Bonus Depreciation: Complete Guide for Real Estate Investors in 2025

For most real estate investors, one of the biggest frustrations is waiting decades to recover the cost of a property through traditional MACRS depreciation. Long depreciation schedules restrict cash flow, while high income taxes eat into potential returns—making it difficult to scale your portfolio or reinvest profits effectively.

That’s where bonus depreciation comes in. This powerful real estate tax strategy allows investors to accelerate deductions by depreciating qualifying assets much faster than standard methods. Instead of spreading write-offs over 27.5 or 39 years, bonus depreciation enables large first-year deductions—creating immediate liquidity and freeing up capital for new acquisitions or improvements.

In this guide, you’ll learn everything you need to know about bonus depreciation: what it is, who qualifies, how it differs from Section 179, and how to implement it through cost segregation. We’ll cover the pros and cons, timing considerations, recapture rules, examples, and real-world applications for property owners. Plus, you’ll get access to our free Ultimate Guide to Real Estate Investing to help you take your next step with confidence.

• What Is Bonus Depreciation?
• Eligibility & Rules for Bonus Depreciation
• Why Real Estate Investors Use Bonus Depreciation
• How to Apply Bonus Depreciation
• Pros & Risks of Bonus Depreciation
• Bonus Depreciation vs Section 179
• Timing & Phase-Out (2025 and Beyond)
• Examples of Bonus Depreciation
• Bonus Depreciation & Cost Segregation
• Depreciation Recapture & Exit Planning
• Who Should Use Bonus Depreciation?
• Alternatives & Complementary Strategies
• Frequently Asked Questions

What Is Bonus Depreciation?

Bonus depreciation—officially referred to as “additional first-year depreciation” under Section 168(k)—is a powerful tax provision that lets investors immediately deduct a significant percentage of the cost of qualifying assets rather than depreciating them gradually over decades. In simpler terms, it’s the IRS’s way of letting you recover the cost of business or rental property assets much faster, dramatically improving your first-year tax position and cash flow.

When you purchase or improve a property, many of the items within it—such as appliances, fixtures, flooring, landscaping, and HVAC systems—typically fall under long-term recovery periods (27.5 or 39 years). Bonus depreciation accelerates this process by allowing immediate expensing of a large portion of those qualifying components. This “front-loading” of deductions is especially powerful for real estate investors seeking to reduce taxable income, increase liquidity, and reinvest those savings into more deals.

The Tax Cuts and Jobs Act (TCJA) expanded bonus depreciation to 100 % for property placed in service after September 27, 2017, and before January 1, 2023. However, that percentage is now phasing out under current law:

This tax incentive applies to both new and used property (as long as it hasn’t been previously owned by the taxpayer or a related entity). When combined with a cost segregation study, which identifies building components eligible for shorter depreciation lives, bonus depreciation can unlock significant tax savings for real estate investors. For example:

A $1.2 million multifamily building might allocate $300,000 of its cost to short-life assets like flooring, cabinets, and parking lot improvements. At a 40 % bonus depreciation rate in 2025, an investor could immediately deduct $120,000 in the first year, saving tens of thousands in taxes and increasing available reinvestment capital.

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Eligibility & Rules for Bonus Depreciation

Understanding the eligibility criteria for bonus depreciation is essential for real estate investors looking to maximize deductions while staying compliant with IRS regulations. The rules determine which assets qualify, how and when they can be claimed, and where exceptions or limitations may apply.

Qualified Property

To claim bonus depreciation, the asset must be considered qualified property under IRS guidelines. In general, this includes tangible personal property with a recovery period of 20 years or less, such as:

• Appliances, fixtures, and furniture used in rental or business operations
• Machinery, tools, and construction equipment
• Land improvements, including fencing, parking lots, and landscaping
• “Off-the-shelf” computer software purchased for business use
• Qualified Improvement Property (QIP) — interior, non-structural improvements to existing commercial buildings placed in service after 2015
• Certain farm and agricultural equipment

Exclusions

Bonus depreciation does not apply to every property type. The following are typically excluded:

• Real property, such as buildings and land
• Assets acquired from related parties or inherited property
• Used property previously owned by the taxpayer
• Assets held for resale or not used in business or income-producing activities

For real estate investors, this means that the building itself does not qualify, but many of its internal components do. A cost segregation study is often necessary to isolate these qualifying parts for bonus depreciation.

Placed-in-Service Dates

The date an asset is placed in service determines which phase-out percentage applies. Assets must be operational and ready for their intended use to qualify in that tax year. Current phase-out schedule:

• 80 % in 2023
• 60 % in 2024
• 40 % in 2025
• 20 % in 2026

After 2026, bonus depreciation is scheduled to expire (0 %) unless extended by Congress. Investors should plan acquisitions and improvements strategically to capture higher percentages before the reduction.

