Bonus depreciation has long been a powerful tool in the tax strategy arsenal of real estate investors. As we move through 2025, the rules around bonus depreciation are shifting—and staying informed is crucial for optimizing your tax outcomes.
What Is Bonus Depreciation?
Bonus depreciation is a tax incentive that allows businesses, including real estate investors, to immediately deduct a significant portion of the cost of qualifying property or improvements in the year the asset is placed in service. Instead of spreading the cost over many years through traditional depreciation schedules, bonus depreciation accelerates the deduction timeline, improving cash flow and reducing taxable income up front.
How Does Bonus Depreciation Work?
When an investor purchases an asset—such as certain improvements to a property or specific components identified through a cost segregation study—the IRS typically requires depreciation over 5, 7, 15, 27.5, or 39 years depending on the asset type.
With bonus depreciation, qualifying assets with a recovery period of 20 years or less (like land improvements, personal property, and qualified improvement property) can be partially or fully deducted in the first year. This makes cost segregation especially valuable: by reclassifying portions of a building into shorter-lived assets, you can make more of your investment bonus-depreciation-eligible.
A Quick Example:
Suppose you purchase a $1 million commercial property. A cost segregation study identifies $300,000 worth of components (like carpet, specialty lighting, or landscaping) that fall under 5-, 7-, or 15-year property classifications. In the past, under 100% bonus depreciation, you could deduct that entire $300,000 in the first year.
Bonus Depreciation: The Legislative Timeline
- Tax Cuts and Jobs Act (TCJA) of 2017 increased bonus depreciation to 100% for assets acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.
- Starting in 2023, bonus depreciation began phasing down:
- 80% in 2023
- 60% in 2024
- 40% in 2025
- 20% in 2026
- Set to expire completely in 2027 (unless Congress acts).
So, in 2025, real estate investors can only claim 40% bonus depreciation on eligible assets placed in service during the year—significantly less than in previous years.
What This Means for Real Estate Investors
Even at 40%, bonus depreciation can deliver substantial tax savings—especially when paired with a cost segregation study that breaks down components into shorter-lived classifications. However, the phasedown emphasizes the importance of timing and tax planning.
Here are some key takeaways:
- Act Early: If you’re considering major property acquisitions or improvements, doing so sooner allows you to maximize remaining bonus depreciation benefits.
- Work with Experts: Tax professionals and cost segregation specialists can identify hidden depreciation potential and ensure you’re fully compliant while optimizing deductions.
- Consider Legislative Uncertainty: There have been bipartisan discussions about restoring 100% bonus depreciation. While nothing has passed as of early 2025, many industry groups are advocating for its return. Stay in close touch with your CPA or tax advisor for updates.
Looking Ahead: Will Bonus Depreciation Be Extended?
There is ongoing debate in Congress about reinstating or extending 100% bonus depreciation. Some lawmakers and business groups argue that it stimulates investment and economic growth. However, others are concerned about its impact on federal revenue. In 2024, proposed tax legislation tied to child tax credit expansions included a return to 100% bonus depreciation, but it stalled in the Senate.
For now, investors should plan based on the current law—assuming the phaseout will continue—while remaining agile in case of legislative change.
In Summary
Bonus depreciation remains a valuable but diminishing opportunity for real estate investors. Acting now—whether it’s through property acquisitions, improvements, or cost segregation—can help you leverage what’s left of this powerful incentive. The future is uncertain, but savvy planning today with an expert at CSSI will position you for success tomorrow. Contact us today.
