Bonus Depreciation 2025: A Guide for Real Estate Investors
How to Use Cost Segregation to Generate Passive Losses and Reduce Your Tax Bill
Key Takeaway
The reinstatement of 100% bonus depreciation for 2025 presents a massive opportunity for real estate investors. Using cost segregation studies to accelerate depreciation deductions can create significant passive losses to offset other passive income and substantially reduce taxable income.
As a real estate investor, one of your primary goals may be to maximize your returns, and a key part of that could be an effective tax strategy. The reinstatement of 100% bonus depreciation for 2025 may present opportunities for qualified investors, and cost segregation studies are one approach some property owners consider. This strategy may allow investors to potentially accelerate depreciation deductions, which could create passive losses to offset other passive income and potentially reduce taxable income in the early years of ownership, though individual results will vary.
The new and final version of the One Big Beautiful Bill has made a significant and permanent change to 100% bonus depreciation, a departure from the temporary extension proposed in the House's version of the legislation. This new law reinstates 100% bonus depreciation for assets acquired after January 19, 2025. It's crucial to understand that this change is not retroactive and does not apply to assets purchased in 2023 or 2024. Furthermore, if a business had a contract to acquire a property before January 19, 2025, but the actual acquisition occurred after that date, the property would not qualify for the 100% bonus and would instead be subject to the prior law's bonus depreciation rules if eligible.
What is a Cost Segregation Study?
A cost segregation study is a tax strategy used by real estate investors to accelerate depreciation deductions. It works by identifying and reclassifying building components into shorter depreciation schedules. Instead of depreciating the entire building over 39 years (for commercial property), a cost segregation study allows you to depreciate certain components – like landscaping, fixtures, and equipment – over 5, 7, or 15 years. This front-loads your depreciation deductions, which can lead to significant tax savings in the early years of your investment. Some property types, like convenience stores, may have additional advantages for bonus depreciation beyond what cost segregation provides.
How Bonus Depreciation Creates Passive Losses
Because 100% bonus depreciation allows you to deduct the full cost of assets with a life of 20 years or less in the first year, it can create a large paper loss for tax purposes. This "passive loss" can then potentially be used to offset passive income from other sources, such as rental income from other properties. This is a powerful real estate investor tax strategy for sheltering income and improving your after-tax returns.
A Real-World Example: How a $100k Investment Created a $50k Passive Loss
David, a seasoned real estate investor, found himself in a familiar position. His portfolio of rental properties was performing exceptionally well, generating a steady stream of passive income. While this was a great problem to have, the income was pushing him into a higher tax bracket, and he was looking for a way to mitigate his tax liability.
He came across a compelling opportunity: a limited partnership investment in a new multifamily development. The deal was structured with a favorable 50% loan-to-value (LTV) ratio, which meant it was not overly leveraged. The sponsor's projections were solid, but what truly caught David's attention was the opportunity to utilize bonus depreciation.
He decided to invest $100,000 as a limited partner. Soon after the property was placed in service, the sponsor provided the K-1 forms, which showed the results of a cost segregation study. This study reclassified a significant portion of the building's cost into shorter-lived assets (5, 7, and 15-year property), which could be fully depreciated under the current bonus depreciation rules.
His $100,000 investment, as a result, generated a passive loss of $50,000 in the first year alone. Since this was considered a passive loss, he was able to use it to offset the passive income from his other rental properties. This strategy effectively sheltered a significant portion of his passive income, allowing him to reduce his overall taxable income and keep more of his investment returns. The passive loss generated from the limited partnership provided an immediate tax benefit, which enhanced his overall return on investment and allowed him to strategically manage his tax exposure.
Investment Opportunities with Bonus Depreciation Potential
Through our curated marketplace, we offer real estate investments that can potentially qualify for bonus depreciation benefits through cost segregation studies. These opportunities include multifamily developments, commercial properties, and other asset classes that may provide significant tax advantages for accredited investors.