Opting Out

Investors can elect out of bonus depreciation on a class-by-class basis. This may be wise if you anticipate higher income in future years, prefer to spread deductions evenly, or want to minimize depreciation recapture upon sale. The election is made by attaching a statement to your tax return for the year the property is placed in service.

State Conformity

Not all states follow federal bonus depreciation rules. Some, like California, New York, and New Jersey, do not conform or only allow partial deductions. Always confirm your state’s treatment of accelerated depreciation with a qualified CPA or tax advisor before filing.

Why Real Estate Investors Use Bonus Depreciation

Real estate investors use bonus depreciation to unlock powerful tax advantages that increase cash flow, enhance return on investment (ROI), and accelerate portfolio growth. By deducting large portions of asset costs upfront instead of spreading them over decades, investors can reinvest those savings into more deals, upgrades, or debt reduction—fueling long-term wealth creation.

Accelerated Tax Deductions

Bonus depreciation lets investors deduct a substantial percentage of the cost of qualifying assets in the same year the property is placed in service. This front-loaded depreciation immediately reduces taxable income, lowering the current-year tax bill and increasing liquidity. For high-earning investors, this can mean tens or hundreds of thousands in near-term savings that compound over time.

Cash Flow & Reinvestment

Every dollar saved through bonus depreciation can be reinvested to grow your portfolio faster. Investors commonly use tax savings to:

• Pay down existing mortgages or high-interest loans
• Fund property renovations or value-add improvements
• Acquire additional rental or commercial properties
• Build liquidity reserves for future opportunities

Pairing with Cost Segregation

A cost segregation study complements bonus depreciation by identifying which property components qualify for shorter depreciation lives (5, 7, or 15 years). The study’s engineering-based analysis isolates assets like flooring, lighting, and landscaping—unlocking the full benefit of accelerated deductions under bonus depreciation rules. Without cost segregation, many of these opportunities remain hidden within the building’s 27.5- or 39-year schedule.

Synergy with Section 179

Bonus depreciation works hand-in-hand with Section 179 expensing. Section 179 allows investors to immediately expense certain assets up to $2.5 million in 2025, while bonus depreciation can be applied to the remaining eligible basis. The main difference: Section 179 is capped and limited by taxable income, but bonus depreciation has no cap and can create net losses to offset other income streams.

Time Value of Money

Accelerating deductions increases the time value of money—the principle that a dollar saved today is worth more than one saved in the future. Investors can deploy these early-year tax savings into additional investments that produce compounding returns, easily outpacing the eventual depreciation recapture upon sale.

State & Federal Considerations

Not all states follow federal bonus depreciation rules. For example, California, New York, and New Jersey may disallow or limit these deductions, requiring separate depreciation schedules for state filings. A qualified CPA should review both federal and state conformity before applying bonus depreciation to ensure compliance and maximum benefit.

How to Apply Bonus Depreciation

Applying bonus depreciation properly can help investors maximize deductions while staying IRS-compliant. Here’s a high-level step-by-step overview of how to take advantage of this tax incentive before diving into a more detailed cost segregation process later in this guide.

1. Determine Eligibility: Review your assets and property improvements to confirm they qualify as tangible personal property or Qualified Improvement Property. Eligible assets typically include equipment, appliances, carpeting, parking lots, and other improvements with a recovery period of 20 years or less.
2. Perform a Cost Segregation Study: Hire a qualified engineer or tax professional to conduct a cost segregation study. This process separates the building into its individual components, identifying which parts can be reclassified into shorter depreciation categories (5-, 7-, or 15-year property).
3. Place Assets in Service: Ensure all qualifying assets are placed in service—meaning ready and available for their intended use—before the end of the tax year. The percentage of bonus depreciation you can claim depends on the year the asset is placed in service (e.g., 60 % in 2024, 40 % in 2025).
4. Elect Bonus Depreciation or Section 179: Bonus depreciation is applied automatically to eligible property unless you elect out. You can also use Section 179 expensing for certain assets to deduct up to $2.5 million in 2025. Investors may strategically opt out of bonus depreciation on specific classes if planning for future income or recapture considerations.
5. Coordinate with Your CPA: Update depreciation schedules and ensure your tax return includes the proper elections. Keep detailed documentation from your cost segregation study, invoices, and placed-in-service confirmations—these support your deduction in case of an IRS review.
6. Check State Rules: Some states, like California, New York, and New Jersey, do not fully conform to federal bonus depreciation rules. Verify your state’s tax treatment with your CPA to prevent discrepancies between your federal and state returns.

