Bonus Depreciation

Bonus depreciation was first introduced in 2002 as a stimulus measure and has been expanded and modified multiple times since. The Tax Cuts and Jobs Act of 2017 raised the bonus depreciation percentage to 100 percent for qualifying property placed in service after September 27, 2017, and extended eligibility to used property (as well as new) for the first time. This meant a real estate investor completing a cost segregation study on an acquired property could immediately expense 100 percent of the identified short-lived components in the year of purchase.

The 100 percent bonus depreciation rate began phasing down after 2022. The phase-down schedule under current law reduces the deductible percentage by 20 points each year: 80 percent for property placed in service in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026, before dropping to zero in 2027 for most property absent new legislation restoring the full deduction.

Qualifying property for bonus depreciation purposes includes tangible property with a recovery period of 20 years or less under the Modified Accelerated Cost Recovery System (MACRS). This encompasses the five-year, seven-year, and fifteen-year property components commonly identified in cost segregation studies — making bonus depreciation highly complementary to cost segregation as a combined tax strategy.

For real estate investors who qualify as real estate professionals under IRS rules, large first-year bonus depreciation deductions can offset substantial amounts of ordinary income. For passive investors, these deductions are generally limited to offsetting passive income from the same or other passive activities.

Legislative risk is a consideration when planning around bonus depreciation. The phase-down schedule has been the subject of ongoing Congressional debate, and proposals to restore 100 percent bonus depreciation have been introduced in multiple recent sessions.