Bonus Depreciation
Bonus depreciation is an additional first-year federal tax deduction on qualifying tangible property with a recovery period of 20 years or less — often used with cost segregation to front-load real estate depreciation.
What it means
Bonus depreciation (IRC § 168(k)) allows taxpayers to deduct a percentage of the cost of qualifying depreciable property in the first year it is placed in service, on top of regular depreciation. The rate has varied by year — 100% through 2022, phasing down by 20 percentage points per year (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, 0% in 2027 absent legislative change).
Bonus depreciation applies to property with a recovery period of 20 years or less, which means it does not apply to the 27.5-year or 39-year building shell. It does apply, however, to the 5-, 7-, and 15-year components that cost segregation studies identify. The cost seg + bonus combination is the primary tax strategy for CRE acquisitions.
Example
A $5M multifamily purchase with $3M depreciable basis. A cost seg study reclassifies $900K into 5/7/15-year components. At 40% bonus (2025), the owner deducts $360K in year one on top of regular depreciation on the reclassified amount.
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