Bonus depreciation lets real estate investors deduct a large percentage of certain property costs in the first year, rather than spreading those deductions over decades. For 2025, the bonus depreciation rate is 40% of the cost of qualifying assets, and it continues to phase down each year until it expires entirely after 2026 under current law. The deduction applies not to the building itself but to specific components within a property, which is why it pairs so closely with a strategy called cost segregation.
How Bonus Depreciation Works
When you buy a rental or commercial property, the IRS requires you to depreciate most of the building’s value over a long timeline: 27.5 years for residential rental property and 39 years for commercial buildings. That means if you buy a $1 million commercial building, you can only deduct roughly $25,600 per year in regular depreciation. Bonus depreciation accelerates a portion of that by letting you write off qualifying components much faster.
The catch is that a building’s structure (walls, foundation, roof framing) doesn’t qualify. Bonus depreciation only applies to tangible property with a MACRS recovery period of 20 years or less. In a real estate context, that means components like appliances, carpeting, certain fixtures, landscaping, parking lots, sidewalks, and various mechanical systems. These items fall into 5-year, 7-year, or 15-year depreciation categories, and that shorter classification is what makes them eligible for the bonus deduction on top of their already faster schedule.
The Phase-Down Schedule
The Tax Cuts and Jobs Act of 2017 temporarily set bonus depreciation at 100%, meaning investors could deduct the entire cost of qualifying components in year one. That full write-off applied through 2022. Since then, the percentage has been stepping down by 20 points each year:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027 and beyond: 0% (unless Congress extends or modifies the provision)
If you place qualifying property in service during 2025, you can deduct 40% of its cost immediately. The remaining 60% gets depreciated over the asset’s normal recovery period. So a $200,000 pool of 15-year property identified through cost segregation would generate an $80,000 first-year bonus deduction in 2025, with the other $120,000 spread across the remaining recovery period.
What Qualifies in a Real Estate Property
The building shell itself, classified as either 27.5-year or 39-year property, does not qualify for bonus depreciation because it exceeds the 20-year recovery period cutoff. Land never qualifies for any depreciation at all. What does qualify are the shorter-lived components tucked inside and around the building.
Common examples in a typical rental or commercial property include flooring and carpet (5-year property), appliances and certain fixtures (5 or 7-year property), and site improvements like parking lots, fencing, and landscaping (15-year property). Electrical and plumbing systems that serve specific equipment rather than the building as a whole can sometimes be reclassified into shorter categories as well.
Certain property is specifically excluded. Assets required to be depreciated under the Alternative Depreciation System (ADS) don’t qualify. This matters for real estate investors who elect to use ADS for residential rental property, which some do to claim the qualified business income deduction. Listed property used 50% or less for business is also excluded, along with property placed in service and disposed of in the same tax year.
There is a newer carve-out worth knowing about. Starting in mid-2025, nonresidential real property used as an integral part of a qualified production activity may qualify for a special depreciation allowance if construction began after January 19, 2025, and the property is placed in service before 2031. This provision targets manufacturing and production facilities specifically, not typical rental properties.
Cost Segregation: Unlocking the Deduction
Most real estate investors can’t claim bonus depreciation without first performing a cost segregation study. When you purchase a building, the entire structure is typically classified under one long recovery period. A cost segregation study breaks the property apart, component by component, and reclassifies as many pieces as possible into 5-year, 7-year, and 15-year categories. Those reclassified assets then become eligible for bonus depreciation.
The study is typically performed by a team of tax professionals and engineers who review blueprints, construction records, cost details, and sometimes physically inspect the property. They determine what each component cost and which depreciation category it belongs in. For a commercial property, it’s common for 15% to 40% of the building’s cost to shift into shorter-lived categories, though the exact percentage depends heavily on the property type. A hotel with extensive fixtures and specialized systems will yield more reclassifiable assets than a basic warehouse.
Cost segregation studies generally cost several thousand dollars, with fees scaling based on property size and complexity. The tax savings often dwarf the cost of the study, especially on properties valued above $500,000. You don’t need to perform the study in the year you buy the property either. A “look-back” study lets you reclassify assets on a property you’ve owned for years and catch up on the missed accelerated depreciation in a single tax year.
A Practical Example
Say you buy a $2 million commercial building in 2025. After subtracting the land value (let’s say $400,000), you have $1.6 million in depreciable basis. Without cost segregation, the entire $1.6 million depreciates over 39 years, giving you roughly $41,000 in annual depreciation.
With a cost segregation study, suppose $400,000 of the building’s components get reclassified into 5-year, 7-year, and 15-year property. At the 2025 bonus depreciation rate of 40%, you can immediately deduct $160,000 of that $400,000. The remaining $240,000 of reclassified property depreciates on its shorter schedule, and the other $1.2 million that stayed in the 39-year category continues depreciating normally. Your first-year depreciation jumps dramatically compared to the standard approach.
What Happens When You Sell
Bonus depreciation is powerful on the front end, but it creates a tax obligation on the back end. When you sell a property for more than its depreciated value, the IRS recaptures the depreciation you claimed. For real estate, this falls under Section 1250 rules.
The portion of your gain attributable to depreciation, known as unrecaptured Section 1250 gain, is taxed at a maximum rate of 25%. That applies to all the straight-line depreciation you would have taken over time. If you used accelerated methods (including bonus depreciation) that exceed what straight-line depreciation would have been, the excess portion can be taxed at ordinary income rates, which could be significantly higher.
This doesn’t mean bonus depreciation is a bad deal. Deducting a large amount now and paying recapture tax years later still provides a meaningful time-value-of-money advantage. You’re essentially getting an interest-free loan from the IRS. Many investors also defer recapture entirely by using a 1031 exchange to roll the proceeds into another property, pushing the tax bill further into the future.
Who Benefits Most
Bonus depreciation delivers the biggest advantage to investors with significant taxable income to offset. If you’re a real estate professional for tax purposes (meaning you spend more than 750 hours per year materially participating in real estate activities), rental losses created by bonus depreciation can offset your W-2 or business income without the passive activity loss limits that apply to most investors.
For investors who don’t qualify as real estate professionals, the deduction still reduces taxable income from rental activities. Excess losses may be suspended under passive activity rules and carried forward to future years or used when the property is sold. The value also depends on your tax bracket: someone in the 37% bracket saves $37 for every $100 of bonus depreciation claimed, while someone in the 24% bracket saves $24.
With the bonus percentage dropping to 20% in 2026 and expiring after that, investors placing property in service sooner capture a larger immediate write-off. That said, the deduction doesn’t change the total amount of depreciation you’ll eventually claim over the property’s life. It simply moves more of it into the early years, which is most valuable when you have high current income and expect your tax rate to stay the same or decrease over time.