Bonus Depreciation Applied to Used Property

Understanding the Rules, Requirements, and Strategic Benefits of Bonus Depreciation

For decades, bonus depreciation has been one of the most powerful tax incentives available to real estate investors and business owners. When the One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025, it made a critical shift: Permanently restoring 100% bonus depreciation for qualifying property.

While much of the focus has been on new property and newly constructed assets, one of the most practical (and often overlooked) applications lies in used property.

Used property eligible for bonus depreciation can get investors tremendous tax savings for investors who understand the rules. This article walks you through what constitutes used property for bonus depreciation purposes, the specific requirements that must be met, how to identify acquisition dates correctly, and the strategic planning opportunities that come with this valuable tax provision.

What Is Used Property for Bonus Depreciation?

Under current tax law, used property is not the same as secondhand or pre-owned property. The IRS defines used property in a very specific way. A piece of property qualifies as used property if it has been placed in service by any taxpayer prior to your acquisition of it. In other words, if someone else owned it and depreciated it (or could have depreciated it) before you bought it, it's considered used property from your perspective.

Here's the critical distinction: the property doesn't have to be old. An office building constructed in 2023 that you purchase in 2025 is still used property because it was previously placed in service by another owner. Conversely, a brand-new asset you purchase directly from the manufacturer for which you are the first owner to place in service is new property.

The Core Requirement: No Prior Use by You

The fundamental rule governing bonus depreciation on used property is straightforward: the property must not have been used by you or a predecessor prior to your acquisition. Think of it as the "clean hands" requirement.

The Five-Year Look-Back Rule

To determine whether you've used the property before, the IRS applies a five-year look-back period. This means the IRS examines whether you (or your predecessor) owned or used the property at any point during the five years immediately preceding its acquisition. If you did, the property doesn't qualify for bonus depreciation as used property.

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The Acquisition Method: Purchase Requirements

Simply buying a used asset isn't enough. The tax code has specific rules about how you must acquire used property to claim bonus depreciation. The IRS uses Section 179 concepts to define what qualifies as a valid acquisition.

Must Be a Bona Fide Purchase

Under Section 179 concepts, the property must be acquired by purchase. This means you cannot claim bonus depreciation on used property acquired through gift, inheritance, or transfer from a related party. There are also restrictions on acquisitions from certain family members and controlled group members.

For example, if you acquire a rental property from your spouse (even at fair market value), it would not qualify as a valid purchase under the related-party exclusion. Similarly, property acquired from a corporation you control would likely be excluded. These rules exist to prevent taxpayers from artificially creating bonus depreciation opportunities within family groups or controlled entities.

The Basis Determination Requirement

One more requirement often overlooked: the property's basis cannot be determined by reference to the basis of other property held by the acquiring taxpayer. In tax jargon, this means you can't step into the seller's basis.

This rule applies in situations like partnership mergers or corporate reorganizations where the IRS might otherwise allow carryover basis. If you acquire property in a nontaxable exchange (where basis carries over), it doesn't qualify for bonus depreciation. However, in a standard purchase transaction where you establish a cost basis equal to the amount you paid, this requirement is satisfied.

Determining the Acquisition Date

One of the most important (and technical) aspects of claiming bonus depreciation is correctly identifying when you acquired the property. This isn't always the closing date. The IRS has specific rules for determining acquisition dates, and getting it wrong can cost you significant tax benefits.

Written Binding Contract Rules

If you enter into a written binding contract to acquire property before it is constructed, your acquisition date is determined by the contract. Specifically, the acquisition date is the latest of these four dates:

• The date you enter into the contract

• The date the contract becomes enforceable under state law

• The date all cancellation periods expire (if any)

• The date all contingency conditions are satisfied

A written binding contract must be enforceable against you under state law and cannot limit your damages to a specified amount. In practical terms, this means a serious, legally enforceable agreement, not a letter of intent or preliminary offer.

Property Without a Binding Contract

If you acquire used property without a written binding contract (which is typical in most real estate transactions), the acquisition date is when you pay or incur more than 10% of the total cost of the property, excluding land and preliminary activities. Once you cross that 10% threshold, the acquisition date is established.

Self-Constructed Property

If you construct improvements to used property (common in renovation projects), the acquisition date for those improvements is when manufacturing, construction, or production begins.

The regulations provide a safe harbor: you can treat physical work of a significant nature as beginning when you pay or incur more than 10% of the total cost of the improvements, excluding land and preliminary activities.

Preliminary activities (like planning, designing, securing financing, and obtaining permits) don't count as the start of physical work.

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Real-World Application: A Used Property Example

Let's walk through a practical scenario to tie these rules together.

Sarah is a real estate investor who purchases a 15-year-old office building in January 2026 for $2 million. The building was previously occupied as office space by another company. Sarah plans significant renovations, expecting to spend $500,000 on interior improvements.

From a bonus depreciation perspective:

• The building qualifies as used property because a prior tenant placed it in service.

• Sarah has never owned this property before, so the no prior use requirement is met.

• Sarah purchased it from an unrelated third party, satisfying the related-party exclusion.

• The acquisition date for the building is when Sarah paid or incurred more than $200,000 (10% of $2M).

• For the $500,000 renovation, the acquisition date is when she pays or incurs more than $50,000 on construction.

Assuming these dates fall after January 19, 2025, both the used building and the new improvements could potentially qualify for 100% bonus depreciation under the OBBBA.

