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ContinueLearn how 100% bonus depreciation works for real estate investors in 2025. Maximize tax savings with cost segregation and immediate deductions.
There are few things as satisfying as knowing that your tax bill has been reduced, whether it’s because you have claimed mileage deductions or advertising and marketing costs.
Depreciation is one such reduction that can significantly lower the amount of tax you owe. Standard depreciation is the process of deducting the value of the asset and any improvements against your taxes. For residential rental properties, this depreciation is spread out over 27.5 years, and for commercial property over 39 years which is its deemed useful life by the IRS.
What if we told you that there was a way to immediately deduct 100% of qualifying improvements and equipment in the first year?
That's exactly what bonus depreciation allows, and in 2025, it got even better. On July 4, 2025, the One Big Beautiful Bill Act was signed into law, permanently restoring 100% bonus depreciation for qualifying property. This means that real estate investors can now take full advantage of this powerful tax strategy without worrying about future phase-outs or expiration dates.
Bonus depreciation is a tax incentive that allows businesses and real estate investors to immediately deduct a significant percentage (in this case 100%) of the cost of qualifying property in the year it's placed in service, rather than spreading those deductions over several years through traditional depreciation.
Think of it as an acceleration of your depreciation deductions. Instead of waiting 5, 7, 15, or even 27.5 years to recover the cost of certain assets and improvements, you can deduct the entire amount upfront, creating substantial tax savings in your first year of ownership.
Bonus depreciation was originally introduced in 2002 through the Job Creation and Worker Assistance Act, allowing taxpayers to deduct 30% of qualifying property costs. Over the years, it went through several iterations:
This permanent restoration represents a major victory for real estate investors and eliminates the uncertainty that plagued tax planning for the past few years.
100% bonus depreciation means you can deduct the entire cost of qualifying property in the same year you acquire and place it in service. There's no need to spread the deduction over multiple years—you get the full tax benefit immediately.
For real estate investors, this creates powerful opportunities to:
To qualify for the permanent 100% bonus depreciation, property must be both acquired and placed in service on or after January 20, 2025.
Important: If you had a written binding contract to purchase property before January 20, 2025, even if it was placed in service after that date, it will only qualify for the previous 40% rate. The acquisition date matters just as much as the in-service date.
While residential rental properties themselves (with a useful life of 27.5 years) and commercial buildings (39 years) don't qualify for bonus depreciation due to their longer recovery periods, many components within and improvements to these properties do qualify.
For property to be depreciable at all, it must meet these basic criteria:
Bonus depreciation applies only to property that:
The IRS outlines further bonus depreciation guidelines including that the asset must not have been used before the taxpayer acquired it and that the taxpayer did not acquire it from a relative.
The One Big Beautiful Bill Act introduced a brand-new category eligible for 100% first-year depreciation: Qualified Production Property.
Qualified Production Property is nonresidential real property (typically 39-year property) used as an integral part of manufacturing, production, or refining activities. This is a temporary provision designed to encourage domestic manufacturing.
Property used for:
Real Estate Investor Takeaway: If you're investing in industrial, warehouse, or manufacturing properties, QPP could allow you to expense the entire building (minus land) in the first year, which is a massive tax benefit.
Improvements, but not repairs, are also eligible for bonus depreciation in real estate. Proper classification of improvements vs repairs is essential if you want to maximize your tax benefits and avoid IRS audits.
Improvements - Added to property cost basis and depreciated
An improvement is something that:
Examples: Converting a loft into a bedroom, adding a new bathroom, replacing an old roof with a superior material, installing central air conditioning where there was none
Tax Treatment: Improvements must be capitalized and depreciated (but components with recovery periods of 20 years or less qualify for bonus depreciation).
Repairs - Deductible in the year they are incurred.
A repair is something that:
Examples: Fixing a broken heater, replacing damaged floorboards, patching a leak, repainting
Tax Treatment: Repairs are immediately deductible as expenses in the year incurred (they don't need to be depreciated at all).
One of the most powerful ways to take advantage of 100% bonus depreciation is through a cost segregation study.
A cost segregation study is an engineering-based analysis that identifies and reclassifies building components from long-life real property (27.5 or 39 years) into shorter-life personal property (5, 7, or 15 years). This allows you to accelerate depreciation on those components.
