When it comes to tax strategies for real estate investors and business owners, two terms that often come up are bonus depreciation and cost segregation. Both play vital roles in helping taxpayers maximize deductions and reduce taxable income. Understanding how these tools work, especially in the current tax landscape and in light of upcoming changes in 2025, can significantly impact your investment strategy.
What is Bonus Depreciation?
Bonus depreciation is a tax provision that allows business owners and investors to immediately deduct a significant portion of the cost of qualifying property in the year it is placed in service rather than spreading those deductions over the useful life of the property (as with traditional depreciation).
In simple terms, if you buy a qualifying asset — say, an industrial building or specialized equipment — bonus depreciation lets you deduct a large percentage of the cost in the first year of ownership instead of waiting for years of incremental deductions. This accelerates the recovery of the investment, providing immediate tax savings.
How Does Bonus Depreciation Work?
The Tax Cuts and Jobs Act (TCJA) introduced a 100% bonus depreciation for property placed into service after September 27, 2017. This means that businesses could deduct the full cost of qualifying property in the first year. This applies to both new and used property, as long as the property has a useful life of 20 years or less. Examples include tangible property like machinery, computers, and certain improvements to real property (such as HVAC systems, roofs, and qualified interior tenant improvements).
The process of claiming bonus depreciation typically involves applying a cost segregation study. This study breaks down property into various components, identifying those qualifying for shorter depreciation schedules (5, 7, or 15 years instead of the standard 27.5 or 39 years for real estate). By accelerating depreciation for these components, investors can capture larger deductions in the early years of ownership.
By conducting a detailed cost segregation study, real estate investors can segregate the costs associated with the building’s various components — such as land improvements, personal property (like furniture and fixtures), and specific building systems — into shorter recovery periods (5, 7, or 15 years). This allows you to accelerate depreciation, increasing the initial year deductions under bonus depreciation. The immediate tax savings from this strategy can be reinvested, increasing liquidity and giving the investor more capital for new projects.
By combining these two strategies, investors can dramatically improve their cash flow in the early years of ownership and reduce their taxable income.
Current Status of Bonus Depreciation
As of 2025, bonus depreciation has reduced to 40%. This benefit has gradually started to phase out due to scheduled reductions. The timeline of this reduction was set by the TCJA, and it’s important for real estate investors to be aware of the upcoming changes.
- 2022: Bonus depreciation drops to 100%
- 2023: Bonus depreciation drops to 80%
- 2024: Bonus depreciation drops to 60%
- 2025: Bonus depreciation drops to 40%
- 2026: Bonus depreciation drops to 20%
- 2027 and beyond: Bonus depreciation will phase out entirely, unless new legislation is passed to extend or modify these provisions.
How Will This Affect Investors in 2025?
As bonus depreciation reduces in 2025, investors and businesses will still be able to use it, but at a reduced rate. The move from 60% to 40% bonus depreciation may feel like a small adjustment at first, but over time, it means fewer immediate tax savings. For many real estate investors, this could change the financial calculus when deciding to make property purchases and how to structure those investments.
This reduction in bonus depreciation could also affect how investors approach their cost segregation studies. Although the bonus depreciation percentage will be lower, the fundamental principle of cost segregation remains powerful. By still accelerating depreciation on shorter-lived property components, investors will continue to reap significant tax benefits, albeit at a lower rate than before.
2025 Tax Act
On January 20, 2025, the new Republican administration will take control of the White House and will have control over both the House of Representatives and Senate. This scenario was in place in 2017 when the TCJA was passed, providing for the current bonus depreciation opportunity. The provisions of the TCJA have a number of expiring provisions that if not corrected, will increase taxes dramatically on American taxpayers at many levels.
It is anticipated that a major tax bill will be introduced and debated in Congress that may include a new bonus depreciation provision, giving the real estate industry and economy a boost.
Join Us!
Sign up for our free Cost Segregation 101 webinar on January 14th at 10:04 PST: Increase your Cash Flow
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Edited by Randy Eickhoff, CPA, Founder & Head Coach at Acena Consulting. Photo courtesy of David Williss on Flickr.
