Bonus Depreciation and Cost Segregation for Real Estate Tax Efficiency

In today’s shifting tax landscape, experienced real estate investors are taking a fresh look at tax optimization strategies. The reinstatement of 100 percent bonus depreciation under the One Big Beautiful Bill Act (OBBBA) has brought new life to a familiar tactic: pairing bonus depreciation with cost segregation analysis.¹

Eric Harrison, Co-Founder and Managing Partner at IEQ Capital, emphasizes the importance of aligning tax strategies with broader investment goals. 

“Bonus depreciation and cost segregation are not just technical tax tools,” Harrison says. “When applied strategically, they can potentially enhance long-term returns and improve real estate cash flows at the outset.” 

What Is Bonus Depreciation? 

Bonus depreciation allows investors to immediately deduct the full cost of qualified property in the year it is placed in service, rather than spreading the deduction over multiple years. This immediate expense improves after-tax income and can help investors offset other sources of taxable income. ² 

Under the Tax Cuts and Jobs Act of 2017, 100 percent bonus depreciation was originally available through the end of 2022. The OBBBA reinstates this incentive for qualified property acquired on or after January 20, 2025, eliminating the phase-out schedule that had been in effect.³ 

Jenny Kowal, Managing Director and Tax Strategist at IEQ Capital, explains how this creates a window of opportunity for real estate investors. 

“For investors developing or acquiring new properties, the return of full bonus depreciation makes it possible to front-load deductions that would otherwise take decades to realize,” Kowal says. “This can create meaningful benefits for high-income taxpayers looking to manage current-year tax liabilities.” 

How Cost Segregation Enhances Bonus Depreciation 

Cost segregation is a tax planning strategy that breaks down a real estate property into its individual components. Instead of depreciating the entire building over 27.5 or 39 years, investors can accelerate depreciation on certain components such as electrical systems, flooring, and parking lots, which qualify for shorter recovery periods of 5, 7, or 15 years.⁴ 

By identifying these components through a formal cost segregation study, real estate owners can classify more assets as eligible for bonus depreciation. The combination of the two strategies can significantly increase depreciation deductions in the early years of ownership, which can improve cash flow and reducing taxable income.⁵ 

Key benefits include: 

• Potential for tax deductions in the first year 

• Ways to help manage portfolio-wide tax exposure 

• Impact on after-tax outcomes and investment efficiency 

• Flexibility in structuring real estate financing and planning 

Please see Risks and Considerations at the end of this article for important disclosures related to bonus depreciation and cost segregation strategies. 

Who Should Consider a Cost Segregation Study? 

Cost segregation is most impactful for large-scale commercial real estate investments, including office buildings, warehouses, multifamily developments, and retail properties. However, individual investors participating in fractional or syndicated real estate opportunities may also benefit if the sponsor completes a qualified cost segregation study.⁶ 

A typical study is conducted by an independent firm with expertise in engineering, construction, and tax law. The process involves: 

• A feasibility analysis to determine eligibility 

• A detailed breakdown of the property’s systems and components 

• Allocation of costs to shorter depreciation periods where applicable 

• Delivery of a final report supporting the accelerated deductions 

These studies can only be performed once per property, so accuracy and timing are critical. Investors should work with their tax advisors to ensure compliance with IRS regulations and alignment with their broader financial goals.⁷ 

Implications of the OBBBA for Investors 

In addition to reinstating 100 percent bonus depreciation, the OBBBA makes other notable changes for investors.^1,9 These include: 

• Domestic research and experimentation expenditures may now be immediately expensed under new Section 174A, with eligible taxpayers able to amend 2022–2024 returns to carry back remaining unamortized costs to prior years. 

• The restoration of EBITDA-based interest deductibility, which can enhance the tax benefits on leveraged real estate. 

• A permanent 20 percent qualified business income deduction for pass-through entities, including many real estate investment structures. 

Kowal notes that these provisions, when combined, offer significant planning opportunities. 

“Investors should view the current environment as a time to act,” she says. “Cost segregation studies and bonus depreciation can unlock hidden value in real estate portfolios, especially when integrated with broader tax and estate planning strategies.” 

The Bottom Line for Real Estate Tax Strategy 

At IEQ Capital, real estate is a core component of how we aim to help ultra-high-net-worth families diversify their wealth and preserve purchasing power across generations. Bonus depreciation and cost segregation represent potentially powerful, IRS-recognized strategies for enhancing the tax efficiency of those investments. 

Eric Harrison summarizes it simply: 

“Tax efficiency is one of the most controllable variables in an investment plan. Strategies like these can offer high-impact opportunities for real estate investors who plan ahead and execute thoughtfully.” 

As always, investors should consult with their tax and legal advisors before making any investment decisions or implementing tax strategies. The benefits of bonus depreciation and cost segregation depend on a variety of factors, including the type of property, timing of acquisition, and overall tax position. 

