Bonus Depreciation: What It Is, Where It's Going, and Why It Matters Now
FAM Capital | Investor Education Series
100% bonus depreciation is back. And this time, it is permanent.
On July 4, 2025, the One Big Beautiful Bill Act was signed into law, permanently restoring 100% bonus depreciation for qualifying property acquired after January 19, 2025. The phase-down that had been reducing bonus depreciation by 20 percentage points per year, headed toward elimination in 2027, has been wiped from the tax code entirely. For real estate investors, this is one of the most significant tax developments in years. It means that the most powerful accelerator of real estate tax benefits is not shrinking, not expiring, and not going away. It is fully restored and available on every qualifying property acquired going forward.
If you have read the previous two articles in this series on depreciation and cost segregation, you already understand how real estate generates paper losses that shelter real cash flow from taxation. Bonus depreciation is what takes that benefit and concentrates it into a single year. This article explains what bonus depreciation is, what the new law means for investors, and how the numbers look when you combine all three tools on the same property.
What Bonus Depreciation Is
Standard depreciation spreads the deduction for a building's value over 27.5 or 39 years. Cost segregation reclassifies building components into shorter depreciation categories of 5, 7, or 15 years. Bonus depreciation goes one step further: it allows you to deduct a percentage of the value of those reclassified components in the very first year of ownership, rather than spreading the deduction over the shortened schedule.
At 100%, bonus depreciation means you can deduct the entire value of qualifying 5-year, 7-year, and 15-year property in year one. Not over five years. Not over fifteen years. All of it, immediately, in the year the property is placed in service. When combined with a cost segregation study that reclassifies 20% to 40% of a building's value into these shorter categories, the first-year depreciation deduction can be enormous, often producing a paper loss that exceeds the total cash the investor put into the deal.
The reason this matters is the time value of money. A $60,000 deduction taken in year one is worth significantly more than the same $60,000 deduction spread across five or fifteen years. The tax savings from a first-year deduction can be reinvested immediately, earning returns for the entire hold period. Over a five to seven year investment, the compounding effect of front-loaded tax savings adds meaningfully to the total after-tax return. This is why bonus depreciation is not just a nice addition to cost segregation. It is the mechanism that converts a good tax strategy into an exceptional one.
What Changed: The One Big Beautiful Bill Act
Under the original Tax Cuts and Jobs Act of 2017, 100% bonus depreciation was available for qualifying property placed in service between September 27, 2017 and December 31, 2022. After that, it was scheduled to phase down: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% starting in 2027. For two years, real estate investors watched the most powerful first-year tax deduction in the code shrink by 20 points every January.
The One Big Beautiful Bill Act reversed that entirely. For property acquired after January 19, 2025, 100% bonus depreciation is restored and made permanent. There is no sunset date. There is no phase-down schedule. Under current law, every qualifying property acquired from this point forward is eligible for full first-year bonus depreciation on all components identified through a cost segregation study.
For properties acquired before January 20, 2025, the old phase-down schedule still applies based on when the property was placed in service. If you acquired a property in 2024, your bonus depreciation rate is 60%. If you acquired in 2025 before January 20, your rate is 40%. This transition rule is based on the acquisition date, not the placed-in-service date, so investors should verify with their CPA which schedule applies to their specific properties.
This distinction is important but straightforward. If you are evaluating new investments today, every property you acquire qualifies for the full 100% rate. If you already own a property acquired during the phase-down period, the rate that applied at acquisition is locked in for that property. Investors who own older properties and want to maximize their tax position should consider a lookback cost segregation study, which was covered in the previous article, to capture whatever accelerated depreciation remains available under their applicable rate.
The Full Picture: Straight-Line, Cost Segregation, and Bonus Depreciation Combined
We have been building toward this example across three articles, using the same property each time. Here is the final step: what happens when you apply all three tools to the same investment.
The property: a 60-unit apartment building acquired for $5,000,000. Building value: $4,250,000. Your investment: $100,000 for a 5% ownership stake.
- Article 50: Straight-Line Depreciation Only
Annual depreciation: $154,545 for the whole property. Your 5% share: $7,727 per year. First-year taxable income after depreciation: negative $1,227. You received $8,000 in cash and reported a $1,227 loss. A good result. - Article 51: Cost Segregation Added
A cost segregation study reclassifies $1,275,000 (30% of building value) into shorter depreciation categories: $850,000 in 5-year property and $425,000 in 15-year property. First-year depreciation jumps to $306,515 for the whole property. Your 5% share: $15,326. First-year taxable income: negative $8,826. A much better result. Seven times the loss compared to straight-line alone. - This Article: 100% Bonus Depreciation Added
Now apply 100% bonus depreciation to the reclassified components. Instead of depreciating the $850,000 in 5-year property over five years and the $425,000 in 15-year property over fifteen years, you deduct the entire $1,275,000 in year one. Add that to the straight-line depreciation on the remaining $2,975,000 of building value ($108,182), and the total first-year depreciation for the property is approximately $1,383,182.
Your 5% share of that first-year depreciation: approximately $69,159. Your share of taxable income before depreciation: $6,500. Your depreciation deduction: $69,159. Your first-year taxable income: negative $62,659. You invested $100,000. You received $8,000 in cash distributions. And you reported a $62,659 loss on your tax return.
