100% bonus depreciation is back. Here’s what that means for your CRE business.
The One Big Beautiful Bill Act (OBBBA) restores the 100% bonus depreciation which had been gradually phasing out. Commercial real estate (CRE) investors looking to cash in on the new rule are leveraging cost segregation studies to maximize their tax benefits. We spoke with the members of the real estate industry team at CBIZ, a leading professional services advisor, about what this change means for the CRE industry.
Nearly gone, but not forgotten
Bonus depreciation was on life support prior to the passage of the OBBBA.
It had been gradually phasing out, dropping to 80% in 2023, 60% in 2024, and was scheduled to be 40% in 2025.
“It would have completely phased out by 2027,” says Michael Siino, CPA, NY Metro Regional Leader, Owner-Operator/Family Owned Real Estate, CBIZ. “That would have been a significant loss of a really beneficial aspect of previous tax law.”
For qualified property placed in service after January 19, 2025, the taxpayer can get an immediate depreciation tax deduction in year one, which positively impacts their cash flow.
“Restoring 100% bonus depreciation is likely to spur greater capital investment, because the after-tax cost of acquiring new assets could be significantly reduced,” adds Siino.
The devil is in the details
Bonus depreciation can create significant tax benefits for CRE owners and investors who are both acquiring and improving property. The tax rule can be applied across all commercial property types, from office and retail to restaurants and car washes.
“When you look at the totality of things, bonus depreciation is a huge benefit for real estate operators,” says Steve Brodsky, CPA, JD, LLM, Managing Director, CBIZ.
For CRE investors, there are four major categories of potential applications for bonus depreciation. The largest category is Qualified Improvement Property (QIP), which refers to the interior portion of a commercial building. For example, a QIP could involve a lobby renovation, lighting upgrade or a new HVAC system. A second category is qualified land improvements, such as adding sidewalks, landscaping, fencing, or even a new pool or pickleball court.
Additionally, bonus depreciation can be applied to FF&E and office equipment, such as computers and software.
“The devil is in the details of what’s included and what’s not, and we spend a lot of time digging into the details of a repair, replacement or betterment,” says Siino. “They may sound similar, but there are big differences when it comes to qualifying improvements that are eligible for bonus depreciation.”
The value of cost segregation studies
Performing a cost segregation study is a key step to making sure a real estate owner or investor gets the full benefit of the tax rule and doesn’t leave money on the table.
“A cost segregation study allows you to maximize current deductions rather than capitalizing and depreciating an asset over a number of years,” says Siino.
The greater the tax deduction, the more after-tax dollars would be available for additional investment, or to be reinvested back into a building for other purposes.
As an example, a real estate investor buys a $2 million commercial property after the January 19, 2025 restart date. Depreciating the building over its 39-year lifespan would result in a roughly $51,000 annual deduction per year. A cost segregation analysis potentially finds that 20% of the building value, $400,000, qualifies as 100% bonus depreciation-eligible property. The $400,000 deduction at a 35% tax rate equals about $140,000 in tax savings.
“Bonus depreciation doesn’t eliminate the tax; it simply accelerates the deduction that would have been taken over a longer period,” says Siino. “You’re front-loading the deduction, which means smaller deductions in subsequent years.”
Studies combine engineering and accounting
A cost segregation study is technical and highly nuanced, typically combining both engineering and accounting expertise.
The engineering piece digs into a building blueprint and the nuts and bolts of various building components to identify which portion of building cost can be attributed to individual items, such as lighting, wiring and plumbing. The accounting piece applies a layer of analysis to the rules governing 100% bonus depreciation.
“Real estate owners and investors need to be aware of the many factors that go into qualifying a building for the bonus depreciation,” adds Brodsky. “These include the asset having a lifespan of 20 years or less, restrictions on claiming bonus depreciation for property purchased from a related party, recapturing the bonus depreciation as ordinary income rather than a capital gain, and certain state-level limitations.”
These limitations are why working with an experienced team of professionals like those at CBIZ is of paramount importance.
“The 100% bonus depreciation deduction is a powerful tool, but it’s also important to work with an experienced team when conducting a cost segregation study,” adds Siino. “We have a deep bench of advisors, and our team spends considerable time maximizing tax benefits for our clients.”
To learn more about how CBIZ can help you take full advantage of 100% bonus depreciation, visit their website.