Bonus depreciation now applies automatically to qualified property, so a cost segregation study on a building placed in service today sends every 5-, 7-, and 15-year component into a 100% first-year write-off unless you choose otherwise. The election out of bonus depreciation is how you make that choice, and a worked example is the quickest way to see what it does to a return before you or your CPA commit to it.
As co-founder of Seneca Cost Segregation and a real estate investor myself, I’ve worked with many owners who get a finished study back and decide the full write-off is more than they can use this year. What we see consistently is that the conversation with their CPA moves much faster once both sides can see the numbers for each class choice on one page.
Below, I walk through one rental property under four election choices, show what changes in year two, lay out what the election statement needs to say, and cover the situations where electing out tends to help or backfire.
TL;DR — Election Out of Bonus Depreciation Example
- ●Electing out works class by class: turning off bonus for 15-year property removes it from every 15-year asset placed in service that year, including site work and qualified improvement property.
- ●One $800,000 rental, four very different first years: in our example, year-one depreciation ranges from $48,910 to $220,910 depending on which classes keep bonus.
- ●The deduction moves to later years and stays intact: electing out of both classes adds $46,000 to year two in our example, and the full $800,000 of basis is still recovered over time.
- ●A partial election is a useful middle ground: keeping bonus on 5-year property while electing out of 15-year property still delivered $144,910 in year one.
- ●The statement has to travel with a timely return: attach it to the return for the placed-in-service year, including extensions, or use the six-month amended-return window.
- ●A look-back study cannot add the election later: if the original return carried no election, a Form 3115 catch-up includes bonus on the reclassified classes.
How the Election Out of Bonus Depreciation Works
Bonus depreciation is the default, and the election is your way to switch it off.
Under the One Big Beautiful Bill, qualified property acquired and placed in service after January 19, 2025 receives a 100% special allowance. Qualified property means MACRS property with a recovery period of 20 years or less, which covers the 5-, 7-, and 15-year components a cost segregation study identifies.
The Election Covers a Whole Class of Property
You cannot pick and choose individual assets. The Treasury regulations at 26 CFR 1.168(k)-2 define a class as each recovery class in section 168(e), such as 5-year or 15-year property, and an election for a class reaches every qualified asset in it that you placed in service that year.
Equipment or furniture bought by the same entity can share a class with the study’s components, and qualified improvement property placed in service after 2017 is 15-year property, so it travels with your land improvements. Our guide to building component reclassification shows how a study sorts each component into these classes.
When and How the Election Is Made
The timing rules are strict, so settle the decision before the return goes out.
- ●Deadline: the due date, including extensions, of the return for the year the property is placed in service.
- ●Format: a statement attached to that return naming each class and stating that no special depreciation allowance is claimed for it, as the Form 4562 instructions describe.
- ●Who files it: each owner of the property, so a partnership or S corporation makes the election at the entity level.
- ●A missed election on a timely return: you can still elect on an amended return filed within six months of the original due date (excluding extensions), marked “Filed pursuant to section 301.9100-2.”
- ●Changing your mind: once made, the election cannot be revoked without IRS consent.
Walk Through an Election Out of Bonus Depreciation Example
The figures below are hypothetical and chosen to keep the arithmetic easy to follow.
Start With the Cost Segregation Results
Suppose you buy a residential rental for $1,000,000 under a contract signed after January 19, 2025, and place it in service in January 2026. Of the price, $200,000 is allocated to land, which leaves $800,000 of depreciable basis for the engineering study to split into three classes.
The non-bonus rates follow the standard MACRS methods in IRS Publication 946: 200% declining balance with a half-year convention for 5-year property, 150% declining balance for 15-year property, and straight line with a mid-month convention for the building. Our overview of depreciation schedules for building components covers each class in more depth.
Compare Year-One Deductions Under Four Elections
The building’s $20,910 of year-one depreciation is identical in every scenario, since the 27.5-year shell was never eligible for bonus.
Scenarios B and C show how class-level choices let you size the deduction to the income you can absorb. Scenario D still beats the no-study baseline by $21,030, so a study can still pay off for an owner who plans to elect out of every class.
Track How Electing Out Shifts Deductions to Later Years
Every dollar deferred in year one returns on the regular MACRS schedule.
Over the full recovery periods, each scenario recovers the same $800,000 of basis. The election changes when the deductions arrive, so the real question is which year each dollar is worth the most to you.
Write the Election Statement for Your Return
No separate IRS form exists for this choice, and the statement is a short attachment to the return.
Name each class you elect out of, and keep a copy with the fixed asset records so a future preparer who sees no bonus on those assets knows the choice was deliberate, and see our notes on handing study results to your CPA for what else belongs in that file.
