Bonus Depreciation in Commercial Real Estate: Rules, Timing, and Tax Benefits

It is a depreciation strategy that accelerates how investors recover the cost of certain purchases, including equipment, building components, and property improvements, instead of spreading deductions over several years. The result is a larger first-year write-off that reduces taxable income and frees up cash.

It applies to qualified assets with a recovery period of 20 years or less under the Modified Accelerated Cost Recovery System (MACRS). Commercial real estate investors most commonly use it on short-lived building components, land improvements, and equipment identified through a cost segregation study, because the building structure itself doesn't qualify.

For example, if you were to purchase property classified as qualified improvement property (QIP) and make interior upgrades, those improvements are eligible for bonus depreciation.

How Does Bonus Depreciation Work?

Bonus depreciation lets investors deduct the full cost of qualifying assets in the year they're placed in service, instead of over multiple years.

Bonus depreciation in real estate applies automatically to all qualifying assets placed in service during the tax year, without requiring any special election to claim it. It covers both new and used property, provided the asset is new to the taxpayer and wasn't acquired from a related party. To opt out, you must file an election statement by the return's due date, on a class-by-class basis, and that election is irrevocable.

The deduction equals the asset's cost multiplied by the applicable bonus rate.

For property acquired and placed in service after January 19, 2025, that rate is 100% under the One Big Beautiful Bill Act (OBBBA). For example, if you purchase and place in service $80,000 worth of qualifying fixtures and land improvements in 2026, you can deduct the full $80,000 in year one. Without bonus depreciation, that cost would be recovered over the asset's MACRS recovery period of five, seven, or 15 years depending on the asset class.

This accelerated deduction improves cash flow by front-loading tax savings, and it's especially useful for investors making leasehold improvements or deploying tenant improvement allowance funds.

Claiming bonus depreciation reduces your cost basis and creates a future recapture liability.

Claiming it requires IRS Form 4562, and understanding its basis impact is part of knowing how the deduction works. Once claimed, bonus depreciation reduces your cost basis in the asset. That means a portion of your gain at sale will be taxed as depreciation recapture. For most investors, however, the benefit of earlier tax savings outweighs the downside of the future recapture cost, particularly when there's time to plan your exit strategically.

Which Properties and Assets Qualify for Bonus Depreciation?

Bonus depreciation applies to tangible assets with a recovery period of 20 years or less but not to the building structure itself.

For CRE investors, the qualifying assets break down into four main classes:

Cost segregation unlocks bonus depreciation on the building's components.

The building structure itself doesn't qualify for bonus depreciation, because the IRS depreciates commercial property on a 39-year basis, and residential property on a 27.5-year basis, both beyond the 20-year threshold.

This is where cost segregation becomes essential. It breaks a property's purchase price or construction cost into its component parts, reclassifying eligible items into shorter recovery periods that qualify for bonus depreciation, which makes it an important step when you buy commercial property.

Used property can qualify under certain conditions.

If the taxpayer has no prior ownership interest in it, it wasn't acquired from a related party, and its basis isn't carried over from a previous owner, used property can qualify. This makes bonus depreciation available on value-add acquisitions and renovation projects involving secondhand equipment or materials. However, it's important to keep in mind that sale-leaseback arrangements and circular transfers are subject to IRS anti-abuse rules that can disqualify otherwise eligible assets.

In pass-through structures, elections are made at the entity level.

For investors holding property through partnerships, LLCs, or S corporations, real estate bonus depreciation elections are made at the entity level, not by individual partners or shareholders. If you hold assets through a pass-through structure, coordinate with your tax advisor to ensure elections align with your individual tax position, since the timing and size of deductions flowing through to partners can vary based on ownership percentages and entity-level elections.

If you're evaluating acquisition targets where bonus depreciation could apply, browsing available listings is a good starting point:

How Did the One Big Beautiful Bill Act Change Bonus Depreciation?

The OBBBA permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.

The Tax Cuts and Jobs Act (TCJA) introduced 100% bonus depreciation in 2017, but that rate began phasing down in 2023 by 20 percentage points per year toward zero. The OBBBA, signed into law on July 4, 2025, reversed that phase-down and permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.

Gray bars reflect bonus depreciation rates under the TCJA phase-down schedule. Red bars reflect the permanent 100% rate restored by the OBBBA for qualifying property acquired and placed in service after January 19, 2025. Property acquired on or before that date remains subject to prior phase-down rates.

The January 19 date is a hard cutoff. Property acquired on or before that date, including property purchased under a written binding contract signed before January 20, 2025, remains subject to the prior phase-down schedule, meaning 40% for most property placed in service in 2025 and 20% in 2026.

For CRE investors, this matters because the IRS generally treats the acquisition date, not the closing date, as the date a binding contract becomes enforceable. If your purchase agreement was signed before January 20, verify which rate applies before filing.

Phased projects can use the component election to qualify individual pieces.

Investors with phased renovation or ground-up development projects have an additional option: the component election. Even if a larger project began before the January 20 cutoff, individual components acquired and placed in service after that date can qualify for 100% bonus depreciation independently. This is particularly useful for investors looking to buy multifamily property or undertaking mixed-use developments where units or building systems come online at different times.

How Should Investors Think About Bonus Depreciation and Tax Planning?

Bonus depreciation front-loads tax savings, but it also creates a recapture liability at sale. Understanding that trade-off is key to deciding whether and when to claim it.

