What is Bonus Depreciation?

Bonus Depreciation is a tax incentive that allows you to front-load a percentage of shorter-lived asset classes into Year 1. This helps businesses save money on taxes and redeploy capital to drive more business. On a typical single-family rental home in the Salt Lake City area, Year 1 Bonus Depreciation often exceeds $100,000, resulting in massive tax savings.

Your Bonus Depreciation percentage differs depending on when the asset was placed in service.

Why Do the Rates Change Year by Year?

Put far too simply, Bonus Depreciation is a tool used to help spur the economy. It typically starts at 100% and is then phased out by 20% each year until the economy presumably no longer needs it. This was the case until recently when the One, Big, Beautiful Bill was enacted, which reinstated 100% additional first-year depreciation for qualified property acquired and placed in service after Jan. 19, 2025. There are elections and transition rules that can affect the rate (e.g., 40% or 60% in certain situations); your tax advisor can confirm how they apply to you.

What Does Bonus Depreciation Apply To?

Bonus Depreciation generally applies to shorter-lived assets, such as 5-, 7-, and 15-year property. For your typical single-family home or Airbnb rental property, you'll typically see it divided into three classes:

• 5-Year Property: Kitchen appliances, window coverings, carpet
• 15-Year Property: Fencing, sprinkler system, outdoor shed
• 27.5-Year Property: The foundation, walls, and structure itself

Your average Cost Segregation Study will find between 24–33% of your depreciable basis to be made up of 5- and 15-Year Property. Bonus Depreciation applies to this value. For example, if your depreciable basis was $475,000 and the study found 28% to be 5- and 15-Year Property in a year with 100% Bonus Depreciation, you'd be able to depreciate $133,000 in Year 1.

Without a Cost Segregation Study, all the shorter-lived assets would depreciate within the 27.5-Year Property bucket, meaning in this scenario you'd only be able to depreciate just over $17,000 in Year 1. That's a $116,000 difference!

A Common Question

"If I bought and placed my property in service in 2024 but get a Cost Segregation Study for my 2025 taxes, how does that work?"

One of the great things about Cost Segregation Studies is you can easily apply them to previous years without having to redo all the past tax returns.

In this case, you'd be eligible for the 60% Bonus Depreciation that 2024 allows for, and ultimately you'd apply those losses to your 2025 return. This is done via a 481(a) adjustment, which can be taken care of by us and your CPA.

What's important to understand is that the later you perform a Cost Segregation Study, the smaller the "catch-up" benefit tends to be. That's because the property has already been depreciated under the default schedule (27.5 years for residential and 39 years for commercial), which reduces the remaining basis available to reclassify into shorter-life assets for accelerated depreciation.

That being said, we find that Cost Segregation Studies still provide great value even when done 8–10 years later. Beyond that, the benefits vary on a case-by-case basis.

In summary, Bonus Depreciation opens the door to tremendous tax savings in Year 1 and can be a great tool in your tax strategy.