Tax Strategy Alert: 100% Bonus Depreciation is Permanently Restored
How 100% Bonus Depreciation Can Boost Your Real Estate Cash Flow and Tax Shelter Potential
We have gotten several calls in the past few weeks from folks regarding the topic of 100% Bonus Depreciation. Something that was included in the July 2025 congressional legislation. As your partners at KW Regional Advisors, we believe this is one of the most powerful tax tools available right now for those looking to acquire or substantially improve commercial property in the Central Coast and San Fernando Valley.
1. The Legislation: A Permanent Restoration
As you may know, the 2017 Tax Cuts and Jobs Act (TCJA) introduced 100% bonus depreciation, but it was set to phase out, dropping to 60% in 2024, 40% in 2025, and disappearing entirely by 2027.
The critical news is that Congress has intervened. With the passing of the "One Big Beautiful Bill Act" in July 2025, the scheduled phaseout has been entirely eliminated.
The Key Takeaway: 100% Bonus Depreciation is now permanently reinstated for qualifying property that is both acquired and placed in service on or after January 20, 2025. This certainty allows for predictable, long-term tax planning.
2. What is 100% Bonus Depreciation?
Bonus depreciation is an accelerated tax incentive that allows a business or investor to deduct a substantial percentage (now 100%) of the cost of eligible property in the year it is placed in service, instead of spreading that deduction out over its much longer useful life.
- The Standard Way: Commercial buildings are typically depreciated over 39 years, meaning you can only deduct about 2.56% of the cost each year.
- The Bonus Way (100%): This provision allows you to write off the entire cost of eligible assets immediately, significantly reducing your taxable income in the first year.
The deduction is automatic unless you elect out of it, and, crucially, unlike some other expensing methods (like Section 179), bonus depreciation can be used to create or increase a net operating loss (NOL), which can potentially offset other income.
3. The Synergy: Bonus Depreciation and Cost Segregation
To unlock the full potential of 100% bonus depreciation, real estate investors leverage a Cost Segregation Study.
What is Cost Segregation? It is an engineering and tax study that systematically breaks down the components of a commercial building (e.g., specialized electrical, decorative finishes, and land improvements) and reclassifies them from the standard 39-year depreciation schedule into shorter-lived categories (5, 7, or 15 years).
How They Work Together: Only assets with a recovery period of 20 years or less are eligible for 100% bonus depreciation. The sole purpose of a Cost Segregation Study is to identify and segregate these exact components. By performing the study, you effectively unlock a significant portion of your property’s cost basis for immediate expensing, driving a major reduction in first-year taxable income.
Example of the Impact: If you purchase a $5,000,000 commercial property and a Cost Segregation Study reclassifies 30% ($1,500,000) as short-lived assets, you can deduct the full $1,500,000 in the first year, creating an immediate, non-cash tax deduction that dramatically improves your cash flow.
Next Steps for Your Investment Strategy
With 100% bonus depreciation now a reliable, permanent feature of the tax landscape, it’s the ideal time to re-evaluate your investment planning. We strongly recommend two actions:
- Planning is Key: Consult with us to best determine a strategy for acquiring a new asset or implementing a 1031 exchange, to maximize your goals and benefits. We can help you partner with a qualified vendor to perform a Cost Segregation Study.
- Consult a Tax Specialist: Everyone’s tax situation is a bit different so always consult with your tax professional to discuss. If you are considering a property acquisition or major renovation, If you are interested in exploring commercial properties in the Ventura, Santa Barbara, San Luis Obispo, or San Fernando Valley areas that are perfect candidates for this powerful tax strategy, please reach out. We are here to help you align your investment goals with the current tax advantages.