What Is Bonus Depreciation?
Bonus depreciation accelerates depreciation timing. Instead of waiting years to recover costs, investors deduct a large share up front when property is placed in service. It applies to qualifying property with recovery periods of 20 years or less and is especially powerful when paired with cost segregation, which identifies short-life components inside real estate deals. The exact percentage depends on current law and transition rules, so timing and acquisition date matter.
Bonus depreciation is a first-year deduction rule that lets you immediately write off a percentage of qualifying short-life property, instead of spreading those deductions over 5, 7, or 15 years.
At a Glance
- Core idea: Pull future depreciation deductions into year one.
- What typically qualifies: 5-, 7-, and 15-year property (not the full 27.5- or 39-year building shell).
- Why investors care: Bigger year-one deductions can materially improve after-tax returns and liquidity.
- Where it shows up on filing: Commonly reported through Form 4562 workflows.
- Timing reality: Percentage depends on placed-in-service date and current law.
How It Works
Step 1: Identify qualifying basis. Bonus depreciation generally applies to property with a MACRS life of 20 years or less. In real estate, that's usually the short-life components surfaced by cost segregation, not the main building structure.
Step 2: Apply the year-specific percentage. The bonus rate is legislative, not fixed forever. Under prior TCJA phase-down rules, rates stepped down each year. 2025 introduced updated rules and a transition split tied to acquisition timing, which is why transaction dates and contract dates now matter in planning.
Step 3: Take first-year deduction, then depreciate the remainder. If 60% applies, you deduct 60% now and depreciate the rest on standard schedules. If 100% applies, that qualifying portion is fully deducted in year one.
Step 4: Model downstream effects. Accelerating deductions helps now, but it can increase future recapture exposure. Bonus depreciation is timing leverage, not free money.
Real-World Example
Example A: 60% scenario on a renovation-heavy asset.
An investor has $100,000 of qualifying short-life property. At 60%, first-year deduction is $60,000. At a 32% tax rate, that deduction is worth $19,200 in immediate tax reduction. The remaining $40,000 continues on regular depreciation schedules.
Example B: 100% scenario after law-change effective date.
A cost segregation study identifies $173,000 of qualifying basis in a newly placed-in-service project. At 100%, the full $173,000 is deducted in year one. At a 37% tax rate, that's about $64,010 in current-year tax impact.
Pros & Cons
- Significant first-year deductions when taxable income is high.
- Strong pairing with cost segregation for real estate investors.
- Improves near-term cash efficiency without changing rent or operations.
- Can create better reinvestment velocity when managed carefully.
- Future depreciation recapture exposure can increase at sale.
- Benefit depends on your actual tax posture (income, passive-loss limits, entity profile).
- Rules can change; assumptions hard-coded into old models become stale.
- State conformity may differ from federal treatment.
Watch Out
- Date mismatch risk: Eligibility can hinge on acquisition date, contract date, and placed-in-service date. Verify all three before filing.
- Modeling risk: Don't underwrite assuming 100% forever. Build conservative and downside tax scenarios.
- Conformity risk: Some states decouple from federal bonus depreciation. Federal savings may overstate total savings.
- Recapture risk: Front-loading deductions now can raise tax friction later if exit is unplanned.
- Documentation risk: Keep support for classification and placed-in-service timing. Weak files are where disputes start.
Ask an Investor
The Takeaway
Bonus depreciation is a timing tool that can materially improve year-one tax efficiency when used correctly. The mechanics are simple; the planning is not. Match your assumptions to current law, validate dates, and pair the strategy with clean documentation and an exit plan.