The Tax Cuts and Jobs Act (TCJA) of 2017 gave real estate investors powerful tax incentives, including bonus depreciation. Subsequent legislation made adjustments to the incentives, complicating assessments on what properties qualify and don’t.
Specifically, assessing what qualifies for 100% bonus depreciation under the Big Beautiful Bill could be the difference between a minor write-off and a massive deduction in the first year. The eligibility rules can be complex and depend on asset type, useful life, and acquisition dates.
Don’t leave money on the table because you are unsure how to treat assets under the new legislation. With expert analysis from Seneca Cost Segregation, you can accurately identify all eligible assets within your property. Request a free proposal today.
What Is Bonus Depreciation?
With straight-line depreciation, you allocate your entire cost basis linearly over 27.5 years (residential) or 39 years (commercial). While the deductions are valuable, the standard approach is slow, with investors realizing the benefits incrementally over decades.
In contrast, bonus depreciation supercharges the benefits, allowing you to deduct a significant percentage of the value of a qualifying property in the first year. The incentive aims to help you free up cash for reinvestment and stimulate growth in the local economy.
How the Big Beautiful Bill Changed Depreciation Rules
The TCJA of 2017 initially allowed for 100% bonus depreciation through 2022, phasing it out as follows:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027: 0%
The One Big Beautiful Bill Act, signed into law on July 4, 2025, reversed the phase-out schedule and made bonus depreciation permanent. Bonus depreciation is now back to 100% for qualifying property acquired and placed in service after January 19, 2025.
Key Provisions of the Big Beautiful Bill
Real estate investors should pay keen attention to the following three key provisions of the Big Beautiful Bill:
- Permanent 100% bonus depreciation: The Big Beautiful Bill removed lingering uncertainty about the future of bonus depreciation. The tax incentive is now a permanent fixture on the tax code and is back at 100%.
- Higher Section 179 limits: The legislation significantly increased Section 179 limits, allowing investors to expense up to $2.5 million of the cost of qualifying assets in the first year for properties placed in service after December 31, 2024. The new phase-out threshold is $4 million.
- New Qualified Production Property (QPP) provision: Manufacturing/industrial real estate holders can utilize a new 100% expensing provision for non-residential property used in “qualified production activity.” The provision has strict eligibility rules, excluding properties used for office, sales, or administrative functions.
What Properties Qualify for 100% Bonus Depreciation?
Given the new changes, what properties would qualify for 100% bonus depreciation under the big beautiful bill?
Remember, TJCA initially allowed for 100% bonus depreciation through 2022. Therefore, you can still claim 100% bonus depreciation on any property that would have qualified under the original provisions. A key qualifying criterion is that the property must be new to you.
Also, with bonus depreciation back at 100%, any tangible property with a recovery period of 20 years or less qualifies for 100% bonus depreciation, provided it is acquired and placed in service after January 19, 2025.
In the typical real estate property, here are the expected recovery periods of the various components:
- Real property (the main building structure): 27.5 or 39 years
- Site improvements (sidewalks, swimming pools, outdoor lighting, etc): 15 years
- Personal property (furniture, cabinetry, appliances, carpeting, etc): 5 or 7 years
Real property doesn’t qualify for bonus depreciation in the typical real estate property. However, site improvements and personal property components do because they have recovery periods of under 20 years.
That said, the Big Beautiful Bill includes a new elective provision for QPP that allows investors to immediately expense real property in commercial properties. Ordinarily, you’d have allocated the costs over 39 years, but you can now claim a 100% deduction in the first year. The QPP eligibility criteria are as follows:
- QPP applies to portions of nonresidential property used as an integral part of a qualified production activity.
- A qualified production activity refers to the manufacturing, producing, or refining a qualified product.
- A qualified product is a tangible product, but specifically excludes food and beverages prepared and sold from the same retail property.
Moreover, to qualify for the 100% deduction, the QPP must meet the following requirements:
- A construction start date after January 19, 2025, and before January 1, 2029
- The property must be placed in service before January 1, 2031
- The property must be placed in service in the United States or its possessions
- Original use, meaning the initial use must start with the taxpayer
- The taxpayer must elect to treat the property as a QPP
Cost Segregation and Bonus Depreciation
The Big Beautiful Bill allows for 100% bonus depreciation for various qualifying properties, which is significant. The first step to taking full advantage of this development is to identify the qualifying property you currently hold.
Traditional real estate depreciation lumps assets together, tying you to a single, long 27.5- or 39-year depreciation schedule. However, we’ve already established that various components of your property have different recovery periods as follows:
- Real property: 27.5 or 39 years
- Site improvements: 15 years
- Personal property: 5 or 7 years
The site improvements and personal property qualify for bonus depreciation because their useful lives are less than 20 years.
You’ll need a way to separate these short-lived assets from the real property so you can accelerate their depreciation using bonus depreciation. The way to do this is with a cost segregation study.