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The Component Election Advantage

One powerful strategy worth understanding is the component election. Even if an overall property doesn't meet acquisition date requirements for bonus depreciation, you can apply bonus depreciation to specific components that do qualify.

For example, suppose you purchase an older building in 2023 (before January 19, 2025). The building itself wouldn't qualify for bonus depreciation. However, if you acquire machinery or equipment components within that building after January 19, 2025, those components could qualify separately. This is particularly valuable in properties with integrated systems or built-in equipment.

A written binding contract for the component must satisfy the acquisition date requirements for the component election to work. This means you need clarity on what you're acquiring and when.

Strategic Elections: 40% Alternative and Opt-Out

Bonus depreciation isn't automatically all-or-nothing. The tax code gives you elections to control how you claim (or don't claim) bonus depreciation.

The 40% Election

For your first taxable year ending after January 19, 2025, you can elect to claim 40% bonus depreciation instead of 100%. (The percentage is 60% for long production period property and certain aircraft.) This election might make sense if claiming full bonus depreciation would create unwanted consequences in other areas of your tax return, such as:

• Exceeding corporate alternative minimum tax (AMT) thresholds

• Reducing your business interest deduction under Section 163(j)

• Creating carry-forward depreciation you can better use in future years

The Opt-Out Election

You can also elect out of bonus depreciation entirely for a specific class of property in any tax year. This might apply if you want to spread deductions across multiple years for cash flow or tax reasons. The opt-out is made on a class-by-class basis, not property-by-property, so you can't cherry pick individual assets.

Impact on Other Tax Provisions

Before claiming bonus depreciation on used property, model your complete tax picture. Aggressive depreciation deductions can affect several other tax calculations:

Section 163(j) Interest Limitation

The business interest limitation under Section 163(j) restricts how much interest expense you can deduct. However, depreciation, amortization, and depletion add back to taxable income when calculating your limitation. More depreciation can actually increase your interest deduction ceiling, which is beneficial if you have significant debt.

Section 263A (UNICAP Rules)

If your business manufactures or resells inventory, Section 263A requires capitalization of indirect costs. Accelerated depreciation on assets used in production can increase your UNICAP absorption ratios, potentially offsetting some depreciation benefits. Some taxpayers benefit from the Historic Absorption Ratio (HAR) election to mitigate this effect.

State Tax Considerations

Not all states follow federal bonus depreciation rules. Some states don't allow the OBBBA changes or may phase them differently. Always check state tax treatment before claiming federal benefits.

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Common Pitfalls and How to Avoid Them

Mixing New and Used Property

New and used property have different acquisition date requirements. Don't assume they qualify under the same timeline. Track these separately and apply the correct acquisition date rules to each.

Overlooking Relative Restrictions

If you acquire used property from a spouse, parent, or related entity, no matter the price paid, you will likely disqualify the property. This is a bright-line rule that catches many taxpayers by surprise.

Misjudging the 5-Year Look-Back

Don't assume you can reacquire sold property for bonus depreciation after a few years. The five-year window is firm. If you sold property in 2021 and want to buy it back, wait until 2026.

Failing to Document Acquisition Dates

The IRS will challenge bonus depreciation claims without clear documentation. Keep copies of contracts, closing statements, and payment evidence showing when you acquired (or began acquiring) the property.

Planning Ahead: Cost Segregation and Used Property

Many sophisticated investors combine bonus depreciation with cost segregation studies. Cost segregation accelerates depreciation on components of a building by identifying personal property and land improvements that normally would be bundled with the building structure.

For used property, a cost segregation study can maximize bonus depreciation benefits by identifying components that may qualify separately. This is particularly effective for acquisition of older commercial or industrial properties where equipment and improvements have been overlooked.

Key Takeaways

• Used property qualifies for 100% bonus depreciation if you meet specific requirements: you haven't used it before (within five years), it was acquired by purchase from an unrelated party, and your basis isn't carried over.

  
  

• Correctly determining the acquisition date is crucial. For most used property, this is when you pay or incur 10% of the cost. For self-constructed improvements, it's when physical work begins.

  
  

• You have flexibility: elect 40% bonus depreciation instead of 100%, or opt out entirely by class of property, depending on your overall tax strategy.

  
  

• Model the impact of bonus depreciation on Section 163(j) interest limits, UNICAP calculations, AMT, and state taxes before claiming the deduction.

  
  

• Document everything: contracts, closing statements, payments, and dates. The IRS expects clear evidence of when property was acquired and when it was placed in service.

  
  

• Used property acquired after January 19, 2025, can unlock substantial tax savings, but only if you navigate the rules correctly.

  
  

Conclusion

The permanent restoration of 100% bonus depreciation under the OBBBA creates meaningful opportunities for investors acquiring used property. While new property captures most of the headlines, used property (which represents the bulk of real estate transactions) may offer even greater practical value when the rules are applied correctly.

Whether you're acquiring a commercial building, purchasing improvements to an existing rental property, or stepping into a property you'll renovate, understanding how bonus depreciation applies to used assets can translate into years of deduction acceleration and substantial tax savings. The key is attention to detail: verify acquisition dates, confirm eligibility, document transactions, and model your overall tax position.

For investors serious about tax optimization, bonus depreciation on used property deserves a place at the center of acquisition and capital allocation strategy.