Bonus Depreciation Under OBBBA: What 100% Permanent Means for Real Estate Investors

For nearly four years, real estate investors watched one of the most valuable tax provisions in the Internal Revenue Code slowly erode. The 100% bonus depreciation allowance under IRC Section 168(k), which had supercharged cost segregation studies and first-year depreciation deductions since 2017, began its scheduled phasedown in 2023. That phasedown created uncertainty, delayed acquisitions, and complicated tax planning for investors across the country. The One Big Beautiful Bill Act (OBBBA) has now reversed course entirely, restoring 100% bonus depreciation on a permanent basis with no sunset provision. This article explains what changed, how the retroactive provisions work, and what real estate investors should be doing right now to take full advantage.

The TCJA Bonus Depreciation Timeline and Phasedown

The Tax Cuts and Jobs Act of 2017 expanded IRC Section 168(k) to allow 100% first-year bonus depreciation for qualified property placed in service after September 27, 2017, and before January 1, 2023. Any property eligible for bonus depreciation, including the shorter-lived components identified through a cost segregation study, could be fully expensed in the year it was placed in service. For real estate investors, this transformed cost segregation into an extraordinarily powerful tax planning tool capable of generating massive first-year deductions.

The TCJA included a built-in phasedown schedule that reduced the bonus percentage by 20 points per year beginning in 2023. Property placed in service during 2023 qualified for only 80% bonus depreciation. The rate dropped to 60% for 2024, was set at 40% for 2025, and would have fallen to 20% for 2026 before expiring entirely in 2027. Some investors accelerated acquisitions into 2022 to capture the full deduction, while others delayed cost segregation studies entirely, reasoning that the diminished bonus percentage no longer justified the study cost.

What the OBBBA Changed: Permanent 100% With No Sunset

The One Big Beautiful Bill Act restored the bonus depreciation rate to 100% for all qualified property and eliminated the phasedown schedule entirely. Unlike the TCJA provision, which included a defined expiration, the OBBBA makes 100% bonus depreciation a permanent feature of the tax code. There is no sunset date, no future phasedown, and no scheduled reduction. For the first time, real estate investors can plan multi-year acquisition and improvement strategies with confidence that the full first-year deduction will be available when they need it.

This permanence is significant beyond the immediate tax benefit. The TCJA's phasedown created a perverse incentive to rush acquisitions and defer dispositions, distorting normal investment decision-making. With a permanent 100% rate, investors can evaluate properties on their economic merits rather than racing against a legislative clock. The stability also makes it feasible to plan cost segregation studies years in advance and time them for maximum impact against projected income.

Retroactive Application to the Phasedown Years

One of the most consequential features of the OBBBA is its retroactive application. The Act applies the restored 100% rate to property placed in service during the phasedown years, meaning investors who claimed only 80% bonus depreciation in 2023 or 60% in 2024 are now entitled to the full 100% deduction for those years. Consider an investor who completed a cost segregation study on a property acquired in 2023 and reclassified $500,000 of components into five-year and fifteen-year recovery periods. At the 80% bonus rate, only $400,000 was deducted in the first year. Under the OBBBA retroactive provision, that investor can now claim the additional $100,000 through an amended return (Form 1040-X or 1120-X) or through a change in accounting method under IRC Section 481(a).

The accounting method change approach, filed on Form 3115, is often preferable because it captures the cumulative adjustment in the current tax year rather than requiring amendments to prior-year returns. This is particularly advantageous for investors who have already filed their 2023 and 2024 returns, as it avoids reopening those years while still capturing the full benefit of the restored rate. The choice between amending and filing a 3115 depends on the taxpayer's income profile in each year, the size of the adjustment, and the interaction with passive activity losses and net operating losses.

The Impact on Cost Segregation Studies

Permanent 100% bonus depreciation fundamentally changes the cost segregation calculus. During the phasedown, some advisors questioned whether studies delivered enough value to justify the engineering fees, particularly for smaller properties. With the rate restored permanently, that question is settled definitively in favor of conducting a study on virtually every investment property.

A cost segregation study identifies building components that can be reclassified from the default 27.5-year (residential) or 39-year (nonresidential) recovery period into shorter MACRS categories, typically 5-year, 7-year, and 15-year property. At 100% bonus depreciation, every dollar reclassified is fully deductible in the year the property is placed in service. For a typical residential rental, a study can reclassify 25% to 40% of the purchase price into bonus-eligible categories. On a $1 million property, that translates to $250,000 to $400,000 in additional first-year deductions.

The permanence of the provision also makes lookback studies more attractive than ever. Investors who acquired properties in prior years without a cost segregation study can perform a lookback study and claim missed depreciation through a Form 3115 change in accounting method, capturing years of unclaimed accelerated depreciation in a single tax year. The IRS has provided automatic consent for this type of method change under Revenue Procedure 2023-24.

Interaction With Section 179 Expensing

IRC Section 179 allows taxpayers to immediately expense qualifying property, subject to an annual dollar limit ($1,250,000 for 2026, indexed for inflation) and taxable income limitations. While Section 179 and bonus depreciation both achieve immediate expensing, they serve different planning purposes. Section 179 is limited to aggregate taxable income from active trades or businesses, meaning it cannot create or increase a net operating loss. Bonus depreciation under Section 168(k) has no such limitation and can generate losses carried forward under the NOL rules. For real estate investors who qualify as real estate professionals under IRC Section 469(c)(7), bonus depreciation is generally the more powerful tool.

However, Section 179 retains value when investors want to fine-tune taxable income rather than maximize deductions, as it can be applied selectively to individual assets rather than on an all-or-nothing basis.

Planning Opportunities Going Forward

The OBBBA creates particularly valuable opportunities for investors who postponed acquisitions or deferred cost segregation studies during the phasedown. Those who held off on purchasing investment properties in 2023, 2024, or early 2025 can now proceed with confidence that the full 100% deduction will be available. Investors who acquired properties during those years but chose not to conduct a study should revisit that decision immediately.

Every new acquisition of residential rental property, commercial real estate, or mixed-use property should include a cost segregation analysis as part of due diligence, commissioned before or immediately after closing to ensure reclassified components are captured on the first return filed after acquisition. Investors with existing portfolios should evaluate lookback studies on properties acquired in prior years. The combination of permanent 100% bonus depreciation and automatic consent procedures for depreciation method changes means the window for capturing these deductions is wide open, and the cost of a study is typically recovered many times over in the first year alone.

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This article is for informational purposes only and does not constitute legal or tax advice. Consult a qualified tax professional regarding your specific circumstances. AE Tax Advisors, 935 Lake Elmo Dr, Suite B, Billings, MT 59105. Phone: (631) 614-5762.