Pros & Risks of Bonus Depreciation

Bonus depreciation offers powerful tax advantages for real estate investors, but like any strategy, it comes with trade-offs. Understanding both sides will help you determine if it fits your investment goals and tax plan.

Pros

• Immediate Tax Savings & Cash Flow: Investors can deduct a significant portion of qualifying asset costs upfront, reducing taxable income and freeing cash to reinvest immediately.
• Unlimited Deduction: Unlike Section 179, bonus depreciation has no income limitation—allowing real estate professionals to offset both active and passive business income.
• Accelerated ROI: By lowering taxes in the first year, investors can redirect those funds into new acquisitions, renovations, or debt reduction, compounding returns over time.
• Simple to Claim: Bonus depreciation applies automatically to qualified property—no annual election required unless you choose to opt out.

Risks & Considerations

• Phase-Out Schedule: The deduction rate decreases from 100 % to 20 % by 2026 (and may sunset unless extended by Congress), so timing matters for maximizing benefits.
• Depreciation Recapture: When selling, investors must pay recapture tax on the accelerated portion of depreciation. Strategies like a 1031 exchange can defer this liability.
• State Non-Conformity: Certain states (e.g., California, New York, New Jersey) do not conform to federal bonus depreciation rules, which can increase state tax liability.
• Not Ideal for Low-Income Years: If your income is low now but expected to rise later, deferring depreciation may yield a larger long-term tax benefit.
• Complexity: Coordinating bonus depreciation with Section 179, cost segregation, and other deductions requires professional tax planning and documentation.

Bonus Depreciation vs Section 179

Both bonus depreciation and Section 179 expensing allow real estate investors to deduct the cost of qualifying assets faster than standard depreciation schedules. However, these provisions differ in how deductions are applied, their limits, and which assets qualify. Understanding their distinctions—and how to combine them—can maximize tax efficiency and cash flow.

Many investors strategically combine bonus depreciation and Section 179 expensing to maximize deductions. For instance, you might apply Section 179 to specific improvements like HVAC systems, roofing, or equipment—then use bonus depreciation for the remaining qualified personal property identified in a cost segregation study. This layered approach can produce substantial first-year tax savings and improved long-term cash flow.

Timing & Phase-Out (2025 and Beyond)

Bonus depreciation was introduced under the Tax Cuts and Jobs Act to stimulate business investment by allowing immediate write-offs of qualifying property. However, this powerful deduction is not permanent — it phases out gradually over several years unless Congress renews or extends the provision.

Here’s how the bonus depreciation phase-out schedule currently looks under existing law:

As of now, the rate stands at 60 % in 2024 and will drop to 40 % in 2025, meaning investors can still capture nearly half of their asset cost as a deduction—but time is running out. Unless Congress intervenes, bonus depreciation will fully phase out by 2027.

Tax laws are fluid—especially provisions tied to investment incentives. Always consult your CPA or tax strategist to align your timing with upcoming legislative changes and ensure your bonus depreciation strategy remains effective under the evolving TCJA phase-down schedule.

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Examples of Bonus Depreciation

To see how bonus depreciation impacts real estate investors in practice, let’s walk through a few simple examples. These illustrate how front-loading deductions can multiply first-year savings and improve cash flow compared to standard straight-line depreciation.

Example 1: Small Rental Property ($500 k Basis)

Without bonus depreciation, a $500,000 rental property depreciated over 27.5 years yields about $18,182 in first-year deductions (3.636 % × $500,000).

With a cost segregation study, 20 % of the property ($100,000) is reclassified as 5-year property. Applying a 40 % bonus depreciation rate (2025) produces a $40,000 deduction in year one — more than a 450 % increase over straight-line depreciation. Adding Section 179 for appliances or fixtures could increase this further.

Example 2: Commercial Building ($2 M Basis + $500 k Improvements)

A commercial investor purchases a $2 million building and adds $500,000 in tenant improvements. A cost segregation analysis identifies $600,000 in short-life assets (lighting, HVAC, paving, and interior finishes). Applying the 2025 bonus rate (40 %) yields a $240,000 immediate deduction.

If the investor also uses Section 179 expensing on $250,000 of qualified improvement property (QIP), the combined first-year deduction reaches $490,000—cutting taxable income dramatically and improving cash-on-cash returns.

