How 100% Bonus Depreciation Can Help Real Estate Investors

Everything you need to know about permanent 100% bonus depreciation, what changed under OBBBA, and how to maximize tax savings.

The Game-Changing OBBBA

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law. While most headlines focused on broader fiscal provisions, real estate investors should be paying attention to one specific change: the permanent restoration of 100% bonus depreciation.

Before OBBBA, bonus depreciation was set to phase out over time. Investors were uncertain whether to structure deals around a benefit that might disappear. Now, 100% bonus depreciation is permanent. This changes everything about how you should approach acquisitions, evaluate ROI, and structure your real estate portfolio.

In this guide, we'll walk through exactly how 100% bonus depreciation works under the new law, show you real numbers on potential tax savings, explain the strategic choices you need to make, and give you a framework for deciding whether bonus depreciation makes sense for your next acquisition.

How Bonus Depreciation Actually Works in Real Estate

Bonus depreciation is straightforward in concept but nuanced in execution.

Under standard depreciation, you deduct a building's cost over decades. A residential rental property depreciates over 27.5 years; commercial property over 39 years. Year 1 deduction is roughly 3.6% for residential or 2.6% for commercial.

Bonus depreciation accelerates this. Under 100% bonus, you can deduct a portion of your building basis immediately in Year 1, rather than spreading it across decades. But here's the catch: not the entire building qualifies. Land never qualifies. The building structure itself (foundations, exterior walls, roof) doesn't qualify. What does qualify are shorter-life components: appliances, flooring, interior fixtures, certain HVAC and electrical systems, and improvements.

To identify and quantify these components, most serious investors use cost segregation studies. A cost segregation firm conducts engineering analysis to determine what portion of your building basis consists of 5-year, 7-year, and 15-year property. That reclassified basis becomes eligible for 100% bonus depreciation in Year 1.

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New Property vs. Used Property: The Critical Distinction

The tax code treats new and used property differently under bonus depreciation. Understanding this distinction is essential for your first year depreciation deductions.

New Property

New property is property you construct or for which you are the first owner to place in service. It qualifies for 100% bonus depreciation regardless of when you place it in service.

Used Property

Used property is property that was previously placed in service by another owner. Under OBBBA, used property also qualifies for 100% bonus depreciation if placed in service.

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The ROI of Cost Segregation

Cost segregation is optional but strategically critical. A study costs $3,000 - $8,000 depending on property size and complexity.

The return? Often >20 times the investment.

Here's why: a $2 million property with $1.6 million depreciable basis (after 20% land allocation) might see 35% reclassified to 5, 7, and 15-year property through cost segregation. That's $560,000 immediately deductible in Year 1 (100% bonus). Without the study, you'd deduct roughly $58,000 in Year 1 under standard depreciation, a $502,000 difference.

At a 37% marginal tax rate, that's $185,740 in Year 1 tax savings. The cost segregation study paid for itself 23 times over in that single year.

Most properties over $1 million justify a study. For smaller properties, run the math. Use our bonus depreciation calculator to estimate your property's reclassification potential, then decide whether the study ROI makes sense.

Real-World Example: How Bonus Depreciation Works

Let's walk through a realistic scenario with actual numbers.

Sarah purchases a 20-unit multifamily property in Dallas in March 2026 for $2.4 million. The county assessment allocated 18% to land ($432,000) and 82% to building ($1.968 million). She's considering a cost segregation study.

Before:

No cost seg, standard depreciation

• Depreciable basis: $1.968M

• Property type: Residential rental (27.5-year life)

• Year 1 deduction: $1.968M ÷ 27.5 = $71,563

• Tax savings at 37%: $26,478

After:

With 100% bonus depreciation

• Cost segregation study identifies 32% reclassification (typical for multifamily)

• 5, 7, 15-year property: $1.968M × 32% = $629,760 (100% bonus = $629,760 Year 1 deduction)

• Remaining 27.5-year building: $1.968M × 68% = $1.338M (Year 1 deduction = $48,655)

• Total Year 1 deduction: $678,415

• Tax savings at 37% bracket: $251,014

The difference: $606,852 in extra Year 1 deductions, worth $224,536 in federal tax savings. A $5,000 cost segregation study paid for itself 45x over in Year 1 alone!

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Transition Elections: 100% vs. 40% Bonus

Bonus depreciation isn't all-or-nothing. You have other elections:

The 60% or 40% Election

For your first tax year with qualifying property, you can elect to claim only 40% bonus depreciation instead of 100%. This might make sense if claiming full bonus depreciation creates unwanted side effects elsewhere on your return: triggering corporate AMT, reducing your Section 163(j) interest deduction, or creating excess deductions you can't use in a low-income year.

The Opt-Out Election

You can also elect out of bonus depreciation entirely for a specific class of property. This allows you to spread deductions across multiple years if that better suits your tax strategy. The election is by property class (5 year, 7 year, 15 year, or 39 year), not property-by-property.

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Depreciation Recapture: What Happens When You Sell

Bonus depreciation accelerates deductions but doesn't eliminate them, it defers them. When you sell, the IRS recaptures your depreciation at ordinary income tax rates.

Depreciation recapture rates are up to 25% (Section 1250 property). So if you claimed $500,000 in bonus depreciation, you'd owe up to $125,000 in tax when you sell. This is factored into your long-term return on investment.

However, the economics still strongly favor claiming bonus depreciation. The cash flow and tax deferral benefit during ownership typically far exceed the recapture liability at sale. A five-year hold with bonus depreciation usually beats a 39-year standard depreciation schedule, even accounting for recapture.

Applying Bonus Depreciation in Your Tax Strategy

Bonus depreciation doesn't exist in isolation:

Section 163(j) interest limits

Depreciation is added back to taxable income, potentially increasing your allowable interest deduction.

Passive activity limitations

Real estate professionals have special rules that may allow bonus deductions to offset other income.

State tax treatment

Not all states follow federal bonus depreciation rules. Check your state's treatment.

1031 exchanges

You can claim bonus depreciation on property acquired through a 1031 exchange if placed in service after January 19, 2025.

Model your overall tax picture with a qualified CPA. Bonus depreciation should fit into a broader strategy.

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Your Next Steps

• Use our bonus depreciation calculator to estimate potential Year 1 deductions for a property you're considering.

• If the numbers look promising, contact a cost seg firm for a full engineering analysis.

• Review acquisition dates with your real estate attorney to ensure you capture 100% bonus depreciation.

• Consult with your CPA on elections that fit your tax situation.

• Model the impact on your overall tax return, including Section 163(j), state taxes, and passive activity rules.

Last Words

The permanence of 100% bonus depreciation under OBBBA is a huge win for real estate investors. For the first time in years, you can confidently structure acquisitions around bonus depreciation without worrying about phase-outs or legislative changes.

Combined with cost segregation studies, bonus depreciation can get you six-figure tax savings in Year 1 on major acquisitions. Work with qualified professionals on cost segregation and overall tax planning.

For investors serious about portfolio optimization, permanent 100% bonus depreciation should be a cornerstone of acquisition and capital allocation strategy in 2026 and beyond.