The Big Beautiful Bill (officially the One Big Beautiful Bill Act, P.L. 119-21) has restored 100% bonus depreciation for qualified property acquired on or after January 20, 2025.
Before this legislation, bonus depreciation was phasing out under the Tax Cuts and Jobs Act schedule. The rate dropped from 100% in 2022 to 80% in 2023, then 60% in 2024, and was set to fall to just 40% in 2025. Complete elimination was scheduled for 2027.
The OBBB Act changed that trajectory. Property owners who acquire and place assets in service on or after January 20, 2025 can now deduct 100% of qualifying property costs in year one. There is no scheduled expiration date and no phase-down.
Here is what business owners and real estate investors need to know about these 2025 tax changes and how to maximize them.
What the OBBB Act Changed
The OBBB Act made several significant changes to bonus depreciation rules. Here is what now qualifies for the restored 100% first-year deduction.
Key Changes:
- 100% bonus depreciation is restored for qualified property acquired and placed in service on or after January 20, 2025.
- The phase-down schedule and 2027 expiration date are eliminated for property meeting the new acquisition threshold.
- Specified plants such as vineyards and orchards planted or grafted on or after January 20, 2025 also qualify.
- There is no cap on the total amount of bonus depreciation a taxpayer can claim in any tax year.
- Both new and used property qualify, as long as it is the taxpayer's first use of the property and meets the acquisition date requirements.
Qualifying Property Includes:
- MACRS property with a recovery period of 20 years or less (5-year, 7-year, and 15-year property)
- Water utility property
- Qualified Improvement Property (QIP)
Note that land value is never depreciable. Only building components and improvements qualify for bonus depreciation treatment. A cost segregation study identifies which assets fall into these shorter recovery periods and qualify for the enhanced deduction.
Election Out: Taxpayers can elect out of bonus depreciation on a class-by-class basis if they prefer to depreciate assets over their regular recovery periods instead.
Critical Dates and Transitional Rules
The January 20, 2025, acquisition date is the dividing line between old and new bonus depreciation rules. Timing matters significantly for investors.
Bonus Depreciation Rates by Acquisition Date:
The Binding Contract Rule:
If a written binding contract was entered into before January 20, 2025, the property does not qualify for the new 100% rate. This applies even if the property is placed in service after that date.
What if my property was under contract before January 20, 2025?
You are locked into the old phase-down rates. A written binding contract entered into before January 20, 2025, means your property follows the prior schedule. That means 40% bonus depreciation in 2025, 20% in 2026, and 0% in 2027.
Investors who closed on properties earlier in 2025 but before the OBBB Act should consult with a tax professional at R.E. Cost Seg to determine which rules apply to their specific situation.
The Transitional Election Option
The OBBB Act includes a one-time transitional election that allows taxpayers to apply the lower rates that were in effect on January 19, 2025. This election applies only to property placed in service during the taxpayer's first tax year ending after January 19, 2025. After that transitional year, the 100% rate applies automatically with no option to elect lower rates.
Why Would Anyone Elect a Lower Rate?
In most cases, claiming 100% bonus depreciation makes sense. However, some situations favor preserving deductions for future years:
- Taxpayers with Net Operating Loss (NOL) carryforwards who cannot use additional deductions in the current year
- Investors who expect higher income in future tax years and want to maximize the value of deductions then
- Those facing passive activity loss limitations who cannot use losses against active income
Important Note on Passive Activity Losses:
Most real estate rental activities are considered passive. This means investors who do not qualify for Real Estate Professional Status generally cannot use bonus depreciation losses to offset W-2 wages or active business income. Instead, these losses are suspended and carried forward until the property is sold or the investor has passive income to offset.
Investors using the STR loophole through short-term rentals with material participation can treat rental income as non-passive. This allows them to use bonus depreciation losses against other income immediately.
The transitional election is optional. If you do not make the election, the 100% rate applies by default.
Business Impact Analysis
The return of 100% bonus depreciation delivers immediate cash flow benefits for real estate investors. Here is a concrete example.
Example Scenario:
A real estate investor purchases a $2 million commercial property in March 2025 after the OBBB Act's effective date. Assume $1.5 million is allocated to the building and improvements after subtracting land value.
