Bonus Depreciation 2025-2026: What Real Estate Investors Need to Know

Bonus depreciation under IRC Section 168(k) has been one of the most powerful tax tools available to real estate investors. But the 100% bonus depreciation that investors enjoyed from 2018 through 2022 is phasing down, and the window to maximize this benefit is shrinking.

Here is what you need to know about bonus depreciation in 2025 and 2026, and how to structure your investments to capture the maximum available benefit.

The Current Phase-Down Schedule

Under the Tax Cuts and Jobs Act of 2017, bonus depreciation is being reduced by 20 percentage points per year for property placed in service after December 31, 2022:

• 2023: 80% bonus depreciation
• 2024: 60% bonus depreciation
• 2025: 40% bonus depreciation
• 2026: 20% bonus depreciation
• 2027 and beyond: 0% bonus depreciation (unless Congress extends it)

These rates apply to the year the property is "placed in service" -- meaning the year it is ready and available for its intended use. For rental properties, this is typically the year you begin renting to tenants.

What This Means for Cost Segregation

Cost segregation identifies building components that qualify for 5-year, 7-year, and 15-year MACRS depreciation. These shorter-lived assets are eligible for bonus depreciation. As bonus depreciation phases down, the first-year benefit of cost segregation decreases.

Here is a practical example. Suppose a cost segregation study identifies $400,000 in 5-year and 15-year property on a $2 million rental.

If you perform the study for 2025 (40% bonus):
First-year bonus depreciation: $400,000 x 40% = $160,000
Remaining $240,000 depreciated over 5-15 years using MACRS schedules
Total first-year deduction: approximately $208,000

If you wait until 2026 (20% bonus):
First-year bonus depreciation: $400,000 x 20% = $80,000
Remaining $320,000 depreciated over 5-15 years
Total first-year deduction: approximately $144,000

The difference: $64,000 in additional first-year deductions by acting in 2025 instead of 2026. At a 37% tax rate, that is $23,680 in additional tax savings -- just from timing.

Strategies to Maximize Remaining Bonus Depreciation

Accelerate Cost Segregation Studies

If you own properties that have not had cost segregation studies performed, act now. The higher bonus depreciation rate available today makes the study more valuable than it will be next year or the year after. This is especially true for Form 3115 catch-up filings, where the cumulative missed depreciation can be taken as a single-year adjustment.

Time Property Acquisitions Strategically

If you are planning to acquire property, consider the bonus depreciation implications of when the property is placed in service. Closing in December 2025 versus January 2026 could mean the difference between 40% and 20% bonus depreciation on segregatable components.

Consider Improvement Projects

Qualified improvement property (QIP) -- interior improvements to nonresidential buildings -- is eligible for bonus depreciation as 15-year property. If you are planning renovations to commercial or nonresidential properties, completing them while bonus depreciation rates are higher maximizes the deduction.

Evaluate Partial Asset Dispositions

Under the partial asset disposition rules (Treasury Regulation Section 1.168(i)-8), when you replace a building component, you can dispose of the old component and claim a loss deduction. Combined with bonus depreciation on the replacement component, this creates a double tax benefit. The strategy is more valuable while bonus depreciation rates remain elevated.

Will Congress Extend Bonus Depreciation?

There is ongoing legislative discussion about restoring 100% bonus depreciation. Various bills have been proposed, and the real estate industry has been actively lobbying for extension. However, no legislation has been enacted as of this writing, and prudent tax planning should be based on current law rather than speculation about future changes.

If Congress does extend or restore bonus depreciation, investors who have already performed cost segregation studies will benefit immediately. If it does not extend, investors who acted while rates were higher will have captured the maximum available benefit.

Action Steps for 2025

1. Identify all properties that have not had cost segregation studies performed
2. Evaluate each property for cost segregation potential based on basis, age, and type
3. Commission studies on qualifying properties before year-end to capture 2025 bonus rates
4. File Form 3115 for prior-year catch-up where applicable
5. Time any planned property acquisitions to maximize bonus depreciation benefits

AE Tax Advisors helps real estate investors navigate the changing bonus depreciation landscape. Contact our team at (631) 614-5762 or team@aetaxadvisors.com to discuss your properties and develop a strategy that captures the maximum available benefit before rates decline further.