Key Takeaways
- The 2025 Act restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.
- QIP remains one of the most important real estate depreciation opportunities, especially for commercial interior improvements.
- Section 179 limits are higher for 2025, and certain nonresidential real property improvements may qualify.
- Cost segregation studies can help unlock accelerated deductions, particularly for acquisitions, construction, and renovations.
- Planning should happen early, ideally before contracts, purchase-price allocations, and project documentation are finalized.
Why Now Is the Time to Revisit Your Depreciation Strategy
For real estate owners and investors, depreciation has always been more than an annual compliance calculation. Done thoughtfully, it can improve cash flow, support reinvestment, and help align tax deductions with the economic reality of a property acquisition, renovation, or development project.
The 2025 Act, commonly discussed as the One Big Beautiful Bill Act or OBBBA, has made depreciation planning especially important again. Most notably, the law permanently restored 100% bonus depreciation under IRC Sec. 168(k) for qualified property that is acquired and placed in service after January 19, 2025. For real estate businesses, that change can create significant opportunities, but only when property is properly classified, documented, and placed in service within the applicable rules.
Below are key areas real estate owners, developers, operators, and investors should revisit now.
1. 100% Bonus Depreciation is Back for Qualified Property
Under IRC Sec. 168(k), the 2025 Act reinstates 100% bonus depreciation on a permanent basis for qualified property acquired and placed in service after January 19, 2025. In practical terms, this means eligible assets may be fully deducted in the year they are placed in service, rather than depreciated over several years.
However, timing matters. Property acquired or under a binding contract before January 19, 2025 generally remains subject to the prior phase-down rules, even if it is placed in service after that date. For 2025, that may mean a 40% bonus depreciation rate instead of 100% for certain assets.
This distinction can be especially important for real estate projects with long lead times, staged closings, construction contracts, or significant predevelopment costs. For self-constructed property, special rules determine when the property is treated as acquired. Generally, physical work of a significant nature is the relevant benchmark, and a safe harbor may apply when the taxpayer has paid or incurred more than 10% of the total cost of the asset, excluding land and preliminary activities.
2. Qualified Improvement Property (QIP) Remains a Major Planning Opportunity
One of the most important concepts for commercial property owners is qualified improvement property, or QIP. Under IRC Sec. 168(e)(6) and Reg. 1.168(b)-1(a)(5), QIP generally means an improvement made by the taxpayer to the interior portion of a nonresidential building, provided the improvement is placed in service after the building was first placed in service.
QIP does not include expenditures attributable to:
- Enlargement of a building
- Elevators or escalators
- The building’s internal structural framework
QIP is generally depreciated over 15 years and, because it has a recovery period of less than 20 years, it may be eligible for bonus depreciation. That makes QIP especially valuable after the restoration of 100% bonus depreciation.
One additional planning point: the IRC Sec. 163(j) electing real property trade or business election can limit the ability to claim bonus depreciation on QIP. In general, an electing real property trade or business must depreciate QIP under the alternative depreciation system (ADS), and bonus depreciation is not available for QIP that must be depreciated under ADS. As a result, taxpayers often need to weigh (and effectively choose between) the benefit of the Section 163(j) election for business interest expense and the benefit of immediate 100% bonus depreciation on QIP.
If bonus depreciation was claimed on QIP (or other affected property) in a year before a later Section 163(j) election is made, that prior bonus depreciation generally is not recomputed. However, the property generally must switch to ADS beginning in the election year.
For example, a building owner that renovates interior office space for a new tenant, upgrades interior retail space, or reconfigures nonstructural interior layouts may have QIP. By contrast, improvements made by a prior owner generally cannot be treated as QIP by the buyer simply because part of the purchase price is allocated to those prior improvements.