Example 3: Multifamily Property ($4 M Basis)

A multifamily investor buys a $4 million apartment complex. A cost segregation study finds 25 % ($1 million) qualifies as 5-, 7-, and 15-year property. Applying the 40 % 2025 bonus depreciation rate provides a $400,000 year-one deduction—a huge boost to early cash flow and reinvestment potential.

These examples show how leveraging bonus depreciation—especially alongside cost segregation and Section 179 expensing—can multiply deductions and accelerate cash flow. Typical reclassification ranges between 10 % and 40 % of a property’s total basis, depending on its type and improvements.

Bonus Depreciation & Cost Segregation

For real estate investors, cost segregation is the gateway to unlocking the full benefits of bonus depreciation. This process involves a detailed engineering-based analysis of your property to identify which components can be reclassified into shorter recovery periods—typically 5, 7, or 15 years instead of the standard 27.5 or 39 years.

By breaking down a building into its individual parts, a cost segregation study pinpoints assets that qualify as Section 1245 property, which are eligible for accelerated or bonus depreciation. These assets are then expensed in the year they’re placed in service, allowing investors to front-load deductions and immediately improve their tax position.

Here are common components that often qualify for bonus depreciation through cost segregation:

• Interior finishes: Flooring, millwork, decorative fixtures, cabinetry, and partitions.
• Electrical and cabling systems: Wiring for specialized equipment, networking, or lighting.
• HVAC and plumbing components: Systems serving individual units or specific business functions.
• Exterior features: Landscaping, signage, fencing, and parking lots.
• Specialty lighting: Accent or task lighting within commercial or multifamily spaces.

Once these components are identified, they can be depreciated faster under the Modified Accelerated Cost Recovery System (MACRS), with eligible portions receiving the added benefit of bonus depreciation. For many investors, this translates into tens or even hundreds of thousands of dollars in first-year tax savings.

In short, a cost segregation study isn’t just a tax tactic—it’s the first step in making bonus depreciation work for you. By identifying and separating eligible components, investors can accelerate deductions, increase cash flow, and redeploy savings into their next investment opportunity.

Depreciation Recapture & Exit Planning

One of the most important considerations when using bonus depreciation is understanding depreciation recapture and how it affects your exit strategy. While accelerated deductions boost cash flow today, they reduce your property’s adjusted basis — potentially increasing taxable gain when you sell.

Depreciation recapture occurs when the IRS “recaptures” a portion of your prior depreciation deductions as taxable income upon sale. This recaptured amount is taxed at a maximum rate of 25 %, which can lead to a larger tax bill if not planned for. However, it’s critical to note that recapture only applies to the depreciated portion of the property — not the land itself, which is never depreciable.

For example, if you claim $150,000 of bonus depreciation and later sell the property, you may owe up to $37,500 (25 % of the depreciation taken) in recapture tax. Even so, most investors still come out ahead because the time value of money allows them to reinvest those early tax savings for higher returns long before any sale.

Exit Strategies to Manage Recapture

• 1031 Exchange: Defer both depreciation recapture and capital gains by reinvesting proceeds into a like-kind property under Section 1031.
• Hold Longer: Keep the property for several years to maximize the cash flow and reinvestment benefits of bonus depreciation before selling.
• Refinance Instead of Selling: Tap into property equity through refinancing to access capital tax-free while maintaining ownership.
• Strategic Timing: Align sales with lower-income years or other deductions to offset the tax impact.

Depreciation recapture doesn’t need to be a dealbreaker — it simply requires smart planning. When used strategically, the early savings from bonus depreciation often far outweigh any future recapture liability.

Who Should Use Bonus Depreciation?

While bonus depreciation is one of the most powerful tools in real estate tax planning, it’s not a one-size-fits-all strategy. It tends to benefit investors with larger holdings, high taxable income, or active participation in their real estate business. Below is a breakdown to help you decide whether this strategy aligns with your investment goals.

Ideal Users

• High-basis property owners: Investors with properties valued at $1 million or more, particularly commercial and multifamily assets.
• Developers and BRRRR investors: Those who regularly perform renovations, upgrades, or new construction and want to recoup costs faster.
• Real estate professionals: Taxpayers who meet IRS material participation rules can use bonus depreciation to offset both passive and active income.
• Portfolio builders: Investors aiming to scale by reinvesting tax savings into additional properties through cost segregation and reinvestment strategies.

Not Ideal For

• Small-scale investors: Properties with a basis under $500,000 may not generate enough benefit to justify a cost segregation study.
• Short-term flippers: Quick sales trigger depreciation recapture sooner, eliminating much of the advantage.
• Personal-use properties: Homes or assets used less than 50 % for business purposes don’t qualify.
• Low-income years: Taxpayers expecting minimal income may benefit more from spreading deductions across future, higher-income years.

