Bonus Depreciation Commercial Real Estate 2025: Complete Tax Strategy Guide

The year 2025 is shaping up to be a game-changer for commercial real estate: Nearly nine out of ten industry leaders expecting a revenue boost thanks to smart tax moves like bonus depreciation commercial real estate 2025.

From our experience, these tax benefits can transform how real estate investors, developers, and small business owners manage their portfolios. This guide breaks down the essentials of bonus depreciation and tax strategy to help boost cash flow and cut tax liability.

We’ll show actionable tips on qualifying properties, strategic planning, and avoiding common pitfalls, all tailored for real estate investment trusts, CPAs, and financial advisors.

This article is a key part of our ongoing series breaking down on the big beautiful bill. For more context, check out our take on the big beautiful bill real estate investors benefits in our previous article.

Next, we’ll explore the big beautiful bill SALT cap to round out your tax knowledge.

Let’s start!

Understanding Bonus Depreciation Commercial Real Estate 2025 Rules

Navigating the bonus depreciation rules is the first step to maximizing your return. We’ll break down the percentages, key changes, and what qualifying property truly includes under the internal revenue code.

Current Percentages and Phasedown Schedule (and 2025 Split-Year Rule)

The current federal bonus depreciation rules are in a phasedown schedule, and not a simple on-or-off switch. Under the 2017 Tax Cuts and Jobs Act (jobs act), the 100% bonus depreciation percentage began stepping down each year.

• For tax years beginning in 2024, the rate is 60%.
• For 2025, there is a split-year rule:
• Assets placed in service between January 1–19, 2025 qualify for only 40% reduced bonus depreciation.
• Assets acquired and placed in service on or after January 19, 2025 qualify for a full bonus depreciation rate of 100%, permanently restored under the Big Beautiful Bill Act.

A binding contract rule applies. Property under a binding contract signed before January 19, 2025 may not qualify for the new 100% treatment.

Taxpayers may also elect a transition rule to stick with the 40% rate. Want to lock in maximum deduction? Know when property is property acquired and property placed in service.

Key Changes in 2025

Many investors asked whether Congress would pass a legislation that restores 100% full bonus depreciation.

The answer is yes. The Big Beautiful Bill Act, signed on July 4, 2025, included key provisions that permanently restores 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.

This change overrides the prior tax cuts schedule that phased rates down. What the new legislation shows is that staying updated on final legislation and other provisions remains crucial.

Any further updates could reshape your tax strategy for the coming tax years beginning after 2025.

Defining Qualifying Property Under The Internal Revenue Code

The internal revenue code defines qualifying property broadly. Under §168(k), assets qualify if they have a recovery period of 20 years or less. This includes much tangible property, like capital equipment, qualified improvement property, and certain infrastructure.

This is distinct from qualified improvement property and applies to certain assets used in a qualified production activity. So do you determine when to use election? Careful tax planning helps a lot!.

Impact On REITs And Federal Rules

Real estate investment trusts (REITs) often use taxable REIT subsidiaries to hold and deduct the cost of such property. These rules interact closely with the real property trade or business election.

While the Big Beautiful Bill Act did not create a special carve-out for REITs, the federal bonus depreciation rules continue to create opportunities if structured properly.

It can be quite challenging navigating these intricacies, but a tax advisor can be invaluable for REITs and real estate businesses. After all, you don’t want to miss all those benefits, right?

Qualifying Property And Eligibility Requirements For Maximum Deduction

Knowing the rules is one thing. Understanding what qualifying property truly means is where the real tax benefits happen.

Qualified Improvement Property (QIP)

Qualified improvement property refers to any interior improvement made to a nonresidential real property building, after the building was first placed in service. Think of modernizing tenant spaces in commercial buildings.

Tangible Personal Property Vs. Real Property

The distinction between tangible personal property and nonresidential real property is critical. Tangible property (furniture, movable equipment, certain qualified production property) often qualifies for faster write-offs.

In contrast, real property like the building structure itself is depreciated over longer periods. Getting this classification right is the central goal of a cost segregation study.

Eligible Property Includes Specific Improvements

Eligible property includes more than most investors realize. For example:

HVAC systems, security systems, and fire protection can often be expensed under section 179 expensing, and in some cases under bonus depreciation if classified as QIP.

Land improvements such as parking lots, sidewalks, and fencing are typically 15-year property and bonus-eligible.

Separating these items from the full purchase price of a building allows allocate costs strategically and accelerates deductions.

Timing Requirements

Timing is non-negotiable. The deduction applies in the tax year the asset is placed in service, meaning ready and available for use, not just purchased.

The property acquired must be new to you, though existing property (used property) may also qualify if related-party rules are satisfied. Correctly applying the recovery period standards ensures that your assets qualify for bonus treatment.

