What to Watch as Bonus Depreciation Phases Out
The real estate industry in the United States has long relied on tax incentives to improve investment returns and encourage property development. Among the most impactful incentives in recent years has been bonus depreciation, a tax provision that allowed investors to immediately deduct a significant portion of property-related costs. However, as federal tax rules evolve, the future of real estate tax strategies is shifting.
Beginning in 2023, bonus depreciation started phasing out, and it will continue to decline through the end of the decade unless Congress acts to extend it. For investors, developers, and property owners, this means adapting their approach to tax planning.
In this article, we’ll explore the future of real estate tax strategies, what the phase-out of bonus depreciation means, and how investors can prepare for the new tax landscape in 2025 and beyond.
Understanding Bonus Depreciation and Its Phase-Out
Bonus depreciation was expanded significantly under the Tax Cuts and Jobs Act (TCJA) of 2017, allowing businesses to deduct 100% of certain qualified property costs in the first year. This policy created massive tax savings for real estate investors, especially those using cost segregation studies.
However, the deduction is now gradually decreasing.
Bonus Depreciation Phase-Out Timeline
- 2022: 100% deduction
- 2023: 80% deduction
- 2024: 60% deduction
- 2025: 40% deduction
- 2026: 20% deduction
- 2027 onward: Scheduled to expire
As this tax benefit shrinks, investors must rethink their financial strategies. The future of real estate tax strategies will rely less on immediate deductions and more on diversified tax planning techniques.
For more details on federal depreciation rules, investors can review guidance from the IRS:
https://www.irs.gov
Why These Changes Matter for Real Estate Investors
The phase-out of bonus depreciation could significantly affect how investors evaluate property acquisitions, manage cash flow, and structure deals.
Key Impacts
1. Reduced Immediate Tax Savings
With only 40% bonus depreciation available by 2025, investors will no longer receive the same upfront deductions they enjoyed in previous years.
2. Longer Cost Recovery Periods
More property components will revert to standard depreciation schedules:
- Residential property: 27.5 years
- Commercial property: 39 years
3. Cash Flow Adjustments
Lower first-year deductions could increase taxable income, affecting investors who rely on tax savings to offset operating costs or fund additional acquisitions.
Because of these shifts, the future of real estate tax strategies will require more proactive planning.
Cost Segregation Will Still Play an Important Role
Even as bonus depreciation phases out, cost segregation studies will remain a valuable tool.
Cost segregation allows property owners to break down building components into shorter depreciation categories such as:
- 5-year property (appliances, carpeting)
- 7-year property (furniture, fixtures)
- 15-year property (land improvements)
These shorter recovery periods can still create meaningful tax savings.
Benefits of Cost Segregation
- Accelerates depreciation deductions
- Improves early-year cash flow
- Identifies qualifying components for partial expensing
- Enhances tax planning flexibility
While deductions may be smaller compared to the 100% bonus depreciation era, cost segregation remains central to the future of real estate tax strategies.
Alternative Tax Strategies for Real Estate Investors
As the tax landscape evolves, investors should expand their toolkit beyond bonus depreciation.
1. Strategic Timing of Property Purchases
Closing deals before year-end can help investors maximize remaining bonus depreciation percentages.
For example:
- A property placed in service in 2025 still qualifies for 40% bonus depreciation.
Planning acquisition timelines carefully can protect tax benefits.
2. Utilizing 1031 Exchanges
A 1031 exchange allows investors to defer capital gains taxes by reinvesting proceeds into another qualifying property.
Benefits include:
- Deferring capital gains tax
- Preserving investment capital
- Enabling portfolio growth
Many investors expect 1031 exchanges to become even more important as other tax advantages decline.
3. Leveraging Opportunity Zone Investments
Opportunity Zones remain a powerful incentive for long-term real estate investments.
Potential benefits include:
- Deferral of capital gains taxes
- Reduction of taxable gains
- Tax-free appreciation after holding investments for 10+ years
Although regulations may evolve, Opportunity Zones are likely to remain part of the future of real estate tax strategies.
4. Energy Efficiency Tax Credits
Federal programs encourage sustainable building upgrades through tax incentives.
Examples include:
- Section 179D deductions for energy-efficient commercial buildings
- Energy-efficient home credits for residential developers
These incentives can offset the loss of some depreciation benefits.
Tax Planning Tips for Real Estate Investors in 2025
Navigating the changing tax environment requires preparation. Investors who plan early can still optimize their financial outcomes.
Key Planning Strategies
Work With Specialized Tax Advisors
Real estate tax rules are complex and evolving. A CPA experienced in real estate can help identify deductions and optimize investment structures.
Conduct Cost Segregation Studies Early
Performing a study soon after acquiring property maximizes depreciation opportunities.
Review Portfolio Performance
Analyze which assets generate the best tax efficiency and adjust acquisition strategies accordingly.
Consider Entity Structuring
The choice between LLCs, partnerships, or corporations can affect tax outcomes.
As policy changes continue, adapting to the future of real estate tax strategies will require ongoing evaluation.
Policy Uncertainty and Potential Legislative Changes
Tax legislation frequently changes with shifts in political leadership.
Some lawmakers have proposed:
- Restoring 100% bonus depreciation
- Expanding housing development tax incentives
- Revising Opportunity Zone rules
While nothing is guaranteed, investors should monitor developments closely. The future of real estate tax strategies could shift again depending on congressional action.
What Smart Investors Are Doing Right Now
Experienced investors are already adjusting their strategies in anticipation of the bonus depreciation phase-out.
Common Moves in the Market
- Accelerating acquisitions before deductions shrink further
- Increasing focus on long-term rental income
- Expanding into tax-advantaged development projects
- Prioritizing energy-efficient buildings
These proactive adjustments can help investors remain profitable even as tax incentives evolve.
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Final Thoughts
The phase-out of bonus depreciation marks an important shift for real estate investors across the United States. While the immediate tax advantages of past years are shrinking, opportunities still exist for those who adapt.
By leveraging cost segregation, exploring alternative tax incentives, and staying informed about legislative changes, investors can continue to optimize returns.
Ultimately, the future of real estate tax strategies will belong to investors who prioritize proactive planning, diversify their tax approaches, and remain flexible in a changing policy environment.
With careful strategy and the right professional guidance, real estate can remain one of the most tax-efficient investment vehicles in 2025 and beyond.
At TaxWise Corp, we help small business owners across the USA navigate the complex tax landscape, optimize deductions, and protect their financial future. Don’t leave money on the table, start planning today!
Contact TaxWise Corp to schedule your 2025 Tax Planning Consultation and ensure your business saves every possible dollar.
