At a glance

• The main takeaway: The One Big Beautiful Bill reinstates 100% bonus depreciation and expands §179 deductions, potentially offering tax planning opportunities for real estate businesses.
• Impact on you: Real estate owners can now immediately expense more assets, but must weigh federal and state-level implications, income limitations, and timing strategies.
• Next steps: Evaluate whether bonus depreciation or §179 is more beneficial for your business, consider a cost segregation study, and plan asset placements before year-end.

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Understanding Real Estate Tax Strategies Post-TCJA: The Full Story

On July 4^th President Trump signed the One Big Beautiful Bill Act into law. Within the bill were extensions and expansions of many of the provisions in the 2017 Tax Cuts and Jobs Act (TCJA).

Among the provisions in the Big Beautiful Bill were extensions and enhancements of both Internal Revenue Code (IRC) section 168(k) and 179. Both code sections largely impact the bottom line of businesses in the real estate sector and there are many ways that they can be used to create a tax benefit for real estate business owners.

Comparing Bonus Depreciation and §179 for Real Estate Assets

Both bonus and §179 depreciation are ways to immediately expense qualified assets that would otherwise have to be depreciated over their useful life. While both are methods to fully expense assets, there are some key differences between the two. These differences include the maximum amount of deduction in a given year, the income level of the taxpayer, and state and local tax issues. These differences will help paint a picture as to which immediate expensing method is most beneficial for a specific taxpayer.

How Bonus Depreciation Impacts Real Estate Tax Planning

IRC 168(k), special allowance for certain property, is a subsection of §168, accelerated cost recovery system, that is commonly referred to as bonus depreciation. Within this section, taxpayers were given the ability to speed up the cost recovery process of eligible assets with a depreciable life of less than 20 years. Eligible property includes assets such as computer equipment, furniture, and property improvements. Leasehold improvements are an example of property improvements; they are any interior improvements of a nonresidential building as defined by §168(e)(6)(A).

In 2017, the TCJA overhauled section 168 allowing for 100% cost recovery in the year an asset was placed in service. As TCJA crept closer to expiring, the amount of bonus depreciation available in the year an asset was placed in service was phasing out, until it would eventually reach zero in the 2027 tax year. The passing of the One Big Beautiful bill stopped the phasing down of the first-year deduction and restored it to 100% for qualified property placed in service on or after January 19, 2025.

There is no limit on the amount of bonus depreciation that a taxpayer can take in a year. Additionally, there are no income limitations, meaning that the use of bonus depreciation can both create and further a taxable loss. A cost segregation study is a great way to increase bonus eligible property. The study does this by identifying and separating all an entity’s assets into their rightful asset class. Cost segregations can break out assets that were originally tied to the building, being depreciated over 39 years, and make the asset bonus depreciation eligible, creating large depreciation deductions.

One drawback to bonus depreciation is that around 2/3 of states decouple from the federal rules and do not recognize the accelerated depreciation method. This will cause differences within a taxpayer’s federal and state depreciation schedules, and the benefits of immediate expensing will be lost in most states.  

§179 Deduction: Expanded Opportunities for Real Estate Owners

In addition to the reinstatement of 100% bonus depreciation, the One Big Beautiful bill also made changes to IRC 179, the election to expense certain depreciable business assets. Section 179 was amended by increasing the per year deduction to $2.5 million as well as increasing the reduction in limitation to $4 million. These changes expand eligibility, allowing more real estate taxpayers to immediately expense qualifying §179 property.

Section 179 borrows many of its definitions of eligible property from §168, especially the definition of qualified improvement property. In §179 the term “qualified real property” means “any qualified improvement property described in §168(e)(6)” as well as building improvements to nonresidential real property such as roofs, heating, ventilation, air conditioning, fire protection, alarm systems, and security systems.

Unlike bonus depreciation, the §179 deduction is subject to federal limitations. Specifically, it cannot create or increase a taxable loss. If a taxpayer cannot fully use the §179 deduction in the current year, the unused amount can be carried forward and applied in a future year when there is sufficient taxable income. Additionally, there is a further limitation on the total amount that can be immediately expensed. Since the passing of the One Big Beautiful Bill the maximum deduction in a given taxable year is $2.5 million.

State-Level Considerations for Depreciation Strategies

Differing from the decoupling we see from states regarding bonus depreciation, the 179 deduction is widely accepted. Currently, 46 states conform with §179 and allow the deduction on the state level. This is an added SALT benefit that taxpayers generally do not have when bonusing their assets.

Year-End Planning for Real Estate Tax Optimization: The Bottom Line

As the end of the 2025 tax year draws closer, it becomes increasingly important to ensure a taxpayer’s year end plan is right for them. There are many factors when it comes to choosing between bonus depreciation and §179, each of which has its own benefits and drawbacks. Some questions to consider include:

• Would the taxpayer stand to benefit more from placing an eligible asset in service 12/31/2025 to receive a benefit in the current tax year or wait until 1/1/2026 and take the benefit on the next return?
• Will the taxpayer be limited by their income levels, thus reducing the §179 benefits?
• Would a cost segregation study be a benefit for the taxpayer to accelerate depreciation?
• What will the impact of accelerated depreciation be on the state level?

Practitioners and taxpayers alike must be thinking about the benefits and costs to their decisions at the end of the tax year, especially in a year with a large overhaul to both bonus depreciation and §179 deduction.

Should you want assistance with year-end planning, connect with Aprio’s real estate tax professionals now.