Bonus depreciation explained

Depreciation normally makes you deduct an asset over its useful life, a slice each year. Bonus depreciation is the exception that lets you skip the waiting and deduct the whole thing in the first year. For real estate investors, it is the engine that turns a cost-segregation study from a nice timing trick into a giant year-one deduction.

The rule is simple to state. Property with a recovery period of 20 years or less can be fully deducted the year you place it in service. That covers the 5, 7, and 15-year buckets a study pulls out of a building: the appliances, the flooring, the specialized wiring, the parking lot, the landscaping. It does not cover the building itself, which sits on the 27.5 or 39-year clock, above the 20-year line.

Bonus depreciation applies to the short-life property inside and around a building, not the building itself, which is why cost segregation and bonus depreciation are a matched pair.

The rollercoaster, and why timing is everything

Bonus depreciation has a history that matters, because the rate has swung wildly and the year your property was placed in service decides which rate you get.

The 2017 tax law set bonus depreciation at 100%, then wrote in a phase-down. Starting in 2023 the rate dropped 20 points a year: 80% in 2023, 60% in 2024, 40% for the first stretch of 2025, on a path to zero by 2027. Investors spent those years racing deadlines, because every year of delay meant a smaller first-year write-off.

Then the 2025 tax law reversed it. For property placed in service after January 19, 2025, bonus depreciation is back to 100%, and this time it is permanent. No phase-down, no expiration. The race against the clock is over.

The bonus rate you get is set by the date the property was placed in service, and after January 19, 2025 that rate is 100% with no expiration.

The two dates that trip people up

There are two wrinkles in that 2025 restoration that most summaries skip, and both can cost real money.

First, the very start of 2025 is a dead zone. Property placed in service between January 1 and January 19, 2025 still gets only the old 40% rate. The 100% rate begins January 20. A closing three weeks apart can mean the difference between deducting 40% and 100% of your short-life property in year one.

Second, it is not just about when you place the property in service; it is also about when you acquired it. If you signed a binding written contract to buy before January 20, 2025, the property generally stays on the old 40% schedule even if you place it in service later. So a deal you contracted in late 2024 and closed in mid-2025 may be stuck at 40%, not 100%. This is the kind of detail a good advisor checks before you assume a full write-off.

What it does to a real deal

Return to a $1,000,000 rental: $200,000 land, $800,000 building. A cost-segregation study reclassifies $200,000 of that building into 5, 7, and 15-year property.

Without bonus depreciation, that $200,000 would still be deducted faster than the building, but spread across those 5 to 15-year clocks, a few tens of thousands a year. With 100% bonus depreciation, the entire $200,000 is deductible in year one, stacked on top of the normal depreciation on the rest of the building. First-year depreciation goes from about $29,000 to roughly $222,000. That is the whole reason cost segregation and bonus depreciation are discussed in the same breath: the study finds the short-life property, and bonus depreciation lets you deduct all of it now.

A cost-segregation study without bonus depreciation speeds deductions up; a study with 100% bonus depreciation collapses them into a single year.

The catch that outlasts the deduction

A 100% write-off is not free money; it is borrowed. Every dollar you deduct now lowers your basis in the property, and a lower basis means a larger taxable gain when you sell. Part of that gain comes back as depreciation recapture, some of it taxed as ordinary income. Bonus depreciation does not erase tax; it moves it from now to the sale, betting that a deduction today is worth more than the tax bill later, and that you can defer or manage that bill when it arrives.

And the deduction is only useful if you can use it. A large bonus-driven loss on a passive rental cannot offset your salary; it waits until you have passive income or you sell. The routes that unlock it, real estate professional status and the short-term-rental exception, live in the advanced strategies pillar, and they are the difference between a bonus deduction that cuts your tax this year and one that sits on the shelf.

The bottom line

• Bonus depreciation deducts the full cost of property with a 20-year-or-less life in year one.
• It applies to the short-life property a cost-segregation study finds, not to the building itself.
• After January 19, 2025 the rate is 100% and permanent; the old phase-down toward zero is gone.
• Watch two dates: the January 1-19, 2025 gap still runs at 40%, and a pre-January 20 acquisition contract can lock in the old rate.
• The deduction lowers your basis, raising recapture at sale, and only helps if you can use the loss this year.

For how bonus depreciation differs from the other first-year write-off, read Section 179 vs bonus depreciation. To see where it fits, start at the depreciation and cost segregation hub.

Last verified August 2026.