- 01Bonus depreciation dropped from 100% (2017-2022) to 40% in 2025 — it falls another 20% each year and hits 0% in 2027
- 02A cost segregation study on a $300,000 rental can still reclassify $75,000-$90,000 of the building into 5, 7, and 15-year components eligible for accelerated write-offs
- 03Section 179 allows $1,220,000 in immediate expensing for 2025 — but only on specific personal property components, not the building structure itself
- 04Pairing depreciation with a 1031 exchange lets you defer capital gains AND depreciation recapture — the two-punch combo that builds real wealth
- 05Even at 40%, bonus depreciation on a $75,000 cost seg allocation saves a 35% tax bracket investor $10,500 in year one
Show Notes
Show Notes
From 2017 to 2022, investors could write off 100% of accelerated depreciation in year one through cost segregation. A $300,000 rental could generate $75,000+ in paper losses. That era is over. The Tax Cuts and Jobs Act set an expiration clock, and in 2025 you're at 40%. By 2027, it's zero. But the tax break isn't dead — you need to adjust the playbook.
The Phase-Out Schedule
The rate applies to the year a property is placed in service — meaning rent-ready, not the year you bought it. A property purchased in December 2024 but finished rehabbing in February 2025 gets the 2025 rate.
Year | Bonus Depreciation Rate |
|---|---|
2017-2022 | 100% |
2023 | 80% |
2024 | 60% |
2025 | 40% |
2026 | 20% |
2027+ | 0% |
Cost Segregation: Still the Best $5,000 You'll Spend
Standard residential depreciation spreads the building's value over 27.5 years — $9,091/year on a $250,000 depreciable basis. A cost segregation study identifies components that qualify for 5, 7, and 15-year schedules: appliances and carpet (5-year), cabinets and countertops (7-year), landscaping and fencing (15-year).
On a typical $300,000 rental, a cost seg reclassifies $75,000-$90,000 into these shorter categories. At 40% bonus depreciation in 2025, that $75,000 generates an immediate $30,000 deduction, plus normal depreciation on the remaining $45,000 over 5-15 years. A study costs $3,500-$7,000. On a $300,000+ property, spending $5,000 to unlock $30,000 in deductions that save $10,500 at a 35% bracket is still an absurd return.
Section 179: The Misunderstood Alternative
Section 179 lets you expense qualifying property fully in year one. The 2025 limit is $1,220,000 with a phase-out starting at $3,050,000. But it applies to personal property only — appliances, fixtures, furniture, certain HVAC systems, and some interior improvements. Not the building, roof, or foundation.
For a rental, Section 179 typically covers $15,000-$40,000 in qualifying items. The real power comes when you pair it with a cost seg study: the study identifies everything that qualifies, Section 179 lets you deduct 100% in year one with no phase-out and no sunset. Unlike bonus depreciation, Section 179 isn't going away.
One catch: Section 179 can only reduce business income to zero — it can't create a loss. Bonus depreciation can, which matters if you're using real estate losses to offset W-2 income.
Real Math: What 40% Saves You Today
A duplex in Birmingham for $278,000. Land: $28,000. Depreciable basis: $250,000. Placed in service April 2025.
Without cost seg: $250,000 / 27.5 years = $9,091/year. At 35% tax rate, that's $3,182 in annual savings.
With cost seg: $80,000 reclassified to short-life components. At 40% bonus, $32,000 is deductible immediately. Plus $6,182/year on the $170,000 building balance, plus roughly $7,000 first-year normal depreciation on non-bonus short-life assets. Total year-one depreciation: $45,182. At 35%, that's $15,814 in tax savings — $12,632 more than without the study. Use it as a down payment on the next property or park it in reserves.
The Depreciation + 1031 Combo
Depreciate aggressively using cost segregation over 5-7 years. Those deductions reduce taxable income annually. When you sell, the IRS wants it back through depreciation recapture at 25%. On $100,000 in accumulated depreciation, that's a $25,000 bill — on top of capital gains tax.
A 1031 exchange lets you sell and reinvest into a like-kind property, deferring both capital gains and depreciation recapture. Sell the Birmingham duplex for $347,000 after 5 years — without a 1031, you'd owe roughly $42,250 in combined taxes. With a 1031 into a $500,000 fourplex in Memphis, you pay $0 today. Start a fresh cost seg on the new property and the cycle continues.
When you die, the basis steps up — your heirs inherit at fair market value and the deferred tax bill disappears. For the full breakdown, see the tax strategy guide.
What to Do Right Now
- Close and rehab fast in 2025. Every month of delay moves you closer to 20% in 2026.
- Get a cost seg study on every rental you own. Even properties bought years ago qualify for a "look-back" study — your CPA files Form 3115 and you take catch-up depreciation in a single year.
- Pair Section 179 with remaining bonus depreciation. The combination still produces serious year-one deductions. Push your CPA past straight-line defaults.
Resources Mentioned
- Tax Strategy Guide for Real Estate Investors — depreciation, 1031 exchanges, entity structure, and long-term tax planning
- Cost Segregation Explained — how the study works, what qualifies, and when to order one
- 1031 Exchange: The Complete Guide — timelines, rules, qualified intermediaries, and common mistakes
- Deal Analysis Guide — incorporating depreciation benefits into your deal-level return calculations
- IRS Publication 946: How to Depreciate Property — the official IRS reference for depreciation methods, MACRS tables, and Section 179 limits
The ratio of a loan amount to a property's appraised value, expressed as a percentage — a 75% LTV on a $200,000 property means a $150,000 loan and $50,000 in equity.
Read definition →A short-term, asset-based loan from a private lender, typically used to finance property acquisitions and renovations at higher interest rates than conventional mortgages, with the property itself as collateral.
Read definition →Conditions in a purchase contract that must be met for the deal to close. If they're not satisfied, you can walk away—and usually get your earnest money back.
Read definition →A deposit you put down when your offer is accepted—to show you're serious. It's held in escrow until closing and typically refundable if you back out for a valid reason under your contingencies.
Read definition →Capital gains tax is the federal (and sometimes state) tax you owe when you sell an asset—like a rental property—for more than you paid for it.
Read definition →
