As your host of the Real Estate Tax Playbook, I'm excited to share some significant news that came out of the tax legislation. The "one big beautiful bill" brought back 100% bonus depreciation, and this is huge news for real estate investors and developers.
The Big Change
Bonus depreciation is back better than ever - or at least as good as it has ever been - back to 100%. If you remember back with the Tax Cuts and Jobs Act, President Trump made bonus depreciation 100% back then, but there was a phase-out period. That phase-out was starting and the sunset was going to be at the end of 2026.
Here's what this means practically: if you recall, bonus depreciation was supposed to be at 40% for the 2025 tax year. Now, with the new legislation, you're able to deduct 100% instead of that reduced amount.
Real-World Example
Let me give you a concrete example of how this impacts your bottom line. Let's say you did a cost segregation study - which we've talked about on earlier episodes - and you're able to carve out $100,000 of shorter-lived assets. These would be five-year, seven-year, 10-year, and 15-year property.
Under the old tax law with the sunsets, you were only going to be able to accelerate and deduct 40% of that cost in year one - so $40,000 out of your $100,000. Now with the new legislation, you're able to deduct 100% - the full $100,000 of that carve-out.
This is significant for real estate investors who are looking to offset some of their other income, especially if they qualify as real estate professionals.
New Category: Qualified Production Property
Something new in the bonus depreciation area is a new category called qualified production property. This mainly impacts our manufacturing industry - owners of manufacturing facilities and folks who operate manufacturing facilities.What's interesting is that this isn't actually traditional bonus depreciation. While you elect out of regular bonus depreciation, you actually elect into this item for qualified production property. This applies to real property that is used for production.
Even with this new category, there could still be a need for cost segregation. For the most part, a manufacturing facility isn't used 100% for production. There's likely a sales team in that building, office staff, administrative staff, and maybe some research activities. So there will be a need to carve out some of those non-qualifying components of the building.
What This Means Going Forward
I expect there's going to be some uptick in cost segregation studies as well as activity in the real estate market as these incentives have been increased by bonus depreciation coming back at 100%.
Very significant impact here for real estate investors. There's going to be a lot of opportunity with bonus depreciation being back as good as it's ever been.
As always, there are a lot of nuances here and new information that's going to continue to come with this legislation. There are going to be questions, and that's going to continue. If you have specific questions about how this applies to your situation, don't hesitate to reach out to your tax advisor to discuss your particular circumstances.
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