Using Bonus Depreciation

by | Dec 5, 2025 | Uncategorized

Using Bonus Depreciation-"Real Estate Bonus Depreciation Benefits"


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Using Bonus Depreciation

Welcome to the Real Estate Espresso podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. On today’s show, we’re talking about bonus depreciation. This is one of the things that was brought back in the 2025 tax code. It was originally set to sunset, starting at 100%, then 80, then 60. This year would have been a 40% inclusion rate for bonus depreciation, and then it got bumped up to 100% and made permanent.

Now, we’re talking about tax here, and we’re not accountants, and our role here is not to provide you tax advice. Our role is to educate you enough, or to stimulate enough conversation, that you can have a meaningful conversation with your tax professionals, with your CPAs, and figure out what’s going to work in your circumstance.

Now, there’s three different categories of income that come into play here. There’s active income, there’s passive income, and what’s called portfolio income. Active income requires active material participation. It requires, in the case of real estate, direct property management. It’s really for real estate professionals, and that has a very strict definition. That is the broadest category that qualifies you for bonus depreciation.

Then there’s passive income. This might be income that comes from limited partnership interests. It might come from your syndication investments. There’s no actual day-to-day participation required other than writing a check.

Then there’s portfolio income. These are things like capital gains from sales, interest, and dividends. Could be investments in the stock market, and each of these three categories gets treated differently when it comes to inclusion for bonus depreciation.

The far most beneficial, the holy grail, is active income. If you have bonus depreciation that comes into play, you’d like to be able to deduct it against your active income, but that’s restricted to those who are real estate professionals, and that has a very strict definition again. Our role here is not to provide you tax advice, but you’ve got to be spending at least 750 hours a year in real estate trades of some form. Just saying, “I’m a real estate broker,” may not be enough. You’re going to want to consult with your CPA to find out exactly what the criteria is and if you qualify or not. You’ve got to have more than half of your working time actively in real estate. But when you do, it unlocks full loss of deductions against your active business income.

Now, in order to take advantage of bonus depreciation, especially when we’re talking about real estate, you need to conduct what’s called a cost segregation study. This is where you take a property that would normally be depreciated over 27 and a half years, and you break it up into its constituent pieces because your refrigerator is going to have a shorter life than the building, and the same thing with the carpets and the light fixtures and the paving in the parking lot. Those are all depreciated against different schedules if they are broken apart and separated from the rest of the building.

Now, of course, land itself does not depreciate, so any depreciation that you declare can only be associated with improvements in the property. That’s buildings, equipment, furnishings, all of the things that go into that category called improvements.

Now, this is not something that’s done in an ad hoc manner. This is done in a very detailed manner. Typically, you hire an engineer to do this. You’re not going to want to do this on a small property. It’s not going to make any financial sense because the cost of completing the cost segregation study is going to exceed the benefit. On large projects, or if you’re invested in a large project as a limited partner, you can take advantage of cost segregation, and this is where, like I said, the building gets broken down into all of its constituent pieces, and this is where those classes of assets that are under 20 years in depreciation can be accelerated and written off in one year. The five-year, ten-year, and 15-year property can be written off in year one.

Now, some people say, “Well, I don’t think I want to take advantage of bonus depreciation, because if I sell the asset, what would have been otherwise a capital gain is now going to get recaptured at ordinary business income rates, and I’m going to pay a much higher rate of tax on the recapture.” And there is a scenario where that is true. Again, our role here is not to provide tax advice. There is, however, the opportunity to shelter that further from taxation through the use of a 1031 exchange. So you could continue to roll this forward by, in turn, buying yet another asset in order to shelter from tax.

There are certain types of real estate projects that tend to do better with depreciation. They tend to offer more. These are things like hospitality, hotels, short-term rentals that have high content of furnishings and equipment. Restaurants, same thing. They have a lot of equipment relative to the rest of the property. Same is true for industrial and retail. Second behind that comes residential multifamily. So there are definitely some asset classes that do tend to perform better when it comes to bonus depreciation.

Now, not every state in the US has embraced the federal bonus depreciation part of the tax code. There’s close to 19 states that have, in fact, rejected the federal bonus depreciation, and their statutes, in fact, claw that back, or at least partially. There’s the usual suspects that top the list, including California, New York, but there’s a long list of others. You are definitely going to want to check with your CPA to see if you’re going to get the maximum benefit in the state in which you reside.

So, there’s only a few weeks remaining in the year. You definitely want to get in conversation with your CPA and see if, maybe, purchasing an asset this year could help your tax bill next year. And if that’s the case, maybe come look at Y Street Capital, see what projects we have underway that might be candidates for you to include in your portfolio that would be eligible for bonus depreciation and take a bite out of your tax bill.

If you’re not already a member of our investor portal, click on the link in the show notes and you’ll be able to register for our investor portal and have a look at the projects we have in our portfolio. And as you think about that, have an awesome rest of your day. Go make some great things happen, and we’ll talk to you again tomorrow.

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