Bonus depreciation reduces your tax bill in the year of purchase, but it also reduces what the IRS considers your investment in the asset, which can have consequences when you exit.

When you sell, the IRS recaptures the depreciation you claimed and taxes it as income. For real property depreciated on a straight-line basis, that recapture is taxed at a maximum rate of 25%. But for short-lived personal property, including the fixtures, equipment, and land improvements most commonly claimed through bonus depreciation, recapture is taxed as ordinary income at your marginal rate, which can be as high as 37%. That distinction matters especially for investors who have used cost segregation to accelerate large deductions on personal property components.

Investors who roll proceeds into a new acquisition through a 1031 exchange, however, can defer recapture entirely until a future taxable sale.

Example assumes a $500,000 investment in 15-year qualifying property (such as land improvements) placed in service after January 19, 2025, eligible for 100% bonus depreciation under the OBBBA. The "without bonus depreciation" column applies straight-line depreciation over a 15-year recovery period, yielding an annual deduction of approximately $33,333. The 30% tax rate is illustrative. Actual savings depend on the investor's effective tax rate, entity structure, and applicable state tax treatment. Both scenarios are subject to depreciation recapture at sale, taxed as ordinary income up to 25% on the full amount of depreciation previously claimed.

Exit timing is the primary lever for managing recapture liability.

Selling in a low-income year keeps the recapture from pushing you into a higher bracket. Structuring the sale so payments arrive over multiple years, also known as an installment sale, spreads your tax liability across those years rather than concentrating it in one. Some investors use a sale leaseback to unlock capital without triggering recapture immediately. Selling in a low-income year, using a sale leaseback, or relying on another tool won't eliminate your liability, but they can help manage how much hits in a given year.

Whether bonus depreciation makes sense depends on your hold period and income trajectory. Use your rate of return and internal rate of return projections to model whether the benefit of taking larger deductions now outweighs the tax cost you'll pay later. For most investors running the numbers on an accelerated depreciation strategy, it does, but the answer changes if you're expecting significantly higher income in future years or a near-term sale.

Electing out of bonus depreciation is irrevocable and requires deliberate planning.

If you're likely to be in a high-income year or face a near-term sale, electing out may be worth evaluating. Bonus depreciation is applied automatically by asset class, and opting out requires filing a separate election statement for each class by the return's due date. That election is irrevocable, so the decision needs to be deliberate. The alternative is straight-line depreciation, which spreads deductions evenly over the asset's recovery period and may better match your income profile if deductions are more valuable to you in later years. Tools like a cash on cash return calculator and discounted cash flow models can help you run that comparison before filing.

Does Bonus Depreciation Apply to State Taxes?

Roughly two-thirds of states have historically decoupled from federal bonus depreciation rules, meaning investors may owe more state tax than their federal deduction suggests.

How much of your federal bonus depreciation deduction you actually keep depends largely on where your property is located. Federal bonus depreciation doesn't automatically apply at the state level. States set their own rules, and those rules fall into three categories:

• Full conformity: the state follows federal treatment
• Decoupled: the state requires you to add back the federal deduction and use its own depreciation schedule
• Partial conformity: the state conforms in some years or for some asset types but not others

The OBBBA hasn't changed the fact that many states remain decoupled from federal depreciation rules. California and New York, for example, do not conform so investors with assets in those states must add back any bonus depreciation claimed on their federal return and depreciate those assets separately for tax purposes. Colorado, Kansas, and Louisiana on the other hand, conform to federal rules.

State positions are also not static: several states are actively reviewing their conformity rules in response to the OBBBA, and legislative changes are possible.

Non-conforming states require separate depreciation schedules and reduce your net deduction.

The practical impact is significant. If you own property in a non-conforming state, your actual tax savings from bonus depreciation will be lower than the federal deduction suggests and you'll need to maintain two separate depreciation schedules. In those states, Section 179 is often worth evaluating, since many non-conforming states have higher conformity with Section 179 than with bonus depreciation. Before filing, confirm your state's current position with a tax advisor, especially if you hold property across multiple states.

Frequently Asked Questions

How did the One Big Beautiful Bill Act change bonus depreciation?

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. Before the OBBBA, bonus depreciation had been phasing down from 100% in 2022 to 80% in 2023, 60% in 2024, and 40% in early 2025, on track to reach 0% by 2027. The OBBBA reversed that schedule entirely. Property acquired on or before January 19, 2025, remains subject to the prior phase-down rates.

What's the difference between bonus depreciation and Section 179, and when should I use each one?

Both allow you to deduct the cost of qualifying assets in the year they're placed in service, but they work differently. Bonus depreciation applies automatically to all qualifying assets in a given class, has no dollar cap, and can also create a net operating loss. Section 179 lets you choose which assets to deduct and how much, but it's capped at $2.5 million in 2025 and can't be used to create a loss. For CRE investors operating in states that don't conform to federal bonus depreciation, Section 179 is often worth evaluating first because many non-conforming states accept Section 179 even when they require a bonus depreciation add-back on the state return.

What are the tax implications when I sell property that received bonus depreciation?

When you sell, the IRS taxes the depreciation you previously claimed as income rather than at the lower long-term capital gains rate. For real property depreciated on a straight-line basis, the maximum rate is 25%. For personal property, such as fixtures, equipment, and land improvements commonly claimed through bonus depreciation, recapture is taxed as ordinary income at your marginal rate, up to 37%. This is called depreciation recapture, and it applies to the full amount of bonus depreciation taken, not just a portion.