The Big Beautiful Bill restored 100% bonus depreciation for qualifying property acquired after January 19, 2025. For real estate investors, this means the opportunity to deduct the full cost of eligible assets in the year they're placed in service. The result is accelerated tax savings and improved cash flow from day one.
However, not all property qualifies. The IRS has specific eligibility criteria that determine which assets can receive bonus depreciation treatment. Understanding these rules is essential before claiming this powerful deduction.
This guide provides a straightforward checklist to help you determine if your property qualifies.
What Is Bonus Depreciation?
Bonus depreciation allows taxpayers to deduct a specified percentage of an asset's depreciable basis in the year the property is placed in service. Rather than spreading deductions over decades, investors can front-load tax savings immediately.
The current bonus depreciation rates depend on when the property was acquired:
The bonus amount reduces your adjusted basis before calculating regular depreciation for subsequent years. This creates significant Year 1 tax savings for qualifying property.
Note: Many states do not conform to federal bonus depreciation rules and may require addback of bonus deductions. Consult state-specific guidance before filing.
The Bonus Depreciation Eligibility Checklist
Use this checklist to determine whether your property meets the IRS eligibility criteria for bonus depreciation.
Requirement #1: MACRS Property with a Recovery Period of 20 Years or Less
Bonus depreciation applies only to property depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less. Eligible property types include:
- 5-year property: Appliances, carpeting, and certain fixtures
- 7-year property: Furniture and equipment
- 15-year property: Land improvements such as parking lots, sidewalks, fencing, and landscaping
- Qualified Improvement Property (QIP): Interior improvements to nonresidential buildings
- Water utility property
- Computer software depreciable under § 167(f)
Note that land value is never depreciable. Only the building and its components qualify for depreciation treatment.
Exclusion: Property required to be depreciated under the Alternative Depreciation System (ADS) does not qualify for bonus depreciation. This includes tax-exempt use property, tax-exempt bond-financed property, and property used predominantly outside the United States.
Requirement #2: Original Use Must Begin with the Taxpayer (With Exceptions)
"Original use" means the first use to which the property is put. New construction and newly purchased equipment typically satisfy this requirement.
However, used property can also qualify if all three conditions are met:
- Neither you nor a predecessor used the property within the prior five calendar years
- You did not acquire it from a related party (family members or controlled entities)
- The property does not have a carryover basis from a gift or inheritance
Requirement #3: Acquisition Date Requirements
For 100% bonus depreciation, property must be acquired after January 19, 2025. The acquisition date is determined by when a written binding contract is entered into, not the closing date.
Important: If you entered into a written binding contract on or before January 19, 2025, the property is not treated as acquired after that date. This applies even if the property is placed in service after January 19, 2025. Such property would be subject to the phasedown rates (40% for 2025, 20% for 2026).
Requirement #4: Property Must Be Placed in Service
The property must be placed in service during the tax year. This means the asset is in a condition or state of readiness and available for its specifically assigned function.
For construction projects, each component may have a different placed-in-service date. The building shell, land improvements, and personal property components may require separate analysis.
Can I claim bonus depreciation on a property I purchased from another investor?
Yes. Used property can qualify for bonus depreciation if you meet specific requirements.
The IRS requires that you (or a predecessor) did not use the property within the prior five calendar years. You also cannot acquire the property from a related party such as a spouse, sibling, or controlled business entity. Finally, the property cannot have a carryover basis, such as assets received through a gift or inheritance.
Example: You purchase a 15-year-old retail building with existing HVAC systems and parking lot improvements. A cost segregation study would separately identify and value these components. Each component that meets the five-year lookback rule and other used property requirements can then qualify for bonus depreciation. The study is essential to properly document and quantify these eligible assets.
Qualified Improvement Property (QIP) – A Special Category
Qualified Improvement Property receives special treatment under bonus depreciation rules. QIP refers to any improvement made by the taxpayer to the interior portion of an existing nonresidential building after the building was first placed in service.
Key limitation: QIP only applies to nonresidential real property (39-year property). Interior improvements to residential rental property (27.5-year) do not qualify as QIP.