A cost segregation study is a detailed analysis (preferably engineering-based) that breaks down a building’s total cost into its component parts. It will provide a clear breakdown of the qualifying properties and their costs, allowing you to expense them in the first year using bonus depreciation.
Real Estate and Bonus Depreciation
For clarity, let’s expand on the building components that qualify for 100% bonus depreciation under the Big Beautiful Bill.
- Personal property: Five- or seven-year properties, such as appliances, carpeting, furniture, window treatments, office machines, computers, kitchen equipment, movable partitions, cabinets, and office fixtures.
- Land/site improvements: Fifteen-year property, such as parking lots, pavements, driveways, sidewalks, curbs, gutters, retaining walls, landscaping, irrigation systems, swimming pools, tennis courts, basketball courts, stormwater drainage, and signage.
- Quality Improvement Property: QIP applies to improvements made to the interior of a nonresidential building after it was placed in service. Examples include new flooring, lighting, interior walls, and ceilings in a remodelled commercial space.
- Qualified Production Property: QPP applies to the entire shell of a newly built manufacturing/production/refining facility, excluding the office space.
Tax Planning Implications
Save for the QPP provision, bonus depreciation is now a permanent tax tool. You no longer have to rush your real estate investment decisions, fearing the tax incentive will phase out.
Nonetheless, when it comes to tax planning, waiting isn’t always the best move.
Instead of waiting to scramble for deductions during filing time, you can do cost segregation year-round to lock in massive tax savings. You’ll know exactly how much you can claim with your robust cost segregation and bonus depreciation strategy.
Looking ahead, there are three tax planning opportunities you cannot afford to miss:
- The opportunity to catch up: You can claim “catch up” depreciation in the prior years when bonus depreciation was 100%, 80%, or 60% by filing for a change in accounting method using IRS Form 3115. You’ll claim all the depreciation you’ve “missed” on your five- and fifteen-year property components.
- The opportunity to offset high-income years: Where you are likely to have a huge tax bill because of high income, you can strategically deploy the money on new properties, do cost segregation, and take 100% bonus depreciation to reduce or eliminate the tax liability.
- The opportunity to offset business or W-2 income: A massive first-year deduction could lead to a paper loss. With excellent tax planning, you can use the loss to offset all income, including business and W-2 income. You do this by making your real estate operation a trade or business by qualifying as a Real Estate Professional (REP) or being a material participant in a short-term rental (STR).
The three opportunities require you to have a cost segregation partner that can reliably execute IRS-compliant studies. That’s where Seneca Cost Segregation comes in.
We follow the IRS Cost Segregation Technique Guide strictly, executing engineering-based studies that can withstand IRS scrutiny. Our engineers have performed over 10,200 studies nationwide. Contact us today to find out how much tax you can save with a Seneca Cost Segregation study.
Common Compliance Pitfalls and How to Avoid Them
Let’s explore the common pitfalls you must avoid when utilizing bonus depreciation under the Big Beautiful Bill.
- Using generalized cost segregation estimates: A common pitfall is investors relying on cost segregation studies based of general templates and estimates. It’s best to commission an engineering-based study that can provide a thorough analysis and documentation.
- Incorrectly placed-in-service dates: Bonus depreciation has time-bound guidelines for when a property is placed in service. You must not confuse property acquisition dates with the dates they are placed in service. Where there’s multi-phase construction, consider keeping good records in case of an audit.
- Misclassification of property: The subtle line between structural interior components and Quality Improvement Property might lead to misclassification of assets after a renovation. Only use experienced cost segregation companies to avoid such misclassifications.
Frequently Asked Questions (FAQs)
Let’s now answer some of the common questions we get about bonus depreciation.
Is Bonus Depreciation Mandatory or Elective?
It’s not mandatory. You can elect to use regular depreciation instead of bonus depreciation for any class of assets.
Does Bonus Depreciation Apply to Software Purchases?
Yes, bonus depreciation applies to software purchases if you buy it off the shelf (not custom-built). Generally, the software must be available to the general public and subject to a non-exclusive license.
What Happens If You Sell a Property After Claiming Bonus Depreciation?
If you claim bonus depreciation and dispose of your property soon after, you’ll likely sell it at a price significantly higher than the book value. The IRS won’t let you keep the full gain. The depreciation is “recaptured” as ordinary income and is taxed at your ordinary income tax rate.
Conclusion
Real estate investors have generally received the One Big Beautiful Bill Act well. It’s a massive win, but the 100% deduction might cause the IRS to look more closely into the documentation investors provide in their cost segregation reports.
Therefore, it makes sense to work with a cost segregation firm with a history of delivering iron-clad engineering-based studies.
Contact us today to leverage our proven methodologies to unlock the 100% bonus depreciation under the Big Beautiful Bill.