When you purchase a $1,000,000 rental property, you might typically depreciate it like this:
But with a cost segregation study, you might find:
With 100% Bonus Depreciation:
At a 37% tax rate, this translates to approximately $85,571 in additional tax savings in year one.
The best times to conduct a cost segregation study are:
Cost: Typically $8,000-$15,000 depending on property size and complexity
Potential Return: Often 25-30x or more with 100% bonus depreciation
Break-Even: Generally worthwhile for properties valued at $500,000 or more, or with significant recent improvements
With permanent 100% bonus depreciation, cost segregation studies have become even more valuable—the ROI has effectively increased by 150% compared to the 40% rate that was scheduled for 2025.
Taking advantage of bonus depreciation allows you to minimize your set-up costs as you can take greater tax deductions during the first years of property ownership. This means you can offset the costs of acquiring and improving a property more quickly, helping you reach profitability sooner rather than waiting years to break even.
Another benefit of bonus depreciation in real estate is that it enables you to take higher deductions upfront instead of having to spread deductions over a number of years. This means, if you time acquisitions right you can offset high-income years with large depreciation deductions to reduce your end-of-year tax bill so you have more cash left over to put back into expanding your portfolio.
While bonus depreciation does come with its benefits, there are reasons why you may choose to opt out. If you claim bonus depreciation, you may be subject to depreciation recapture where you essentiall "pay back" a percentage of the deductions you took. When you sell the asset this is taxed up to 25% and could significantly increase your sale costs (that said, strategies like 1031 exchanges can help defer recapture taxes indefinitely).
For many real estate investors, rental activities are considered "passive," which means losses can typically only offset passive income. Large depreciation deductions might not be immediately usable unless you qualify as a Real Estate Professional or use the Short-Term Rental Loophole
The Good News: Unused passive losses carry forward indefinitely and can be used in future years or when you sell the property.
Like bonus depreciation, Section 179 of the U.S. internal revenue code also allows you to accelerate depreciation. However, it differs from bonus depreciation in that it is limited to an annual dollar amount ($2.5m for 2025) and the taxpayer must opt-in.
Bonus depreciation, on the other hand, applies automatically unless you opt-out of it when you are filing your taxes. Up until recent years, Section 179 was the only way to depreciate used equipment so was previously the best option for this.
Real estate investors often confuse bonus depreciation with Section 179 expensing. While both allow accelerated deductions, they work differently:
In order to accurately calculate your depreciation and avoid unwanted attention from the IRS, it is essential that you track expenses properly throughout the year. Keeping your records organized and easily accessible will provide valuable insights into the financial health of your portfolio and save you time and money.
Purpose-built software like Landlord Studio will allow you to track depreciation throughout the year and then instantly generate reports for your CPA.
The permanent restoration of 100% bonus depreciation is one of the most significant tax advantages for real estate investors in recent history. Combined with cost segregation studies, it can generate six-figure tax savings on large properties and substantial benefits even on smaller investments.
However, these benefits only work if you take action. Depreciation not claimed in the appropriate year is generally lost—you can't go back indefinitely. The time to optimize your tax strategy is now.
Create your free Landlord Studio account today to make income and expense tracking, document storage, and tax planning easier than ever.
A: No. Bonus depreciation only applies to property used for business or income-producing purposes.
A: You can begin depreciating it (including bonus depreciation for qualifying improvements) from the date of conversion. However, the property's basis for depreciation is the lower of its fair market value or your adjusted basis at conversion.
A: No. Property must be located in the United States or a U.S. possession to qualify.
A: Yes. Bonus depreciation applies automatically, but you can elect out on a class-by-class basis. This might make sense if you prefer to spread deductions over time or want to avoid larger depreciation recapture later.
A: Generally, properties valued at $500,000 or more see the best ROI from cost segregation studies. However, properties with extensive recent improvements might benefit at lower values.
A: You'll be subject to depreciation recapture, but strategies like 1031 exchanges can defer this tax. The immediate cash flow benefit often outweighs the future recapture liability.
“We hope you found this blog interesting! However, do note that the information in this article does not constitute advice. This blog is for general informational and educational purposes only and should not be used as a substitute for competent legal and/or other advice from a licensed professional.”
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