Bonus depreciation is a federal tax provision that allows an immediate first-year deduction of the cost of qualifying property, rather than depreciating it over its normal recovery period. Under the 2025 tax law, 100% bonus depreciation is permanently in effect for qualifying property acquired and placed in service after January 19, 2025.
Where the rule stands now
Bonus depreciation has been a moving target for a decade, which makes the current state worth stating plainly. The 2017 Tax Cuts and Jobs Act allowed 100% expensing but built in a phase-down — 80% in 2023, 60% in 2024, on the way to zero. The One Big Beautiful Bill Act, signed July 4, 2025, reversed that path: 100% bonus depreciation is restored permanently for qualified property that is both acquired and placed in service after January 19, 2025. Property acquired on or before that date (including under a binding contract signed earlier) remains stuck with the old phase-down percentages, a transition detail that trips up deals signed in late 2024 or early 2025.
Qualifying property covers most tangible assets with a recovery period of 20 years or less — machinery, equipment, furniture, vehicles, computer software, land improvements — plus qualified improvement property (certain interior improvements to nonresidential buildings). Used property qualifies if it’s new to the taxpayer and bought at arm’s length. Buildings themselves do not qualify, with one new exception: the 2025 law added a temporary election for “qualified production property,” allowing full expensing of certain U.S. manufacturing and production facilities built within specified windows.
Why it matters in alternatives
For real estate investors, the building doesn’t qualify — but a cost segregation study converts a meaningful slice of a building’s basis into 5-, 7-, and 15-year property, and all of that is bonus-eligible. The pairing means a substantial share of a property’s purchase price can often be deducted in year one, generating paper losses that shelter cash flow. That mechanic sits behind the tax profile of many private real estate programs, Delaware Statutory Trust offerings, and oil and gas programs (where equipment and development costs qualify), and it’s a standard talking point in sponsor materials.
The usual caveats govern real outcomes. Deductions accelerated now reduce basis, setting up larger depreciation recapture on sale — and reclassified personal property recaptures at ordinary rates. The passive activity loss rules determine whether an individual investor can actually use the losses currently or must suspend them. And states diverge: many don’t conform to federal bonus depreciation, so state-level benefits can be materially smaller. Taxpayers can also elect out by asset class when acceleration doesn’t fit their multi-year plan — useful when future rates or income are expected to be higher.
Bonus depreciation is distinct from Section 179 expensing, which achieves similar first-year results but with annual dollar limits, income limitations, and different state treatment. The two are often used together, 179 first.
FAQ
What is bonus depreciation in simple terms?
A rule letting businesses and investors deduct the full cost of qualifying assets in the year they’re placed in service instead of spreading deductions over many years. It’s currently 100% and permanent for property acquired after January 19, 2025.
Does real estate qualify for bonus depreciation?
Buildings don’t, but components identified through a cost segregation study — fixtures, land improvements, qualified improvement property — generally do. That’s how real estate investors capture the benefit.
What happened to the bonus depreciation phase-out?
The 2025 tax law eliminated it. The scheduled drop to 40% in 2025 and 20% in 2026 now applies only to property acquired on or before January 19, 2025; everything qualifying after that date gets 100%.
Is bonus depreciation the same as Section 179?
No. Both allow immediate expensing, but Section 179 has annual caps and income limits, while bonus depreciation is uncapped and automatic unless the taxpayer elects out. State conformity also differs.
Related terms
Cost Segregation · Depreciation Recapture · Passive Activity Loss Rules · Phantom Income · Schedule K-1
Educational content only; not investment, tax, or legal advice. Consult qualified professionals regarding your specific circumstances.