If you would like to learn more about investments that may generate passive losses through bonus depreciation, reach out to our team at Anchor1031 for more information about opportunities that may provide potential tax benefits. You can schedule a call or contact us directly. Each investor's tax situation is different so please speak to your CPA prior to making any tax-related investment decisions.
Frequently Asked Questions about Bonus Depreciation for Real Estate
What are some tax strategies real estate investors might consider in 2025?
One strategy that many investors consider is using a cost segregation study to potentially take advantage of 100% bonus depreciation. This approach may allow investors to accelerate depreciation deductions, which could create passive losses to offset other passive income, though individual results will vary based on specific circumstances.
How does a cost segregation study save you money?
A cost segregation study reclassifies parts of your property into shorter depreciation schedules (e.g., 5, 7, or 15 years instead of 39). This allows you to take much larger depreciation deductions in the early years of owning a property, which lowers your taxable income and improves your cash flow.
Can bonus depreciation create a passive loss?
Yes. Because 100% bonus depreciation allows you to deduct the full cost of certain assets in the first year, it can often result in a net loss for tax purposes. This passive loss can then be used to offset income from other passive activities, like rental income from other properties.
In Summary
- • 100% bonus depreciation reinstated for assets acquired after January 19, 2025
- • Cost segregation studies reclassify building components for accelerated depreciation
- • Passive losses from bonus depreciation can offset other passive income
- • Strategy can significantly reduce taxable income in early ownership years
About the Author
Stephen Haskell, Partner
With a distinguished career managing intelligence operations for elite special missions units, Stephen Haskell's expertise was forged in demanding environments like Afghanistan, Iraq, and Africa. He honed a critical skill set in strategic planning and risk mitigation, a discipline that was a matter of life or death in his previous life. Steve now applies that same meticulous approach to the real estate industry, where he saw a critical flaw: a relaxed, unbalanced approach to risk. For investors looking to retire, he recognized that an overlooked risk could compromise a lifetime of hard-earned wealth. This realization became the foundation of Anchor1031. Our primary objective is to identify risk, educate clients on its potential impact, and build a portfolio based on transparency and integrity.
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Disclosure
Tax Complexity and Investment Risk
Tax laws and regulations, including but not limited to Internal Revenue Code Section 1031, bonus depreciation rules, cost segregation studies, and other tax strategies, contain complex concepts that may vary depending on individual circumstances. Tax consequences related to real estate investments, depreciation benefits, and other tax strategies discussed herein may vary significantly based on each investor's specific situation and current tax legislation. Anchor1031, LLC and Great Point Capital, LLC make no representation or warranty of any kind with respect to the tax consequences of your investment or that the IRS will not challenge any such treatment. You should consult with and rely on your own tax advisor about all tax aspects with respect to your particular circumstances. Please note that Anchor1031 and Great Point Capital, LLC do not provide tax advice.
The information contained in this article is for general educational purposes only and does not constitute legal, tax, investment, or financial advice. This content is not a recommendation or offer to buy or sell securities. The content is provided as general information and should not be relied upon as a substitute for professional consultation with qualified legal, tax, or financial advisors.
Tax laws, regulations, and IRS guidance regarding 1031 exchanges are complex and subject to change. Information herein may include forward-looking statements, hypothetical information, calculations, or financial estimates that are inherently uncertain. Past performance is never indicative of future performance. The information presented may not reflect the most current legal developments, regulatory changes, or interpretations. Individual circumstances vary significantly, and strategies that may be appropriate for one investor may not be suitable for another.
All real estate investments, including 1031 exchanges, are speculative and involve substantial risk. There can be no assurance that any investor will not suffer significant losses, and a loss of part or all of the principal value may occur. Before making any investment decisions or implementing any 1031 exchange strategies, readers should consult with their own qualified legal, tax, and financial professionals who can provide advice tailored to their specific circumstances. Prospective investors should not proceed unless they can readily bear the consequences of potential losses.
While the author is a partner at Anchor1031, the views expressed are educational in nature and do not guarantee any particular outcome or create any obligations on behalf of the firm or author. Neither Anchor1031 nor the author assumes any liability for actions taken based on the information provided herein.