A cost segregation study identifies $450,000 (30%) in components eligible for accelerated depreciation. These include 5-year, 7-year, and 15-year property such as electrical systems, flooring, site improvements, and specialized fixtures.
With 100% Bonus Depreciation:
The investor can deduct the full $450,000 in Year 1 through bonus depreciation alone.
At a 37% marginal tax rate, that equals $166,500 in first-year tax savings from the accelerated components.
Under the Old 40% Rate:
Only $180,000 ($450,000 × 40%) would be deductible via bonus depreciation in Year 1. The remaining $270,000 would be depreciated over the assets' regular recovery periods. In Year 1, this would add approximately $54,000 in regular MACRS depreciation (varying by asset class), bringing total first-year depreciation to roughly $234,000.
At the same 37% rate, first-year savings would total approximately $86,580.
The Difference: Roughly $80,000 in additional immediate tax savings under the new rules.
For properties already in service, investors can claim missed depreciation using Form 3115 to file a change in accounting method. This allows catch-up deductions without amending prior returns.
State Tax Conformity Warning
Federal bonus depreciation rules do not automatically apply at the state level. Many states have decoupled from federal bonus depreciation provisions, which affects the net benefit for multi-state investors.
States That Do Not Fully Conform:
Some states require add-backs for bonus depreciation claimed on federal returns. These include:
- California (fully decoupled)
- New York (fully decoupled)
- New Jersey (fully decoupled)
- Florida (requires add-backs despite conforming to 2025 IRC)
- Connecticut
- Illinois
- Delaware (partially decoupled for the new 100% bonus)
- Pennsylvania (partially decoupled)
States That Fully Conform:
Arizona, Colorado, Kansas, and West Virginia are among the states that fully conform to federal bonus depreciation rules.
Will I get the same bonus depreciation benefit on my state taxes?
It depends on your state. In decoupled states, you may claim 100% bonus depreciation on your federal return but owe additional state taxes because the deduction is added back to state taxable income. Some states allow the bonus depreciation to be spread over multiple years instead.
Note: State tax conformity rules change frequently. Always verify current rules with a tax professional familiar with your state. The team at R.E. Cost Seg can help you understand how state rules affect your total tax savings.
Cost Segregation and Depreciation Recapture
With 100% bonus depreciation restored, cost segregation studies become even more valuable. However, investors should understand how recapture works when selling property.
Key Recapture Rules:
- Section 1245 property includes personal property such as fixtures, carpet, and equipment. It also includes land improvements like parking lots, sidewalks, and landscaping. Gain on sale is recaptured as ordinary income up to the full amount of depreciation previously claimed.
- Section 1250 property includes buildings, structural components, and Qualified Improvement Property. Recapture applies only to depreciation taken in excess of straight-line amounts. For most real property, this means only the 25% unrecaptured Section 1250 gain rate applies rather than full ordinary income recapture.
The distinction matters. Personal property and land improvements (Section 1245) face full ordinary income recapture. Buildings and QIP (Section 1250) face more favorable recapture treatment.
If I take 100% bonus depreciation now, will I owe more taxes when I sell?
Potentially, yes. You are deferring taxes rather than eliminating them. However, the time value of money often makes accelerating deductions worthwhile. A dollar saved today is worth more than a dollar saved years from now.
A 1031 exchange can further defer recapture by rolling gains into a replacement property. Many investors combine cost segregation with 1031 exchanges as part of a long-term wealth-building strategy.
Quality cost segregation studies require thorough documentation. The IRS recommends that providers conduct site visits to ensure accurate asset classification and defensible results under audit.
Conclusion
The OBBB Act has delivered a significant win for real estate investors and business owners. By restoring 100% bonus depreciation with no scheduled expiration, the law allows property owners to write off 100% of qualifying asset costs in Year 1.
For property acquired on or after January 20, 2025, this means accelerated tax savings and improved cash flow from day one. However, investors should understand the passive activity loss rules that may limit their ability to use these deductions and plan accordingly.
Ready to see how much you could save?
A cost segregation study can identify every dollar of accelerated depreciation available on your property. R.E. Cost Seg provides engineering-based studies with comprehensive documentation designed to withstand IRS scrutiny.
Book a free consultation or request a savings estimate to discover your property's hidden tax benefits.
