Bonus Depreciation History
Bonus Depreciation History
Bonus depreciation is a tax incentive that allows investors to deduct a percentage of real-estate acquisition cost immediately, rather than spreading it across 27.5 or 39 years. It was set at 100% from 2017 to 2022, then phased down starting in 2023. Understanding the phase-down schedule is critical for long-term real-estate investment planning.
Key takeaways
- Bonus depreciation for real estate was 0% in 2018–2022, then reactivated at 60% in 2023 with a mandatory 20% annual phase-down.
- The schedule: 60% (2023), 40% (2024–2025), 20% (2026–2027), 0% (2028+).
- Bonus depreciation applies only to depreciable real-estate components (structure and improvements), not land.
- It can be combined with cost segregation: the 60% bonus applies to the entire accelerated-depreciation pool (5-, 7-, and 15-year components).
- For a $10 million acquisition in 2024, bonus depreciation generates a deduction worth $2.4 million (assuming 40% of basis is depreciable real property).
- Recapture at 25% applies when you sell, but the time-value benefit of front-loading deductions remains substantial.
Timeline: the bonus depreciation saga
Bonus depreciation for business property was introduced in 2002 as a temporary stimulus measure, allowing 30% expensing. It was raised to 50% in 2008, then made temporary and increased further through various tax acts. The Tax Cuts and Jobs Act of 2017 set bonus depreciation at 100% for all business property, including real estate, effective through 2022.
In 2022, Congress allowed the 100% bonus to sunset and replaced it with a phase-down schedule for property placed in service after December 31, 2022:
| Year(s) | Bonus Depreciation Rate |
|---|---|
| 2023 | 60% |
| 2024–2025 | 40% |
| 2026–2027 | 20% |
| 2028+ | 0% (expired) |
This phase-down is expected to remain law unless Congress extends it. For real-estate investors, the implication is clear: the time value of aggressive depreciation deductions is shrinking year by year. A property acquired in 2024 receives 40% bonus; in 2026, 20%; in 2028, 0%. This creates a planning incentive to accelerate acquisitions into 2024–2025.
How bonus depreciation works with real estate
Bonus depreciation is applied to the depreciable basis of real property, which is the acquisition cost minus land value. For a $10 million commercial building acquisition with 80% allocated to structure ($8 million), the depreciable basis is $8 million.
In 2024, with 40% bonus depreciation, the deductible amount is $8 million × 0.40 = $3.2 million. This is deducted in year one, before any regular straight-line depreciation.
The remaining depreciable basis ($8 million – $3.2 million = $4.8 million) is depreciated over 39 years (commercial) or 27.5 years (residential): $4.8 million ÷ 39 = $123,077 annually (commercial).
Year-one total deduction: $3.2 million + $123,077 = $3.323 million, or 33.2% of the purchase price. This is extraordinary compared to standard depreciation (without bonus), which would be $205,128 in year one.
Combining bonus with cost segregation: the maximum benefit
The real power emerges when bonus depreciation is layered with cost segregation. Suppose you purchase a $10 million commercial property in 2024. A cost-segregation study determines:
- 65% ($6.5M) is 39-year building structure.
- 20% ($2M) is 15-year leasehold improvements.
- 10% ($1M) is 7-year land improvements.
- 5% ($500K) is land (non-depreciable).
Total depreciable basis: $9.5 million.
With 40% bonus depreciation applied to the depreciable pool:
- Bonus deduction: $9.5M × 0.40 = $3.8 million (deducted immediately).
- Remaining basis to depreciate: $9.5M – $3.8M = $5.7 million.
- Year-one regular depreciation: ($6.5M × 0.60 ÷ 39) + ($2M × 0.60 ÷ 15) + ($1M × 0.60 ÷ 7) = $100,000 + $80,000 + $85,714 = $265,714.
- Year-one total deduction: $3.8M + $265,714 = $4.065 million, or 40.65% of acquisition cost.
For a high-income investor in the 45% combined federal-state bracket, this generates $1.83 million in year-one tax savings—equivalent to a 18.3% after-tax rebate on the entire purchase price.
Why it sunsets: policy debates
Bonus depreciation has always been controversial. Critics (particularly on the left) argue it's a giveaway to wealthy real-estate investors, increasing leverage and speculation without producing proportional economic growth. Supporters counter that it stimulates capital formation and development in under-served markets.
The phase-down reflects a political compromise. Extending 100% bonus permanently would cost the federal government ~$30 billion over a decade (in foregone tax revenue). Full expiration would eliminate incentives critics saw as wasteful. The current schedule splits the difference: bonus depreciation remains through 2027, then expires.
Congress could extend the schedule or restore 100% bonus with a new tax act. But the trajectory is clear: accelerated depreciation incentives are dwindling.
Recapture and the time-value argument
All bonus depreciation is subject to 25% federal recapture when you sell. If you deduct $3.8 million in bonus depreciation and sell five years later, you owe $3.8 million × 0.25 = $950,000 in recapture tax.
This is a real cost, but the time-value benefit can outweigh it:
- Year one: claim $3.8M deduction, save $1.71 million in tax (at 45% rate).
- Years 2–5: invest or deploy the $1.71 million tax savings at a 7% annual return.
- Year 5: owe $950,000 in recapture tax, but you've had five years of tax deferral on $3.8 million, plus five years of compound growth on the saved tax.
The net benefit (deferral + growth – recapture) is strongly positive for most investors, especially those in high tax brackets.
Strategic timing: the 2024–2025 window
The 40% bonus in 2024–2025 is a critical window. In 2026, it drops to 20%; in 2028, to 0%. This creates a two-year tax optimization opportunity:
- Acquisitions in 2024–2025 receive 40% bonus (present value of deductions is higher).
- Acquisitions in 2026–2027 receive only 20% bonus.
- Acquisitions from 2028 onward receive 0% bonus depreciation.
A $10 million acquisition timing matters:
- 2024: $4M bonus deduction (year one), $1.8M tax savings at 45% rate.
- 2026: $2M bonus deduction (year one), $0.9M tax savings at 45% rate.
- 2028: $0 bonus, only standard depreciation.
For investors with substantial capital and high tax brackets, the financial case for accelerating deals into 2024–2025 is compelling. This likely drove capital allocation into real estate in 2023–2024, and explains the recent uptick in commercial real-estate transactions.
Interaction with section 179 expensing
Section 179 allows up to $1.36 million (2024, indexed annually) of tangible property to be expensed immediately. For real estate, Section 179 applies to qualified land improvements (parking lots, landscaping, sidewalks) and some interior finishes (qualified leasehold improvements).
Section 179 and bonus depreciation both reduce basis. If you claim $400,000 in Section 179 on land improvements, your depreciable basis decreases accordingly. The two provisions work together but not separately—bonus is calculated on the remaining depreciable basis after Section 179.
Flowchart: bonus depreciation over time and strategy
Related concepts
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Depreciation benefits are available only for direct real-estate owners. If you own real estate through a REIT or ETF, depreciation flows to the REIT, not to you. Mortgage interest, on the other hand, is deductible by the direct owner at the property level, making it a separate and powerful incentive to finance real estate with debt.