3. Section 179 Can Also Apply to Certain Real Property Improvements
Real estate owners should also revisit IRC Sec. 179, which allows taxpayers to elect to expense certain qualifying property, subject to limitations. The 2025 Act increased the Section 179 dollar limitation to $2.5 million for 2025 and increased the phaseout threshold to $4 million for 2025 under IRC Secs. 179(b)(1) and 179(b)(2). These amounts are adjusted for inflation for tax years beginning after 2025 under IRC Sec. 179(b)(6)(A).
For real estate, Section 179 is particularly relevant because taxpayers may elect to treat certain qualified real property as Section 179 property. This can include QIP and certain improvements to nonresidential real property, such as roofs, HVAC property, fire protection and alarm systems, and security systems.
That said, Section 179 is not automatic and is not unlimited. Property generally must be acquired by purchase, more than 50% of the property’s use must be in an active trade or business, and other limitations may apply. Section 179 also has taxable income limitations that can affect whether an immediate deduction is currently useful.
In many cases, taxpayers and their advisors should compare bonus depreciation and Section 179 rather than assuming one approach is always better. Bonus depreciation may produce a larger immediate deduction, while Section 179 may offer more flexibility in selecting specific assets to expense.
4. Cost Segregation Studies May Be More Valuable Than Ever
A cost segregation study identifies components of a building that may be classified as shorter-lived property, such as personal property, equipment, fixtures, or land improvements. While a building itself is generally depreciated over 27.5 years for residential rental property or 39 years for commercial property, certain components may qualify for shorter recovery periods, such as five, seven, or 15 years.
That classification matters because shorter-lived property may be eligible for accelerated depreciation, including bonus depreciation and Section 179 expensing. With 100% bonus depreciation available again for qualifying property, the tax benefit of identifying eligible components may be substantial.
Cost segregation can be useful in several common situations:
- Purchasing an existing commercial or residential rental property
- Constructing a new building
- Completing a major renovation or tenant improvement project
- Converting space to a new business use
- Reviewing prior-year acquisitions where a study was not previously performed
However, documentation matters. Purchase agreements that allocate the sales price among specific asset classes may bind the buyer and seller for tax reporting purposes, limiting the ability to later reclassify assets through a cost segregation study. For that reason, buyers should consider depreciation planning before finalizing purchase agreements and related schedules.
5. Practical Action Steps for Real Estate Owners and Investors
The renewed depreciation opportunities are significant, but they require proactive planning. Real estate owners and investors should consider the following steps:
Review Recent and Pending Acquisitions
Determine whether assets were acquired, under binding contract, or placed in service before or after January 19, 2025. This timing may determine whether 100% bonus depreciation is available.
Identify Potential QIP
For nonresidential properties, review interior improvements placed in service after the building was first placed in service. Confirm that the improvements were made by the taxpayer and do not fall into excluded categories such as building enlargements, elevators, escalators, or internal structural framework.
Evaluate Section 179 Alongside Bonus Depreciation
Consider whether QIP, roofs, HVAC, fire protection and alarm systems, or security systems may qualify for Section 179 expensing under IRC Sec. 179. Also evaluate whether taxable income, business-use, acquisition, and other limitations may affect the available deduction.
Consider a Cost Segregation Study
For acquisitions, construction projects, and major renovations, a cost segregation study can help identify assets that may qualify for shorter recovery periods and accelerated deductions. Ideally, this should be considered before purchase-price allocations are finalized.
Model the Cash Flow Impact
A larger first-year deduction can improve near-term cash flow, but it may also reduce deductions available in later years. Owners should model the effect on taxable income, financing covenants, investor reporting, state taxes, and future exit planning.
Final Thought
Depreciation planning is not just a tax return exercise. For real estate owners and investors, it can affect acquisition economics, renovation budgets, investor distributions, and long-term after-tax returns. With the 2025 Act changes now in place, this is an excellent time to revisit depreciation strategies for both new and existing projects.
Disclaimer: This article is intended for general informational purposes only and does not constitute tax, legal, or accounting advice. The application of depreciation, bonus depreciation, QIP, Section 179, and cost segregation rules depends on each taxpayer’s specific facts and circumstances. Please consult your tax advisor before taking action.