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_{1. U.S. Senate Committee on Finance. “Opportunity for Business and Building Bonus Act (OBBBA) Summary.” finance.senate.gov.}  

_{2. Internal Revenue Service. “Publication 946: How To Depreciate Property.” irs.gov.}  

_{3. Tax Cuts and Jobs Act of 2017, Public Law No: 115-97. congress.gov.}  

_{4. Ernst & Young LLP. “Understanding Cost Segregation Studies.” EY Insights, 2023.}  

_{5. York, Erica; Muresianu, Alex; Gurudatt, Arnav. “Bonus Depreciation and New Corporate Investment in 2018.” Tax Foundation, Dec. 2022.}  

_{6. EquityMultiple. “What Is Cost Segregation in Real Estate Investing?” equitymultiple.com.}  

_{7. CCH IntelliConnect. “IRS Audit Techniques Guide on Cost Segregation.” Wolters Kluwer.}  

_{8. Internal Revenue Code §163(j) as amended by the TCJA and modified by the OBBBA.}  

_{9. Internal Revenue Code §199A. U.S. Department of the Treasury, 2025.}

_{This document is for informational purposes only and is intended exclusively for the use of the persons to whom it is delivered and the information provided therein is confidential and may not be reproduced in its entirety or in part, or redistributed to any party in any form, without the prior written consent of IEQ Capital, LLC (“IEQ” or “IEQ Capital”). Information contained in this document is current only as of the date specified in the document, regardless of the time of delivery or of any investment, and IEQ does not undertake any duty to update the information set forth herein. The information contained in this document does not constitute an offer to sell or the solicitation of an offer to purchase or sell any securities, including any securities or alternative investments recommended by IEQ. Regarding alternative investments, any such offer or solicitation may be made only by means of the delivery of a confidential private offering memorandum which will contain material information not included herein regarding, among other things, information with respect to risks and potential conflicts of interest. No representation is made that any client will or is likely to achieve its objectives, that IEQ Capital’s strategies, investment process or risk management will be successful, or that any client will or is likely to achieve results comparable to any shown or will make any profit or will not suffer losses or loss of principal. Investing involves risks. You should not construe the contents of this document as legal, tax, investment or other advice. Any tax-related decisions should be made after conducting such investigations as the investor deems necessary and consulting the investor’s own legal, accounting and tax advisers to make an independent determination of the suitability and consequences of a composite election.}      

_{Bonus Depreciation and Cost Segregation Strategies} 

_{Legislative Risk: Bonus depreciation provisions are subject to change through new legislation or regulatory updates. The reinstatement under the OBBBA may be modified or repealed.} 

_{Tax Risk: Tax benefits may be reduced due to income limitations, AMT exposure, passive activity loss rules, or IRS recharacterization. Improper implementation may trigger penalties or disallowed deductions.} 

_{Recapture Risk: Accelerated depreciation may lead to higher tax liabilities upon sale due to depreciation recapture.} 

_{Execution Risk: Cost segregation studies require technical expertise. Errors in classification or valuation may result in audit exposure.} 

_{Cash Flow Timing Risk: Upfront tax benefits may reduce deductions in later years, affecting long-term after-tax returns.} 

_{Suitability Risk: These strategies are complex and may not be appropriate for all investors. Individual tax circumstances should be reviewed with a qualified advisor.} 

 _{Real Estate – Core-Plus} 

_{Macro Risk. Economic weakness could potentially increase cap rates, lower occupancy, and lower rents, all of which would adversely impact real estate prices and a fund’s performance.} 

_{Liquidity Risk. There is no guarantee that a fund’s liquidity mechanisms will be reliable, and the managers are under no obligation to provide liquidity. In a downturn where investor outflows increase materially, investors are likely to experience periods of gating and potentially will be unable to redeem fully.} 

_{Mark to Market Risk. These funds report net asset value more frequently, which may result in more volatility than other real estate investments.} 

_{Interest Rate Risk. Higher interest rates may result in higher financing costs, higher cap rates, and economic pressure which would adversely impact the funds.}  

_{Tax Risk. Tax-Efficiency may decline over time if the pace of deployment slows and there is less property-level depreciation available as an offset to taxable income.} 

_{Corporate Lending} 

_{Credit risk. Private companies are usually unrated or below investment grade, and may be more susceptible to default.} 

_{Competitive Risk. Direct Lending is a crowded space with lenders competing on price and weaker covenants.}  

_{Liquidity Risk. There is no guarantee that a fund’s liquidity mechanisms will be reliable, and the managers are under no obligation to provide liquidity. In a downturn where investor outflows increase materially, investors are likely to experience periods of gating and potentially will be unable to redeem fully.} 

_{Mark to Market Risk. Certain portfolios may own liquid loans or mark to liquid markets, resulting in fund volatility.}   

_{Tax Risk. Lending is generally tax-inefficient and post-tax returns may be materially lower than pre-tax returns.} 

_{Real Estate – Net Lease} 

_{Tenant Credit Risk: There is risk that the tenants of the underlying properties could fail on their rent payments which would ultimately negatively impact cashflows, yield, and return.} 

_{Interest Rate Risk: There is risk involved if rates were to increase, from both a financing and asset value perspective, and rent escalators may not be adequate to offset inflation.}  

_{Competitive Risk. There are many new entrants to the net lease space, and heightened competition may limit deal flow or ability to source attractive deals.}  

_{Liquidity Risk. exit strategies are typically contingent on capital markets and prevailing appetite for risk, which may ebb and flow with the cycle.}