Updated · Part of the CRE investment glossary
How bonus depreciation works
Normally the cost of business property is deducted over its recovery period under MACRS. Bonus depreciation lets the owner deduct a percentage of the cost of qualified property in the first year instead; whatever basis is left is depreciated over the regular schedule. Unless the owner elects out, it applies automatically.
Qualified property is, mainly, tangible property depreciated under MACRS with a recovery period of 20 years or less, plus certain computer software and a few other categories (IRS Publication 946). It can be new or certain used property. In real estate the building itself — 27.5-year residential rental or 39-year nonresidential property — does not qualify, but its shorter-lived parts can: appliances, carpet and fixtures (often 5- or 7-year property), land improvements such as paving and landscaping (15-year), and qualified improvement property, the interior improvements to an existing nonresidential building (15-year). A cost segregation study is how owners identify them.
The 2025 change
The Tax Cuts and Jobs Act of 2017 set bonus depreciation at 100% and then phased it down from 2023. The One, Big, Beautiful Bill Act (Public Law 119-21) reinstated a permanent 100% allowance for qualified property acquired and placed in service after January 19, 2025. The IRS issued interim guidance in Notice 2026-11, and taxpayers may generally rely on the existing bonus depreciation regulations.
The acquisition date decides which rule applies, and property acquired under a written binding contract signed before January 20, 2025 is treated as acquired then. That property stays on the old phase-down: 40% if placed in service in 2025. For the first tax year ending after January 19, 2025, taxpayers may also elect 40% instead of 100% on newly acquired property (60% for certain long-production property).
The formula
For one asset, in the year it is placed in service:
Bonus deduction = qualified basis × bonus % Year-1 depreciation = bonus deduction + regular MACRS on (basis − bonus deduction)
- Qualified basis: the cost of property with a recovery period of 20 years or less, net of any section 179 expensing.
- Bonus %: 100% for qualified property acquired after January 19, 2025, unless the taxpayer elects out or elects the lower transition rate.
- Regular MACRS: the remaining basis over its 5-, 7- or 15-year life, with the applicable convention.
Worked example: the acquisition date decides
A partnership buys an apartment property in 2025 and places it in service the same year. A cost segregation study identifies $1,500,000 of 5-, 7- and 15-year property. If the purchase contract was signed after January 19, 2025, the whole $1,500,000 is deducted in year one. If the binding contract was signed in December 2024, the 40% phase-down rate applies: $600,000 of bonus depreciation, and the remaining $900,000 is depreciated over the regular 5- to 15-year schedules. Either way, the building’s own basis stays on 27.5 years.
| Line | Contract after Jan. 19, 2025 | Binding contract before Jan. 20, 2025 |
|---|---|---|
| 5-, 7- and 15-year basis | $1,500,000 | $1,500,000 |
| Bonus rate | 100% | 40% |
| Bonus depreciation in year 1 | $1,500,000 | $600,000 |
| Left for regular MACRS | $0 | $900,000 |
What to watch for in real estate
Bonus depreciation moves deductions earlier; it does not add to them, and it has conditions:
- Electing real property trades or businesses: a partnership that elects out of the business-interest limit must use the alternative depreciation system for its buildings and qualified improvement property, and property required to use ADS does not get bonus depreciation.
- Recapture: when the property is sold, gain on the expensed short-life property is generally ordinary income under §1245, up to the depreciation taken.
- Investors’ limits: a syndication passes the deduction to partners on their K-1s, and basis, at-risk and passive activity rules decide whether each partner can use the loss this year.
- Electing out: the election is made by class of property, by the partnership — not partner by partner.
- State tax: some states do not follow federal bonus depreciation.
- Manufacturing buildings are different: the 2025 law also added a separate 100% allowance for qualified production property under new §168(n); it is for manufacturing and production facilities, not rental real estate.
Primary sources
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.