Bonus Depreciation and Section 179 Expensing

The Tax Cuts and Jobs Act of 2017 introduced 100% bonus depreciation for property placed in service after September 27, 2017. This allowed investors to immediately deduct 100% of the cost of eligible components (5-year, 7-year, and 15-year property identified in a cost segregation study). However, bonus depreciation is phasing down: 2022: 100%. 2023: 80%. 2024: 60%. 2025: 40%. 2026: 20%. 2027 and beyond: 0% (unless Congress extends or modifies the provision). The phase-out makes acquisition timing a significant tax planning variable. A $2M property acquired in 2024 with $510,000 in cost-seg-eligible components generates $306,000 in bonus depreciation (60%). The same property acquired in 2026 generates only $102,000 (20%). By 2027, bonus depreciation on those components drops to zero—only the standard accelerated MACRS schedule applies.

Section 179 allows immediate expensing of certain property in the year placed in service, up to an annual limit ($1,220,000 for 2024). Historically, Section 179 did not apply to real property, but the TCJA expanded it to include qualified improvement property (QIP)—interior improvements to nonresidential buildings (but not enlargement, elevators, escalators, or structural framework). For real estate investors, Section 179 is most useful for expensing interior renovations of commercial properties and eligible personal property (appliances, furniture, equipment) placed in rental units. Section 179 cannot create a business loss—the deduction is limited to the taxpayer's business income. This is a critical distinction from bonus depreciation, which can create or increase a loss. If an investor has $50,000 in net rental income and $80,000 in Section 179-eligible property, they can only deduct $50,000 under Section 179 (the remaining $30,000 carries forward).

Given the bonus depreciation phase-out, timing acquisitions and cost segregation studies is increasingly important. Strategy 1: Front-load acquisitions—if you plan to buy two properties in the next three years, consider acquiring both in 2024-2025 while bonus depreciation is still 60-40% rather than waiting until 2027 when it reaches 0%. Strategy 2: Commission cost segregation studies immediately after acquisition—every month of delay is a month of missed accelerated depreciation. Strategy 3: For properties acquired before 2023, perform a look-back cost segregation study now to capture the Section 481(a) catch-up adjustment. Strategy 4: Coordinate bonus depreciation with REPS status—the accelerated deductions are most valuable when they can offset active income rather than being trapped as passive losses. Without REPS, large depreciation deductions may simply increase suspended passive losses rather than generating immediate tax savings.