Common examples include updated lighting, new flooring, interior walls, and restroom renovations in office buildings, retail spaces, and warehouses.
However, not all interior work qualifies. The following are excluded from QIP treatment:
- Enlargements of the building
- Elevators or escalators
- Changes to the internal structural framework
QIP has a 15-year recovery period under MACRS. This makes it eligible for bonus depreciation. Commercial property investors who make interior renovations should ensure these improvements are properly classified to capture available deductions.
How do I identify which parts of my building qualify for bonus depreciation?
A cost segregation study is the answer. This engineering-based analysis separates your building into component parts. It identifies which assets qualify as personal property (5, 7, or 15-year recovery periods) versus structural components (27.5 or 39-year recovery periods).
Without a study, items like specialized electrical systems, decorative lighting, and certain HVAC components remain lumped into the building's long depreciation schedule. These assets miss out on bonus depreciation entirely.
Professional cost segregation studies often include site visits to document and photograph qualifying property. For properties already in service, investors can claim missed depreciation using Form 3115 to change their accounting method without amending prior returns.
Financial Example: How Bonus Depreciation Impacts a $2M Commercial Property
Consider an investor who purchases a $2 million commercial building. Without cost segregation, the entire depreciable basis is spread over 39 years.
This example assumes 20% of the building value is reclassified to 5, 7, and 15-year property. Results vary significantly based on property type, construction methods, and building use. A retail property may yield different results than an office building or warehouse. With 100% bonus depreciation applied, the investor in this scenario receives $129,000 in additional Year 1 tax savings.
Investors with Real Estate Professional Status can use these deductions to offset other income. Investors using the STR loophole through short-term rentals may also qualify to apply losses against active income.
How does bonus depreciation affect depreciation recapture when I sell?
When you sell, the IRS requires recapture of the depreciation you claimed. The tax treatment depends on the asset type:
- § 1245 property (personal property): Recaptured as ordinary income up to the amount of gain
- § 1250 property (real property such as land improvements and QIP): The portion of bonus depreciation that exceeds what straight-line depreciation would have been is recaptured as ordinary income. The remaining depreciation is taxed at 25% as unrecaptured § 1250 gain.
Accelerating depreciation does not create new tax liability. It shifts when taxes are paid.
Investors can defer both capital gains and recapture taxes by pairing bonus depreciation with a 1031 exchange. This strategy allows you to reinvest proceeds into a replacement property while postponing the tax bill.
Common Mistakes to Avoid
Pitfalls That Disqualify Property or Reduce Tax Benefits
1. Electing Out by Accident If you elect out of bonus depreciation for one asset class, the election applies to all property in that class placed in service during the tax year. However, revocation may be possible within six months of the original due date under Treasury Regulation § 301.9100-2(b). Consult a tax advisor if you need to revoke an election.
2. Missing the Acquisition Date The acquisition date is determined by when a written binding contract is executed. This is not the same as the closing date. Investors who signed contracts on or before January 19, 2025 do not qualify for the restored 100% rate, regardless of when the property is placed in service.
3. Failing to Segregate Costs Without a cost segregation study, qualifying assets remain buried in long-term depreciation schedules. This is the most common reason investors leave bonus depreciation on the table.
4. Overlooking Existing Properties Many investors assume bonus depreciation only applies to new purchases. Properties placed in service in prior years can still benefit through a Form 3115 accounting method change.
Bonus depreciation is back at 100% for property acquired after January 19, 2025. To qualify, your property must meet four key criteria: MACRS recovery period of 20 years or less, original use requirements (or the used property exception), proper acquisition timing based on binding contract date, and placement in service during the tax year.
A professional cost segregation study is the most reliable way to identify and document qualifying assets. Without one, eligible property often goes unrecognized, and bonus depreciation benefits are lost.
R.E. Cost Seg helps real estate investors maximize depreciation deductions through detailed, IRS-compliant cost segregation studies. Whether you recently acquired a property or own buildings placed in service years ago, there may be significant tax savings available.