Decide When Electing Out of Bonus Depreciation Makes Sense
Full bonus is usually the right call when you can use the deduction now. Electing out deserves a closer look in a handful of situations.
- ●The loss would sit suspended: rental activities are passive unless you qualify as a real estate professional, according to IRS Publication 925, and a disallowed loss carries forward. Our guide on whether bonus depreciation can create a loss explains where that loss lands.
- ●Your income is expected to rise: a deduction taken in a low-income year shelters less tax than the same deduction taken in a higher bracket.
- ●Your state adds bonus back: some states decouple from federal bonus, so a large federal deduction can come with a state add-back, as our page on California’s treatment of bonus depreciation shows.
- ●Owners of one entity are in different positions: a partnership or S corporation makes one election per class for everyone, so the choice has to work for the whole group.
- ●A sale is close: gain on section 1245 property is ordinary income up to the depreciation allowed or allowable, so fast write-offs on assets you sell soon can come back as ordinary income.
Check These Special Cases Before You Elect Out
Three situations catch owners who otherwise know the election well.
Look-Back Studies Cannot Carry a Late Election
A look-back cost segregation study lets you catch up depreciation on a property placed in service in an earlier year through Form 3115 and a Section 481(a) adjustment. The election out, though, belonged on the return for the placed-in-service year.
If no election was made then, the regulations treat the allowable depreciation as including bonus, and they bar making the election through a change in accounting method. In practice, the catch-up includes the bonus the reclassified 5-, 7-, and 15-year components qualified for in their placed-in-service year, so plan the filing year with that amount in view.
The 40% Transition Election Works Differently
For the first tax year ending after January 19, 2025, you can elect a 40% special allowance instead of 100% for qualified property acquired after that date. The transition election lowers the rate, while the class election removes bonus entirely, and the transition option exists for that one year only.
For a calendar-year owner, the transition year is 2025, so the 2026 property in our example could use only the class election out. Our breakdown of the bonus depreciation changes in the Big Beautiful Bill covers the transition dates.
Partnerships and S Corporations Elect for Every Owner
The election is made by whoever owns the property, so a partnership or S corporation decides once per class for all of its owners. Each partner’s section 743(b) basis adjustment counts as its own class, which lets the partnership treat that adjustment differently from its own basis in the same assets.
Owners then apply their own basis, at-risk, and passive limits to their share. Model the election with their returns in view.
Mistakes to Avoid When Electing Out of Bonus Depreciation
Each of these is common and avoidable.
- ●Electing out for a single asset: the statement covers the whole class, so equipment you meant to expense loses bonus too. List every asset in the class before you file.
- ●Overlooking assets outside the study: a vehicle or furniture purchase in the same entity can share a class with study components. Pull the full fixed asset list alongside the study report.
- ●Leaving bonus off without a statement: omitting bonus from the depreciation schedule is no substitute for the election, and the allowable depreciation still includes bonus. Attach the statement every time.
- ●Missing the deadline: once the extended due date and the six-month amended-return window both pass, bonus stays on those classes for the placed-in-service year and every year after. Put the decision on the calendar before the extension runs out.
- ●Assuming you can undo it next year: revocation requires IRS consent through a private letter ruling. Model both paths before filing.
- ●Deciding without the state return: a decoupled state can make the federal choice look different on the combined return. Run federal and state projections side by side.
Frequently Asked Questions
Below are the questions we hear most from owners weighing an election out of bonus depreciation.
How Seneca Supports Your Bonus Depreciation Decision
An election out only works when the classes underneath it are right, so the study comes first. At Seneca, cost segregation is the only work we do: our in-house engineers break down every component that makes up the property and assign each to its recovery class, through an onsite visit or a virtual tour, whichever you prefer. Our Head of Engineering signs off on every study before it reaches your CPA.
You work directly with a dedicated Project Manager, our Engineering team, and an Advisor, with real-time updates as the study moves through each stage. Audit defense is included, backed by 10,200+ properties assessed and zero IRS audits triggered or lost. We also run Qualified Production Property (QPP) studies, and you can test your own figures in our cost segregation calculator before deciding which classes keep bonus.
Conclusion
An election out of bonus depreciation is a timing tool. In the example above, the same $800,000 of basis produced anywhere from $48,910 to $220,910 of year-one depreciation, and every dollar left on the table up front returned on the regular MACRS schedule.
The right mix depends on your income, your passive position, your state, and how long you plan to hold, and the decision has to be made on the return for the year the property goes into service. Our longer guide to cost segregation and bonus depreciation is a good next read, and a free estimate from our team will show which classes your property would produce.
