OBBBA revives bonus depreciation for real estate investments

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Under the One Big Beautiful Bill Act, or OBBBA, eligible real estate investments once again qualify for a bonus depreciation starting in 2025. This incentive may offer significant tax savings to real estate owners and investors starting this year.

What is bonus depreciation?

When you buy real estate, you typically can't deduct the entire purchase price right away. Instead, you depreciate it—spreading out the deduction over the property's useful life. Normal depreciation for residential real estate, for example, is calculated over 27.5 years, while commercial property is calculated over 39 years.

Compared to normal depreciations, bonus depreciations let you write off eligible property costs at an accelerated rate. These real estate bonus depreciations—made permanent for qualifying assets purchased after January 19, 2025, under the OBBBA—allow you to take large upfront deductions immediately instead of spreading the expense out.

To maximize their tax benefits, real estate bonus depreciations are often combined with deductions from Section 179 of the IRS tax code. Section 179 also offers immediate tax relief in the form of tax deductions for the full purchase price of qualifying business assets each year.

When using the two methods, Section 179 is applied first—and when its spending cap and net-loss limits are reached, the 100% bonus depreciation is applied.

Who is impacted

Real estate investors and business owners who own their business property may offset a sizable portion of their rental income or expenses.

Although buildings don't typically qualify for the bonus depreciation, elements that are part of real property—like office equipment and land improvements—can qualify for the bonus by reclassifying them into new categories with lifespans that are depreciable over 5, 7 or 15 years.

For example, the items below can be reclassified by conducting a cost segregation study that allows you to take advantage of the 100% depreciation provision for each category.

• 5-year property: Furniture and building fixtures
• 7-year property: Office equipment, including computers, copiers and printers
• 15-year property: Landscaping, fencing and parking area improvements

What action is required and when

In addition to purchasing the property and making it ready and available for rental or business use after January 19, 2025, there are a few other recommended actions for the 100% bonus depreciation provision.

1Ensure the assets are eligible

This typically includes tangible business assets with a useful life of 20 years or less. These assets can be purchased new or used—as long as they're new to the purchaser. For more information on the types of assets that qualify, explore Publication 946 from the IRS.

2Conduct a cost segregation study

Although it's not a requirement, a segregation study helps you maximize your deductions on real estate investments by reclassifying portions of your building, such as cabinets and fixtures, into items with shorter depreciation schedules that are eligible for the 100% bonus depreciation.

3Be mindful of variations by state

State participation in 100% bonus depreciation varies substantially. Although the bonus depreciation was permanently reinstated for federal taxes, most states haven't universally adopted the same approach, requiring an adjustment on your state return. Given the variation among states, be sure to discuss your state's treatment with your tax advisor when reviewing your tax plan.

The following states are expected to conform to the federal tax law on bonus depreciation but may have restrictions or exclusions.

4Consider your long-term investment goals

While 100% bonus depreciation provides enticing short-term tax advantages, there are long-term issues to address—including the possibility of depreciation recapture and the reduction of future deductions.

Depreciation recapture occurs when you sell an asset for a profit and the IRS requires you to pay taxes on the profit to recover the depreciation you claimed during ownership.

In certain instances, it may not be in your best interest to take advantage of the full 100% deduction. You may opt to take a lower depreciation if it better aligns with your long-term plans.

Who you should talk to now

Given the complexities of using the 100% bonus depreciation incentive, you should consult with tax professionals who are well acquainted with the OBBBA and can balance your immediate needs with your long-term goals.

To learn more about bonus depreciation under the OBBBA and how it may affect your real estate tax strategies, visit the IRS resource on One Big Beautiful Bill Act provisions or speak with your tax advisor and your First Citizens Wealth consultant today.