Alternatives & Complementary Strategies

While bonus depreciation is one of the most powerful tax incentives available to real estate investors, it isn’t the only strategy for optimizing deductions. Depending on your investment profile, holding period, and property type, you may benefit from pairing it with—or substituting it for—other tax planning tools.

• Section 179D (Energy-Efficient Commercial Buildings Deduction): Offers up to $5.65 per square foot for energy-efficient upgrades like HVAC, lighting, and insulation. This deduction can be stacked with cost segregation to amplify total write-offs for commercial properties.
• Section 179 Expensing: Ideal for small to mid-sized businesses that want control over timing. Investors can deduct up to $2.5 million in qualifying assets in 2025, including certain building improvements. Unlike bonus depreciation, it’s limited to taxable income and must be elected each year.
• Straight-Line Depreciation: Offers simplicity and long-term predictability by spreading deductions evenly across an asset’s life. This method may be better if you expect a higher income later and want deductions in future years.
• 1031 Exchange: Allows investors to defer capital gains and depreciation recapture taxes by rolling proceeds from one property into another of “like-kind.” This can preserve the benefits of bonus depreciation while continuing to grow a portfolio.
• Opportunity Zones & Historic Credits: Provide federal and state incentives for investing in designated low-income or historic areas. These can work alongside bonus depreciation or Section 179D for a stacked tax-saving strategy.

Frequently Asked Questions (FAQ)

Before wrapping up, let’s address some of the most common questions investors have about bonus depreciation. Whether you’re wondering which assets qualify, how it interacts with Section 179, or what happens after the phase-out, these quick answers will help clarify key rules and next steps. If you’re planning your next real estate acquisition, this section can guide your tax strategy with confidence.

What is bonus depreciation?

Bonus depreciation is a tax incentive under Section 168(k) that allows investors to immediately deduct a large percentage of the cost of qualified property—such as equipment, fixtures, or certain building components—rather than depreciating it over many years.

How much bonus depreciation can I claim in 2025?

For assets placed in service during 2025, the bonus depreciation rate is 40 %. The rate will continue phasing down unless new legislation extends it.

Does bonus depreciation apply to improvements on a rental property?

Yes, improvements like carpeting, appliances, and landscaping often qualify if identified through a cost segregation study as assets with shorter recovery periods.

Can I combine bonus depreciation with Section 179 expensing?

Absolutely. Many investors use Section 179 for specific improvements up to its dollar limit and apply bonus depreciation to remaining qualifying costs for maximum tax benefit.

Do I need a cost segregation study to claim bonus depreciation?

While not legally required, a professional cost segregation study helps identify which components of a building qualify for accelerated depreciation and ensures accurate documentation for the IRS.

How does bonus depreciation affect recapture taxes?

Accelerating deductions lowers your property’s basis, which can increase recapture tax liability at sale. However, strategies like a 1031 exchange can defer this tax.

Can I still claim bonus depreciation on used property?

Yes. Unlike older versions of the rule, the Tax Cuts and Jobs Act allows used property to qualify as long as it’s newly acquired by the taxpayer and not previously owned by them or a related party.

Do states follow federal bonus depreciation rules?

Not always. States such as California and New York do not conform to federal bonus depreciation or only partially align, so your state deduction may differ.

What happens when the bonus depreciation rate drops to 0 %?

If the rate phases out completely (after 2026 under current law), businesses will revert to regular MACRS depreciation unless Congress passes an extension.

How Bonus Depreciation Can Transform Your Real Estate Strategy

Bonus depreciation remains one of the most powerful tax tools available to real estate investors. By front-loading deductions, you can dramatically reduce your taxable income, boost short-term cash flow, and reinvest those savings into acquiring more properties or funding value-add improvements. Even with the phase-out schedule in place, pairing bonus depreciation with cost segregation and Section 179 expensing can unlock substantial first-year tax advantages.

However, this strategy works best when integrated into a long-term plan. Investors should carefully evaluate hold periods, recapture implications, and state-level conformity rules before proceeding. Working with a CPA or cost segregation specialist ensures that your depreciation strategy aligns with your overall investment goals and compliance requirements.

*Disclosure: Real Estate Skills is not a law firm, and the information contained here does not constitute legal advice. You should consult with an attorney before making any legal conclusions. The information presented here is educational in nature. All investments involve risks, and the past performance of an investment, industry, sector, and/or market does not guarantee future returns or results. Investors are responsible for any investment decision they make. Such decisions should be based on an evaluation of their financial situation, investment objectives, risk tolerance, and liquidity needs.