be sold without a 1031 exchange, this needs to be modeled into the planning from the start.
Trying to use bonus depreciation against W-2 income without REPS or short-term rental qualification. Rental property bonus depreciation deductions are passive by default and cannot offset W-2 income without a qualifying exception.

Frequently Asked Questions

Is 100 percent bonus depreciation really permanent now?

Yes, under the One Big Beautiful Bill Act signed into law on July 4, 2025. The previous phase-down schedule (which would have eliminated bonus depreciation entirely by 2027) was replaced with a permanent 100 percent rate for qualifying property acquired after January 19, 2025. Like any tax provision, it could be changed by future legislation, but it is currently permanent law.

Does the building itself qualify for bonus depreciation?

The structural portion of residential or commercial real estate does not qualify, because the recovery period (27.5 or 39 years) exceeds the 20-year limit. However, cost segregation studies routinely identify 20 to 35 percent of a property’s basis as components (personal property, fixtures, land improvements) that DO qualify for bonus depreciation.

Can I use bonus depreciation on a used property?

Yes. The Tax Cuts and Jobs Act eliminated the prior requirement that bonus depreciation apply only to new property. Used property qualifies if it is “first use by the taxpayer” (meaning the taxpayer cannot have previously used the property).

How does bonus depreciation differ from Section 179 expensing?

Section 179 has annual dollar limits ($2,560,000 in 2026, phasing out above $4,090,000 of total qualifying purchases) and cannot create a Net Operating Loss. Bonus depreciation has no dollar limit and can create or increase an NOL. Most businesses making large capital investments use Section 179 first (up to its limit) and then apply bonus depreciation to the remainder. The IRS generally requires this ordering. See our page on Section 179 deductions for more.

What happens if I sell the property a few years after taking bonus depreciation?

Depreciation recapture applies at sale. Property that was reclassified into shorter-life categories through cost segregation is subject to Section 1245 recapture at ordinary income rates (up to 37 percent federally), which is higher than the 25 percent rate that applies to standard Section 1250 real property. A 1031 exchange can defer both the capital gain and the recapture indefinitely. See depreciation recapture strategies for more.

Can I take bonus depreciation on a property I acquired before January 19, 2025 but did not place in service until 2026?

The acquisition date (binding contract date), not the placed-in-service date, determines which bonus rate applies. Property under contract on or before January 19, 2025 is subject to the prior phase-down rates even if it is placed in service later. Property acquired after that date qualifies for 100 percent.

Should I always elect to take 100 percent bonus depreciation?

Not always. Taxpayers can elect out of bonus depreciation entirely, or elect the reduced 40 percent rate during the transition year, when those choices produce better long-term tax results. The right answer depends on your current and projected income, your NOL situation, state tax conformity in your jurisdictions, and your broader tax planning. This is one of the areas where coordinating with a CPA experienced in tax planning produces meaningfully better outcomes than taking the default.

Make Depreciation Work Harder

Bonus depreciation is one of the most powerful first-year tax deductions available in the current tax code. Combined with cost segregation, applied in the right year, and structured around your broader tax picture, it can produce hundreds of thousands of dollars in tax savings on a single property or equipment acquisition.

If you are planning a property purchase, business equipment acquisition, or other depreciable investment:

Contact our team to discuss the planning before you close
Review our page on Section 179 deductions for the related expensing strategy
See tax strategies for high-income real estate investors if you want to use depreciation to offset W-2 or business income
Read depreciation recapture strategies for the other side of the equation when you eventually sell

The decision to use bonus depreciation, the timing of the acquisition, the structure of the cost segregation study, and the integration with your broader tax plan all happen before the property is placed in service. Planning ahead of time turns a basic deduction into a strategic advantage.