For property owners, investors, and managers, 2025 has been a significant year for depreciation planning. Originally, the Tax Cuts and Jobs Act (TCJA) had planned to reduce bonus depreciation to 40% in 2025 and eliminate it entirely after 2026. However, the One Big Beautiful Bill Act (OBBBA), signed in July 2025, changed all that, reinstating permanent 100% bonus depreciation for many types of qualified property acquired and placed in service after January 19, 2025.
This mix of “old” and “new” rules within the same calendar year has made 2025 unusually important for planning around:
Regular property depreciation
- Bonus depreciation rules under OBBBA
- Section 179 deductions
- Practical examples for rental and commercial real estate
- Key state and planning considerations
Depreciation Basics for Rental and Commercial Property
Depreciation allows property owners to recover the cost of certain business or income-producing property over time. It reflects the wear, tear, and obsolescence of property. To depreciate an asset, the following must apply:
- You own the property (even if financed).
- The property is used in a trade, business, or income-producing activity.
- It has a determinable useful life.
- It is expected to last more than one year.
For real estate, the core rules are:
- Land is not depreciable.
- Buildings are depreciable:
- Residential rental property generally uses a 27.5-year MACRS life.
- Nonresidential (commercial) property generally uses a 39-year MACRS life.
- Improvements and specific components, such as parking lots, landscaping, interior finishes, furniture, equipment, and many building systems, may qualify for shorter lifespans, often ranging from 5 to 15 years.
Depreciation begins when property is placed in service, meaning it is ready and available for income-producing use, not necessarily when rent is first collected.
Regular Property Depreciation in 2025
Most real property continues to depreciate under the Modified Accelerated Cost Recovery System (MACRS). For investors, this usually means:
- 27.5-year MACRS, straight-line for residential rental buildings
- 39-year MACRS, straight-line for commercial buildings
- 5, 7, or 15-year MACRS for many non-structural components and land improvements, often identified through a cost segregation study
A cost segregation study breaks a building into components that qualify for shorter depreciation periods. In a world with 100% bonus depreciation, cost segregation becomes even more powerful because many shorter-life components can be expensed immediately.
Bonus Depreciation in 2025: The New Rules After OBBBA
What is Bonus Depreciation?
Bonus depreciation, also called the “additional first-year depreciation deduction” or the Section 168(k) allowance, allows a business to immediately deduct a large percentage of qualifying property in the year it is placed in service. Any remaining cost is depreciated using regular MACRS rules.
Historically, TCJA allowed 100% bonus depreciation on eligible property, but the percentage began phasing down starting in 2023.
What OBBBA Changed
Important changes were made to the One Big Beautiful Bill Act for 2025:
- Qualified property acquired and put into service after January 19, 2025, will receive permanent 100% bonus depreciation.
- Qualified property placed in service between January 1 and January 19, 2025, will receive 40% bonus depreciation.
- Transitional elections that permit certain taxpayers to apply 40% or 60% bonus depreciation for specific property classes rather than 100%
There are two federal bonus regimes in effect for 2025:
- 40% bonus from January 1 to January 19, 2025
- After that date, 100% bonus (default), with optional transitional elections at 40% or 60%
Qualifying Property
To be eligible for bonus depreciation in 2025, a property typically needs to:
- Be acquired and put into service within the relevant window
- Be depreciable under MACRS
- Have a recovery period of 20 years or less
- Be bought from an unaffiliated party and not used by the same taxpayer before
Common qualifying assets include furniture, fixtures, appliances, interior finishes, specific land improvements (like parking lots and lighting), qualified improvement property (QIP), and components reclassified through cost segregation.
Used property can qualify if it is new to the taxpayer and not acquired from related parties.
Business Use and Recapture
Only property used in a trade, business, or activity that generates income is eligible for bonus depreciation. Bonus depreciation may be recaptured as ordinary income in part or in full if the property is sold, particularly if it is Section 1245 property. To mitigate recapture risk, plan bonus elections in conjunction with your long-term exit strategy.
Section 179 in 2025 and How It Differs from Bonus Depreciation
Section 179 allows accelerated deductions like bonus depreciation, but operates differently:
- Maximum deduction: $1,250,000
- Phase-out threshold: $3,130,000 of Section 179 property placed in service
- Special cap: Certain SUVs limited to $31,300
Important distinctions:
- Income limitation: Unlike bonus depreciation, Section 179 is restricted to taxable business income, whereas bonus depreciation can create or increase net operating losses.
- Dollar limits: In addition, Section 179 is capped at a specific dollar amount, while bonus depreciation has no federal dollar limit.
- Election mechanics: Furthermore, Section 179 requires a taxpayer election on an asset-by-asset basis; in contrast, bonus depreciation is applied by default unless you choose to opt out.
- Property type: Finally, Section 179 comes with more restrictions on real property, whereas bonus depreciation is primarily determined by recovery period and acquisition rules.
Many taxpayers layer the two: Section 179 for targeted assets and bonus depreciation for remaining eligible 5, 7, or 15-year components.
A Simple 2025 Example
Suppose you acquire a residential rental property on February 15, 2025, with $2,000,000 allocated to the building (excluding land). A cost segregation study assigns 20% ($400,000) to 5, 7, or 15-year property and 80% ($1,600,000) to 27.5-year structural property.
- Assets placed in service after January 19, 2025, qualify for 100% bonus depreciation under OBBBA.
- Result in year one: $400,000 bonus depreciation on shorter-life assets plus MACRS deductions on the $1,600,000 building basis.
This accelerates a significant deduction into 2025, but the strategy must align with your overall tax profile, loss utilization, recapture expectations, and state rules.
Federal Rules vs State Conformity
Bonus depreciation is a federal provision. States may:
- Conform fully (e.g., Colorado, Kansas, Louisiana)
- Decouple from federal rules (e.g., Illinois, New Jersey, New York, Pennsylvania)
- Offer partial or time-limited conformity (e.g., Arkansas, Connecticut, Kentucky)
Understanding state treatment is critical for multi-state portfolios, as it affects effective tax savings and reporting.
Planning Takeaways for 2025
- Track placed-in-service dates carefully – January 1–19 at 40% bonus; after January 19 at 100% (federal).
- Use cost segregation strategically – Shorter-life components can dramatically increase expensing.
- Coordinate bonus and Section 179 elections – Decide where each is most effective and consider transitional elections.
- Model recapture before accelerating deductions – Bonus and cost segregation can increase ordinary income on exit.
- Check state conformity early – Federal results may differ from state, affecting tax planning and cash flow.
Final Note
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This article summarizes federal rules for 2025, including changes from the One Big Beautiful Bill Act and IRS guidance on depreciation and Section 179. It provides general information only and should not replace advice from a qualified tax professional who has reviewed your specific facts and state positions.
