100% Bonus Depreciation Is Back: What That Means for Property Owners & Real Estate Investors

Big news for property owners and real estate investors: 100% bonus depreciation is back — and it could mean major tax savings for you.

If you've heard the buzz but aren't sure what it means or how to take advantage of it, you're in the right place. Let’s break it down.

What Is Bonus Depreciation?

Bonus depreciation allows businesses to deduct a significant portion of the cost of qualifying assets in the year they are placed in service, rather than spreading the deduction over several years. Under the Tax Cuts and Jobs Act (TCJA) of 2017, 100% bonus depreciation was introduced, allowing businesses to deduct the full cost of eligible assets. While it began phasing down after 2022, recent legislative updates have reinstated 100% bonus depreciation for 2025, providing a renewed opportunity for tax savings.

Key Features of 100% Bonus Depreciation

• Eligibility: Applies to new and used property with a recovery period of 20 years or less, including machinery, equipment, furniture, and certain real property components.

• Timing: Assets must be placed in service during the 2025 tax year to qualify for the full 100% deduction.

• Impact: Allows businesses to immediately deduct the entire cost of qualifying assets, reducing taxable income significantly in the year of acquisition.

What is a Cost Segregation Study?

A cost segregation study is a detailed analysis performed by tax professionals or engineers to reclassify components of a commercial or residential rental property into shorter depreciation periods. Typically, real property is depreciated over 27.5 years (residential) or 39 years (commercial). A cost segregation study identifies components—such as electrical systems, plumbing, fixtures, and landscaping—that can be depreciated over shorter periods (5, 7, or 15 years).

Benefits of a Cost Segregation Study

• Accelerated Depreciation: Reclassifying assets into shorter recovery periods allows for faster tax deductions.

• Increased Cash Flow: By front-loading deductions, businesses can reduce taxable income, freeing up cash for reinvestment.

• Retroactive Savings: Cost segregation can be applied to properties acquired in prior years without amending tax returns, using IRS Form 3115 (Change in Accounting Method).

Combining 100% Bonus Depreciation with Cost Segregation

When paired with 100% bonus depreciation, a cost segregation study becomes a game-changer for property owners. Here’s how they work together:

1. Reclassification of Assets: A cost segregation study identifies portions of a property that qualify for shorter depreciation periods (e.g., 5 or 7 years for personal property, 15 years for land improvements).

2. Application of Bonus Depreciation: Components reclassified with recovery periods of 20 years or less become eligible for 100% bonus depreciation, allowing the entire cost of those components to be deducted in the year the property is placed in service.

3. Maximized Tax Savings: By combining the two strategies, businesses can deduct a significant portion of a property’s cost upfront, rather than spreading it over decades.

   
   

Example Scenario

Suppose a business purchases a commercial building in 2025 for $2 million. Without a cost segregation study, the entire cost would be depreciated over 39 years, resulting in an annual deduction of approximately $51,282. However:

• A cost segregation study determines that 20% of the property ($400,000) qualifies as 5-year or 15-year property (e.g., carpeting, lighting, parking lot improvements).

• With 100% bonus depreciation, the business can deduct the entire $400,000 in 2025, significantly reducing taxable income for that year.

• The remaining $1.6 million is depreciated over 39 years, but the upfront deduction provides immediate cash flow benefits.

Who Can Benefit?

• Real Estate Investors: Owners of commercial or residential rental properties can use cost segregation and bonus depreciation to offset rental income.

• Business Owners: Companies purchasing or improving property for business use can leverage these strategies to reduce tax liability.

• New and Existing Property Owners: Bonus depreciation applies to both newly acquired and used property, and cost segregation can be applied retroactively to properties purchased in prior years.

Conclusion

The reinstatement of 100% bonus depreciation in 2025, combined with a cost segregation study, offers a powerful strategy for businesses and property owners to accelerate tax deductions and improve cash flow. By reclassifying property components and applying bonus depreciation, you can significantly reduce taxable income in the year of acquisition. Consult with a tax professional to explore how these strategies can benefit your specific situation and unlock substantial tax savings.