OBBB Breakdown: Bonus Depreciation Explained
In our last blog on the One Big Beautiful Bill Act (OBBB), we discussed changes to itemized deductions. In this post, we focus on one of the most valuable tax benefits for real estate investors: bonus depreciation.
Depreciation has long been one of real estate’s biggest tax advantages. The OBBB reintroduced bonus depreciation, making this benefit even more powerful.
Depreciation Basics
Depreciation allows investors to spread the cost of a property over time. Depreciation allows for residential rental property to be depreciated over 27.5 years and commercial property over 39 years. Land is not depreciable for either commercial or residential real estate property.
For example, a $275,000 rental property (excluding land) provides about $10,000 in annual deductions. These deductions reduce taxable income and improve after-tax cash flow.
Types of Depreciation
Most real estate is depreciated using the straight-line method—an even deduction each year over the life of the property.
However, a cost segregation study can reclassify parts of a property into shorter recovery periods:
- 5-year property (appliances, fixtures)
- 7-year property (furniture, equipment)
- 15-year property (parking lots, landscaping, fencing)
These shorter lives create opportunities for accelerated depreciation, and with bonus depreciation, they can often be deducted immediately.
Bonus Depreciation Returns
For buildings purchased after January 19, 2025, the OBBB reinstates bonus depreciation for property with a useful life of 20 years or less. This allows investors to deduct qualifying assets in the year they are placed in service.
Examples of qualifying assets include:
- Appliances (5 years)
- Carpets and flooring (5–7 years)
- Parking lots, landscaping, and fencing (15 years)
Planning Idea: Bonus depreciation provides a powerful opportunity for investors with long-term horizons, but timing is everything. If you are considering a property purchase, pairing it with a cost segregation study may unlock immediate deductions that can improve cash flow right away. At the same time, short-term investors should model how recapture would impact their eventual sale. Talking through these scenarios before filing taxes can help avoid costly surprises and ensure your depreciation strategy aligns with your overall financial plan.
What Doesn’t Qualify
As previously noted, not every aspect of real estate qualifies for bonus depreciation. First, land is not eligible for any depreciation.
Additionally, assets with a useful life of greater than 20 years are not eligible for bonus depreciation from the OBBB tax legislation. For example, the wooden structure of an apartment building—including framing—must be depreciated over 27.5 years. Since that exceeds the 20-year rule, it does not qualify for bonus depreciation.
This is why cost segregation studies matter. They allow you to separate eligible components from the building itself, unlocking the ability to use bonus depreciation.
Planning Idea: For discerning investors, taking the time to understand the building(s) purchased/developed can foreshadow expected depreciation pass-thru's. For example, apartment buildings built on the periphery of urban centers may offer greater depreciation than industrial buildings because apartment "finishes" are more expensive than tenant improvements for industrial tenants. Additionally, it's imperative to review legal documents to know that depreciation is passed along to investors on a pro-rata basis.
Section 179 vs. Bonus Depreciation
Both Section 179 and bonus depreciation allow immediate expensing, but there are key differences:
- Section 179 has dollar limits ($1.22M in 2025) and generally applies to business equipment, vehicles, and certain property improvements.
- Bonus depreciation has no dollar limit and applies broadly to qualifying real estate components with a useful life of 20 years or less.
For most real estate investors, bonus depreciation is the more impactful tool.
What If Bonus Depreciation Didn’t Exist?
Without the OBBB, investors would be left with only straight-line depreciation on the building (27.5 or 39 years). There would have remained limited acceleration from items identified in a cost segregation. These "cost seg" items would have been depreciated over 5 - 15 years.
The result: smaller deductions each year and less upfront tax savings. Bonus depreciation reintroduces the ability to front-load deductions, significantly improving cash flow in the early years of ownership.
When Depreciation Might Not Make Sense
Depreciation comes with a catch called recapture tax. When a property is sold, the IRS “recaptures” depreciation taken and taxes it at up to 25%. This is higher than the 20% long-term capital gains rate.
Short-term developments or flips: Depreciation may not make sense, as you get the deduction now but pay it back quickly at a higher rate.
Long-term holds: Depreciation usually makes sense, since the upfront savings outweigh the recapture. A 1031 exchange can also defer recapture into the future.
Strategic Considerations
When deciding whether to use bonus depreciation, investors should think carefully about both their investment horizon and their tax strategy. For those planning to hold a property long-term, the upfront tax savings created by bonus depreciation often outweigh the recapture costs later. The ability to improve cash flow early in the life of an investment can make a meaningful difference in how quickly the property begins to pay for itself.
On the other hand, if an investor plans to sell a property in the near future—particularly in development projects or short-term flips—the recapture tax can quickly erase the benefits of accelerated deductions. In those cases, it may make sense to limit depreciation or carefully time improvements so that the recapture burden is smaller when the property is sold.
Because each situation is unique, investors should model different scenarios with their advisors. Bonus depreciation can be a tremendous advantage when paired with a thoughtful exit strategy, but without planning it can create surprises at tax time.
Key Takeaways
Depreciation is one of the most powerful tools available to real estate investors, reducing taxable income and increasing after-tax cash flow. The return of bonus depreciation under the OBBB strengthens this advantage by allowing certain parts of a property to be written off immediately. However, not every asset qualifies. Buildings themselves must still be depreciated over decades, while only assets with a useful life of 20 years or less are eligible.
Just as important, investors must remember that depreciation is not “free money.” The IRS will eventually reclaim part of the benefit through depreciation recapture. This means strategy is key. Long-term investors can use depreciation to improve cash flow and defer taxes for years, while short-term investors may want to minimize its use. The best results come from matching your depreciation strategy to your investment goals and exit plans.
In our next post, we will discuss the tax savings available for seniors under the OBBB. If you have specific questions on how the new tax bill impacts your financial or tax situation, please click here to schedule a time with Niko Finnigan, partner at Delta Wealth.