That $62,659 paper loss does not just shelter the $8,000 you received. It creates $62,659 in passive losses that can offset income from other passive real estate investments in your portfolio. If you are in a 35% combined federal and state tax bracket and have sufficient passive income to absorb the loss, that deduction saves you approximately $21,930 in taxes in year one. On a $100,000 investment. In the first year alone. Before the property has appreciated a dollar or the business plan has been executed.
That is the combined power of depreciation, cost segregation, and bonus depreciation working together. Three articles, one property, and a progression from a $1,227 loss to a $62,659 loss on the same $100,000 investment.
What Qualifies for Bonus Depreciation
Not everything in a real estate investment qualifies for bonus depreciation. The building structure itself, depreciated over 27.5 or 39 years, does not qualify. Bonus depreciation applies to tangible personal property with a recovery period of 20 years or less. In practice, this means the components that a cost segregation study reclassifies into shorter categories: appliances, flooring, cabinetry, fixtures, decorative elements (5-year and 7-year property), and land improvements like parking lots, sidewalks, landscaping, and fencing (15-year property).
Qualified improvement property, which includes interior improvements to nonresidential buildings such as lighting, flooring, and interior walls, also qualifies for bonus depreciation with a 15-year recovery period. This is particularly relevant for commercial properties and retail spaces where interior build-outs are a significant cost.
Both new and used property qualify for bonus depreciation under the current law, as long as the property is new to the taxpayer. You do not need to build a new building to claim bonus depreciation. An existing property with existing components qualifies as long as you have not previously used those specific assets. This is why bonus depreciation is so powerful for acquisitions, not just new construction.
A common misconception is that bonus depreciation only applies to new construction. That is not the case. When you acquire an existing building, the components that a cost segregation study identifies and reclassifies are treated as new to you for tax purposes. The appliances, flooring, fixtures, parking lot, and landscaping that are already in the building when you buy it all qualify for bonus depreciation in the year you acquire the property. This is why cost segregation studies on acquisitions are so powerful. You are not waiting to install new components. The qualifying components are already there, and the study simply identifies and reclassifies them so you can take the accelerated deduction.
How This Flows to Passive Investors in Syndications
If you are a passive investor in a syndication, the bonus depreciation benefit flows through to you automatically on your Schedule K-1. You do not need to request it, file for it, or do anything beyond investing in the deal. The syndicator performs the cost segregation study, applies the bonus depreciation at the entity level, and allocates the resulting deductions to each investor based on their ownership percentage.
This is why it matters so much that the syndicator you invest with performs a cost segregation study and applies bonus depreciation. These are not automatic. They are decisions the sponsor makes as part of their tax strategy for the deal. Most professional syndicators do this as a standard practice because the tax benefits are too significant to leave on the table. But it is worth confirming before you invest. A syndication that does not plan to perform a cost segregation study is a syndication that is not maximizing the tax benefits available to its investors.
In the first year of a syndication that applies cost segregation with 100% bonus depreciation, it is common for the K-1 to show a paper loss that represents 50% to 70% or more of the investor's total cash investment. You receive cash distributions and report a large loss. That loss shelters the distributions from taxation and generates additional passive losses that offset income from your other real estate investments. The tax benefit alone can represent a meaningful percentage of your total return in the early years.
What This Means Strategically
The permanent restoration of 100% bonus depreciation changes the strategic calculus for real estate investors in two important ways.
- First, the urgency that existed during the phase-down period is gone. When bonus depreciation was dropping 20 points per year, there was real pressure to acquire properties before the next step-down. That pressure no longer exists. 100% is the rate for the foreseeable future. Investors can make acquisition decisions based on the merits of the deal rather than rushing to beat a deadline. While future legislation could always change the law, the current statute has no expiration date, and investors should plan based on what the law says today.
- Second, the after-tax return profile of every real estate acquisition just improved permanently. Every property acquired going forward that has a cost segregation study performed will generate larger first-year deductions than it would have under the phase-down. For high-income investors with passive income to offset, this translates directly to more money saved in the year of acquisition. That saved money can be reinvested, creating a compounding advantage that accumulates over every deal in the portfolio.
For investors building a portfolio of passive real estate investments, this creates a compounding cycle. Each new acquisition generates a large first-year loss that offsets passive income from existing investments. As the portfolio grows, the new acquisitions shelter the income from the older, stabilized deals. The result is a portfolio where the effective tax rate on passive real estate income is dramatically lower than the statutory rate, sometimes close to zero in the years when new acquisitions are being made. This portfolio-level tax efficiency is one of the primary reasons sophisticated investors continuously add new real estate positions rather than simply holding a static portfolio.
The Bottom Line
Bonus depreciation at 100% is the most powerful first-year tax deduction available to real estate investors. It takes the components identified by a cost segregation study and allows you to deduct their entire value in year one rather than spreading the deduction across 5 to 15 years. Combined with standard depreciation on the remaining building, the result is a first-year paper loss that can represent 50% to 70% or more of your total cash investment.
The One Big Beautiful Bill Act permanently restored this benefit for property acquired after January 19, 2025. There is no phase-down. There is no sunset. Under current law, 100% bonus depreciation is available on every qualifying acquisition going forward. For passive investors in syndications, the benefit flows through automatically on your K-1. Make sure your sponsors are performing cost segregation studies and applying bonus depreciation. The difference between a deal that uses these tools and one that does not is tens of thousands of dollars in tax savings on every investment.