Special Considerations

Mixing old and new property can be powerful. For example, adding capital equipment such as a new elevator to existing property may allow you to classify the elevator separately as such property.

These qualifying assets accelerates deductions and improves near-term cash flow. Of course, you have to first identify these assets.

Careful classification with a tax advisor ensures compliance with both federal bonus depreciation rules and local tax treatment.

Strategic Tax Planning And Cash Flow Optimization

Good planning separates those who maximize deductions from those who leave money on the table.

Let’s walk through cost segregation, the differences between Section 179 and bonus depreciation, ways to boost cash flow, and advanced strategies real estate investors often consider.

Cost Segregation And Allocation

A cost segregation study breaks a building down into components. Instead of depreciating everything over 39 years, investors can reclassify parts like fixtures, flooring, or specialty lighting into shorter schedules. That allows you to allocate costs more strategically.

For example, an investor who buys a hotel may identify millions in assets that qualify for five, seven, or fifteen-year depreciation.

Those accelerated write-offs create immediate deductions and can support qualified production activity if the property serves business functions tied to manufacturing or production.

A practical takeaway: run a study early after acquisition. The sooner assets are reclassified, the quicker deductions impact the bottom line.

Section 179 Vs. Bonus Depreciation

Both Section 179 and bonus depreciation are powerful, but they operate differently. Section 179 lets you expense items immediately, subject to limits. In 2025, the threshold is high enough to cover many property upgrades, but not unlimited.

• Section 179 expensing applies best to smaller purchases or equipment.
• Bonus depreciation covers a broader range and has no dollar limit.
• Timing matters: Section 179 cannot exceed taxable income, while bonus depreciation can create a loss carryforward.

Consider a warehouse purchase: the purchase price may include racking systems. Section 179 might allow partial expensing, but bonus depreciation can let you deduct the full purchase price of qualifying items. It’s a smart tax strategy to knowing which to choose.

Improving Cash Flow

Strong cash flow is the lifeblood of any property. Accelerating deductions helps improve cash flow in the early years, giving businesses more capital to reinvest.

For instance, a developer who places assets into service in Q4 can generate deductions that offset taxable income immediately. That means more cash for capital investments like additional properties or renovations.

These deductions also help control adjusted taxable income, which plays into interest deduction limitations.

Bottom line: accelerated depreciation works best when it matches upcoming projects. Deduct now, reinvest faster, and grow returns.

Advanced Planning Strategies

Larger entities such as real estate businesses and taxable REIT subsidiaries often use layered strategies. These may include pairing bonus depreciation with interest deductions, timing acquisitions across tax years, or adjusting allocations within a real property trade.

There’s also the policy angle. With the big beautiful bill act restoring full bonus depreciation, planning flexibility matters even more. Savvy teams model different outcomes so they aren’t caught flat-footed.

Implementation And Professional Guidance For Real Estate Investors

Knowing the rules is one thing. Applying them correctly each tax year is where real value shows up. Here’s how to handle filings, avoid mistakes, consider alternatives, and when to call in expert help.

Filing And Claiming Deductions

When claiming bonus depreciation, timing is a huge factor. Assets must be placed into service during the tax year and properly recorded in filings. Good tax planning means tracking acquisitions and ensuring documentation lines up with IRS definitions.

For example, filing for HVAC upgrades without listing service dates can delay approval. Organized records keep your tax liability predictable and ensure you get the maximum deduction available.

Common Mistakes

Several missteps come up repeatedly:

• Treating repairs as improvements when they don’t qualify.
• Misclassifying existing property that has already been depreciated.
• Assuming new acquisitions automatically qualify without checking definitions.
• Overlooking qualifying assets that could have accelerated schedules.
• Forgetting about the recovery period rules for shorter-lived property.

Careful not to make these errors! Avoiding these can protect against audits and maximize deductions.

Other Provisions And Alternatives

There are times when bonus depreciation isn’t the best or only choice. New markets tax credit and markets tax credit programs provide incentives for certain geographic areas. Some investors explore other provisions like energy credits for sustainability projects.

In complex cases, an alternative depreciation system (ADS) may apply. This often happens when businesses face international tax rules. ADS can extend schedules, so planning is needed.

Investors also must consider how carried interest, capital gains, and income recognition interact with bonus depreciation decisions.

Example: a fund manager might defer capital gains through a 1031 exchange but still face different rules for depreciation recapture. These moving parts require careful coordination.

Professional Guidance

Even seasoned investors know the value of help. A trusted tax advisor can flag red flags, model scenarios, and interpret shifting legislation.

• Real estate investors facing complex scenarios like cross-border assets need expert input.
• Local tax treatment may not always mirror federal law.
• Monitoring key provisions within final legislation can determine whether planning assumptions hold.

All in all, it’s better to get guidance early on to avoid corrections later, which may be costly. It’s less about fixing mistakes and more about optimizing returns from the start.