Cost segregation now that 100% bonus depreciation is back

What changed. Bonus depreciation had been phasing down since 2023: 80% for property placed in service in 2023, 60% in 2024, and 40% for property acquired before January 20, 2025 and placed in service in 2025. The tax law signed in July 2025 reversed that. For qualifying property acquired after January 19, 2025, 100% bonus depreciation is back, and this time it is written into the code without a sunset. For a developer holding rental product, or a builder keeping a portion of a project as a long-term asset, the arithmetic of a cost segregation study just moved back to where it was in 2018.

Why cost segregation is the key that unlocks it. Bonus depreciation does not apply to a building. It applies to property with a recovery period of 20 years or less. A residential building on its own depreciates over 27.5 years, so without a study almost none of the cost qualifies. An engineering-based cost segregation study breaks the purchase price or construction cost into its parts: land improvements (15-year), personal property such as appliances, flooring, cabinetry and specialty electrical (5- and 7-year), and the structure itself. On a typical multifamily or build-to-rent asset, 20% to 35% of the depreciable basis lands in those shorter buckets, and every dollar of it can now be deducted in year one.

What that looks like in dollars. Take a $6M building with $1.2M allocated to land. Of the $4.8M depreciable basis, a study that reclassifies 28% produces roughly $1.34M of 5-, 7- and 15-year property. Under 100% bonus, that full amount is a first-year deduction, on top of the ordinary depreciation on the remaining structure. For a developer with net income in the seven figures, that single decision can be worth several hundred thousand dollars of federal tax in the year the asset is placed in service, and it compounds when the capital is redeployed into the next project rather than sent to the IRS.

The acquisition date is the trap. The 100% rate keys off when the property was acquired, not when the study is done. Property under a binding written contract before January 20, 2025 generally falls under the old phase-down percentages even if it closed later in 2025. Self-constructed property has its own rules tied to when physical work of a significant nature began. Before you count on the full deduction, the contract dates, construction start and placed-in-service dates need to be read against the statute, and the study needs to document them.

Look-back studies still work. If you have held a building for years and never segregated it, nothing is lost. A look-back study captures every dollar of depreciation you should have taken as a single catch-up deduction in the current year through an automatic accounting method change on Form 3115, with no amended returns. The catch-up is calculated at the bonus rate that applied when the property was originally placed in service, so an asset bought in 2019 or 2020 still gets its original 100% treatment.

When it does not make sense. Studies are not free, and the deduction is a timing benefit that reverses through depreciation recapture when you sell, taxed at up to 25% on the real property portion and at ordinary rates on the personal property portion. If you plan to sell within two or three years without a 1031 exchange, or you are in a low bracket this year and a high bracket next year, accelerating the deduction can cost more than it saves. The study has to sit inside a plan that knows your exit and your income trajectory.

Where developers get this wrong. The most common mistake we see is treating the study as a filing decision made by the CPA in March. It is a planning decision made before the asset is placed in service, coordinated with your entity structure so the losses can actually be used. A passive loss trapped inside an LLC you do not materially participate in is a deduction on paper. Real estate professional status, the short-term rental exception and grouping elections decide whether the paper becomes cash, and those have to be arranged before the year closes.

What to do next. If you placed a building in service in 2025 or will in 2026, or you own one that was never studied, have the numbers run before year end. Apply for tax planning and we will review the asset, the contract dates and your entity structure together. If you have one specific question, bring it to a Strategy Session and leave with an answer.