100% Bonus Depreciation
A breakdown of how bonus depreciation works and how it impacts your tax savings with a cost segregation study.
TLDR: 100% Bonus depreciation is back! If you purchase, build, or renovate after Jan 19, 2025, you qualify for 100% bonus depreciation and may receive significant tax savings in your first year of ownership. Purchases in previous years may still benefit from 40%+ bonus depreciation!
What Is Bonus Depreciation?
Bonus depreciation is a tax incentive first enacted by Congress back in 2001. It is meant to incentivize investment (through the acquisition, renovation, or construction of real estate) and allows owners to partially or fully deduct the depreciation costs of qualifying assets in the first year of ownership instead of spreading those depreciation deductions over time. The One Big Beautiful Bill Act (“OBBB” or “OB3”) was signed into law on July 4, 2025 and returns bonus depreciation to 100% for properties acquired or construction work performed after January 19, 2025.
How Does Bonus Depreciation Work?
The IRS allows real estate owners of rental properties to use depreciation to offset income, lowering the taxable income of each year, and the taxes you pay. Typically, assets are depreciated over 27.5 or 39 years.
With cost segregation, significant portions of your real estate can be allocated to shorter useful life categories (5, 7, and 15 years) which depreciate more quickly. With bonus depreciation, these tax categories can be partially or fully depreciated in the first year, causing significant increases in first year depreciation and tax savings in the first years of ownership.
Bonus depreciation (technically called the “Special Depreciation Allowance for Qualified Property” by the IRS in the tax code) is a misleading name and can cause confusion. Bonus depreciation does not create more overall depreciation - instead it further accelerates the depreciation that can be deducted in year 1. “Accelerated depreciation” would probably be a more descriptive name. Bonus depreciation only applies to the components and costs in the shorter life tax categories (i.e., the 5 year, 7 year, and 15 year property).
Depending on when your property was acquired, constructed, and placed into service, you may be eligible to claim up to 100% bonus depreciation. This means you could deduct 100% of the costs of the reclassified components in the shorter life tax categories (i.e., the 5 year, 7 year, and 15 year property) in year 1. So, for example, instead of recognizing those depreciation deductions over 5 years, you will recognize 100% of them in year 1.
Bonus depreciation significantly accelerates your depreciation, increasing the potential tax savings from cost segregation materially.Cost Seg Example
| Purchase price for a short term rental property | $1,000,000 |
| % of purchase price allocated to land (which is non-depreciable) | 20% |
| Depreciable basis | $800,000 |
| % of depreciable basis reclassified into shorter life categories with a cost seg | ≈ 25% |
| Assets eligible for Year 1 100% bonus depreciation with a cost seg | ≈ $200,000 |
| Year 1 tax savings at a 37% federal income tax rate with a cost seg | ≈ $74,000 |
Higher depreciation → lower taxable income → improved cash flow
Note: This estimate is provided for informational purposes; actual results will depend on the specific features of your property (e.g., quality of the property, condition, year of purchase, renovation work, location, etc.).
How do I unlock the power of bonus depreciation?
Unlocking the power of bonus depreciation is simple. All you need is to complete a cost segregation for your property. The purpose of a cost segregation study is to identify and segregate the costs of assets that are eligible for bonus depreciation.
If it is your first year of ownership, you can claim the bonus depreciation on your tax return for that year. If you acquired or constructed the property in a prior year, don’t worry, you can always perform a “look back” cost segregation study and and catch up any missed bonus depreciation with your current year tax return.
What is my bonus depreciation?
Bonus depreciation has been in existence in many forms since 2001, ranging from 0% to 100% at various times. Determining your bonus depreciation percentage is a multi-step process.
When did you acquire your property (typically, this is the date the transaction closed)? This determines which tax law applies to your property.
- If before September 28, 2017: Please consult your qualified tax advisor or reach out to us with questions.
- If between September 28, 2017 and January 19, 2025: Please see the table below.
- If after January 19, 2025: The applicable bonus depreciation percentage is 100%.
If you acquired your property between September 28, 2017 - January 19, 2025, then the applicable bonus depreciation percentage is based on the date Placed in Service as follows:
| Date Placed in Service | Bonus Depreciation % |
|---|---|
| 9/28/2017 thru 12/31/2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 | 0% |
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