Property taxes can eat away at your investment returns faster than termites through wood. Smart investors know that depreciation is one of the most powerful tools in their arsenal for keeping more money in their pockets. But the rules are changing, and if you’re not paying attention, you could miss out on significant tax savings.
Understanding the 2025 Bonus Depreciation Shift
The landscape of property investment is shifting beneath our feet. Starting January 1, 2025, bonus depreciation drops from 60% to 40%. This means the window for maximizing your tax benefits is closing faster than most property owners realize.
Think about it this way. If you purchase a commercial property today and identify $500,000 in qualifying assets through a cost segregation study, you could potentially deduct $300,000 immediately with the current 60% bonus depreciation. Next year? That same property would only yield $200,000 in immediate deductions. That’s a $100,000 difference in your pocket – or rather, a $100,000 difference that stays out of the IRS’s pocket.
How Accelerated Depreciation Benefits Work in Practice
Most property owners treat their buildings like a single asset, depreciating everything over 27.5 or 39 years. That’s like driving cross-country in first gear – you’ll eventually get there, but you’re wasting tremendous potential.
Cost segregation studies break down your property into components with shorter depreciation lives. Carpet, landscaping, parking lots, specialized electrical systems – these items depreciate over 5, 7, or 15 years instead of decades. When you combine this with bonus depreciation, you’re essentially front-loading years of tax benefits into your first year of ownership.
A medical office building owner recently discovered this firsthand. His $3 million property contained over $800,000 in assets qualifying for accelerated depreciation. Instead of waiting 39 years to fully depreciate these components, he claimed $480,000 in year one. The cash flow impact transformed his entire investment strategy.
The Timeline That Matters
Here’s what property owners need to understand about the bonus depreciation phase-out schedule:
- 2023: 80% bonus depreciation
- 2024: 60% bonus depreciation
- 2025: 40% bonus depreciation
- 2026: 20% bonus depreciation
- 2027: 0% bonus depreciation
The Tax Cuts and Jobs Act created this benefit, but like all good things in the tax code, it’s temporary. Each year you wait costs real money.
Strategic Moves for Property Owners
Smart money doesn’t wait for opportunities to disappear. If you’re considering purchasing investment property, the math heavily favors acting before the 2025 bonus depreciation reduction. Even properties you already own might benefit from a look-back study if you haven’t maximized your depreciation benefits.
The accelerated depreciation benefits extend beyond just the immediate tax savings. That cash you keep from tax savings can be reinvested into more properties, improvements, or simply held as reserves. Money today is always worth more than money tomorrow – a fundamental principle that bonus depreciation acknowledges.
Consider a Utah apartment complex owner who implemented a cost segregation strategy. The $150,000 in first-year tax savings funded the down payment on another property. That second property generated its own accelerated depreciation benefits, creating a compounding effect that traditional depreciation could never match.
Beyond the Basics
Not every property component qualifies for bonus depreciation. Land improvements, qualified improvement property, and certain specialized systems make the cut. But structural components, the roof, and basic HVAC systems follow standard depreciation schedules.
This distinction matters because proper asset classification can mean the difference between maximizing and missing your benefits. A manufacturing facility might have specialized ventilation systems that qualify for accelerated treatment, while a standard office building’s basic HVAC would not.
Property type also influences the potential benefits. Hotels, restaurants, and medical facilities often contain more short-life assets than warehouses or basic retail spaces. Understanding your property’s unique characteristics helps set realistic expectations for tax savings.
The Real Cost of Waiting
Every month you delay is money left on the table. A property owner who waits until 2025 to conduct a cost segregation study loses 20% of their potential bonus depreciation benefit. On a typical commercial property with $400,000 in qualifying assets, that’s $80,000 in lost deductions.
But the impact goes deeper than just the percentage reduction. Property values continue rising in most markets. The property you buy in 2025 will likely cost more than the same property today, yet offer lower depreciation benefits. It’s a double hit to your investment returns.
Some property owners worry about depreciation recapture when they sell. Here’s the truth: you’ll face recapture whether you use standard or accelerated depreciation. The difference is that accelerated depreciation gives you use of that money throughout your ownership period. Used wisely, those tax savings can generate returns that far exceed the eventual recapture tax.
Making Your Move
The path forward is clear for property owners who understand the value of timing. First, evaluate your current properties for cost segregation opportunities. Many owners are surprised to learn they can perform retroactive studies on properties owned for years.
Next, accelerate any planned property acquisitions to capture higher bonus depreciation rates. The 20% difference between 2024 and 2025 could fund significant improvements or additional investments.
Finally, work with professionals who understand both the technical requirements and strategic implications of cost segregation. The wrong approach can trigger audits or miss legitimate deductions. The right approach maximizes your benefits while maintaining full compliance.
Property investment success comes from understanding and using every available tool. Bonus depreciation ranks among the most powerful, but only for those who act before the opportunity diminishes. The rules are changing, but your ability to benefit from them remains entirely in your control.
The question isn’t whether to use accelerated depreciation strategies. The question is whether you’ll act while the benefits remain substantial, or watch from the sidelines as they slowly disappear.
Frequently Asked Questions
What happens to bonus depreciation after 2026?
Unless Congress acts to extend or modify the current law, bonus depreciation will phase out completely by 2027. Property owners will return to standard depreciation schedules without the ability to front-load deductions. Some tax professionals expect new legislation before the complete phase-out, but planning based on current law remains the prudent approach.
Can I claim bonus depreciation on a property I’ve owned for several years?
Yes, through a retroactive cost segregation study. If you haven’t previously claimed accelerated depreciation on qualifying components, you can “catch up” those missed deductions. The IRS allows you to claim these benefits without amending prior returns by filing Form 3115 with your current year tax return.
Does bonus depreciation apply to used property purchases?
Absolutely. The current bonus depreciation rules apply to both new and used property acquisitions. As long as the property is new to you and meets other qualifying criteria, you can claim bonus depreciation on eligible components identified through a cost segregation study.
How much does a typical commercial property benefit from accelerated depreciation?
Most commercial properties contain 20-30% of their value in assets qualifying for accelerated depreciation. A $2 million office building might have $400,000-$600,000 in 5, 7, and 15-year property. With 60% bonus depreciation, that translates to $240,000-$360,000 in first-year deductions beyond standard depreciation.
What’s the minimum property value that makes cost segregation worthwhile?
While every situation differs, properties valued above $500,000 typically generate enough tax savings to justify the cost of a professional study. Properties over $1 million almost always benefit significantly. The 2025 bonus depreciation reduction makes acting on properties at the lower end of this range more urgent.
