If you’ve been using bonus depreciation as part of your real estate investment strategy, you’ve probably noticed the landscape is changing. Bonus depreciation has been a huge tax-saving tool over the last few years, allowing you to write off a significant portion of your property’s cost upfront. But here’s the catch: bonus depreciation is on its way out—and fast.
The percentage dropped from 100% in 2022 to 80% in 2023, and in 2025, it’s going down to just 40%. By 2027, it will be gone altogether. So, if you’ve been depending on this benefit, it’s time to think about how this change will affect your bottom line and plan accordingly. The good news? There’s still a way to maximize deductions and lower your taxes—cost segregation is still a great option.
The Phase-Out: What’s Happening?
Here’s the breakdown of the upcoming bonus depreciation changes:
- 2022: 100% bonus depreciation (gone)
- 2023: 80% bonus depreciation
- 2024: 60% bonus depreciation
- 2025: 40% bonus depreciation
- 2026: 20% bonus depreciation
- 2027: Bonus depreciation phased out
With each drop, the benefit becomes smaller, but you still have time to take advantage of some upfront deductions in 2025.
How Cost Segregation Can Help
Even as bonus depreciation shrinks, cost segregation is still a powerful tool for real estate investors. If you’re not familiar with it, a cost segregation study allows you to break down your property into different components—like land improvements, personal property, and building systems. These can then be reclassified into shorter depreciation schedules (5, 7, or 15 years), helping you accelerate your deductions and reduce your taxable income.
Let’s say you bought a $2 million commercial property—through a cost segregation study, you might be able to identify 25-30% of that cost as eligible for shorter depreciation schedules. With 40% bonus depreciation in 2025, that still adds up to a pretty solid upfront deduction. Even after 2025, when bonus depreciation disappears, cost segregation will continue to help you spread out deductions over time and minimize taxes.
For a deeper dive into how cost segregation can enhance your tax strategy, check out our article on Cost Segregation: A Great Strategy When?
What Should You Do Now?
The clock is ticking, and bonus depreciation isn’t going to last forever. If you’ve recently bought or renovated a property, now is the time to act. The 40% bonus depreciation in 2025 is still worth taking advantage of, and a cost segregation study can help you get the most out of this opportunity.
Tax planning is more important than ever, and being proactive will ensure you’re prepared for future changes. It’s also worth staying updated on any potential changes to tax laws—there’s always a chance that Congress could make adjustments, especially in the midst of tax reform discussions.
To understand how combining cost segregation with other strategies can further enhance your tax benefits, read our post on Maximizing Your Tax Benefits: Combining Section 1031 Exchanges with Cost Segregation Studies.
