100% Bonus Depreciation Is Back. Here Is How a Cost Segregation Study Turns a Building Into a Year-One Deduction.

For three years the bonus depreciation rate was sliding toward zero. 80 percent in 2023, 60 in 2024, 40 in 2025. Every CPA I know had a client holding a building purchase hoping Congress would fix it.

Congress fixed it. The One Big Beautiful Bill Act, signed July 4, 2025, restored 100 percent bonus depreciation and made it permanent for qualifying property acquired and placed in service after January 19, 2025. No phase-down, no sunset.

That is the headline. The useful part is how it interacts with a cost segregation study, because on its own a building does not qualify for bonus depreciation at all. Here is the whole mechanic, with numbers.

First, what bonus depreciation is not

Bonus depreciation applies to property with a recovery period of 20 years or less. A commercial building is 39-year property. An apartment building is 27.5. Neither qualifies. If you buy a $5 million office building and do nothing else, you deduct roughly $128,000 a year for 39 years, and bonus depreciation never enters the picture.

So the rule by itself does nothing for a real estate buyer. It needs a second step.

What a cost segregation study does

A building is not one asset. It is a structure plus hundreds of components that the tax code treats differently. Carpet, cabinetry, dedicated electrical, signage, security systems, parking lots, landscaping, site lighting, fencing, and on and on.

A cost segregation study is an engineering report that walks the building, prices each of those components, and reclassifies them out of the 39-year bucket into 5, 7 and 15-year buckets. Five-year property is the personal-property items. Fifteen-year property is the land improvements. What is left in 39 years is the structure: foundation, frame, roof, walls, base building systems.

Everything that lands in the 5, 7 and 15-year buckets now has a recovery period under 20 years. Which means it qualifies for bonus depreciation. Which means, as of this year, you deduct 100 percent of it in the year you place the building in service.

The numbers on a $5 million building

Here is a typical suburban multi-tenant office or flex building, the kind we buy every month. Purchase price $5,000,000. Land allocation $750,000, which is never depreciable. Depreciable basis $4,250,000.

Without a study: $4,250,000 over 39 years is about $109,000 a year. Year one, a little less because of the mid-month convention.

With a study: on this kind of building, 25 to 35 percent of the depreciable basis typically moves into the short-life buckets. Call it 30 percent, or $1,275,000. That full amount is deductible in year one under 100 percent bonus. The remaining $2,975,000 stays on the 39-year schedule, about $76,000 a year.

Year-one deduction without the study: roughly $109,000. Year-one deduction with the study: roughly $1,350,000. On a buyer in the 37 percent federal bracket, that is a first-year tax reduction near $460,000 at the federal level, on a building that cost $5 million. The study itself runs $8,000 to $15,000 for a building this size.

Flex and industrial tend to land at the lower end of the range because so much of the cost is in the shell. Office with heavy tenant finish and retail with site work land higher. Multi-family is in the middle.

Where people get it wrong

Two places.

The passive loss rules. A $1.35 million deduction is only worth something if you can use it. For most investors, rental real estate losses are passive, which means they offset passive income and nothing else. The excess carries forward. The deduction becomes fully usable against wages, business income and gains only if you qualify as a real estate professional, which has a 750-hour test and a material participation test, or if your spouse does. Plenty of owner-operators qualify. Plenty of passive investors do not and are surprised. This is the conversation to have with your CPA before you close, not after.

Minnesota does not play along. Minnesota has never conformed to federal bonus depreciation. On your Minnesota return you add back 80 percent of the bonus deduction and recover it over the following five years. The federal benefit is real and immediate. The state benefit is spread out. If you see a projection that applies the full deduction to your Minnesota tax, somebody skipped a step.

And then there is recapture

Depreciation is a deferral, not a gift. When you sell, the 5, 7 and 15-year property you expensed is recaptured as ordinary income, and the 39-year depreciation is recaptured at 25 percent. I wrote about recapture here, and it is the reason the exit matters as much as the entry.

A cost segregation study front-loads the deduction. A 721 contribution at the end defers the recapture. Together they are the two bookends of a building's tax life: take the deduction in year one, never trigger the recapture at the end. That is the full strategy, and it is why we run a study on almost everything we buy and offer a 721 on almost everything we sell.

What else the bill did

Two other items matter for commercial owners. Section 179 expensing went up to $2.5 million with a $4 million phase-out, which helps with tenant improvement work on smaller buildings. And a new category called qualified production property allows 100 percent expensing of the production-use portion of a manufacturing building, for construction started after January 19, 2025 and placed in service by the end of 2030. If you are building or buying a plant, that one is large.

What to do with this

If you are buying a building in the Twin Cities this year, get a cost segregation study and model it with your CPA before closing, with the passive-loss question answered and the Minnesota add-back included. If you are investing passively alongside an operator, ask whether they run studies and how the depreciation flows through to your K-1. We do, and it does.

And if you are on the other side, holding a building you have already fully depreciated and dreading the recapture, that is exactly the owner a 721 exchange was built for. Send me the address.

This article is general information, not tax advice. Bonus depreciation, passive activity rules, Minnesota conformity and recapture all depend on your facts. Have your CPA run your numbers.

Mike Sowers, CCIM founded Commercial Investors Group in 2005 and is the Managing Member of AlphaDiv Real Estate Fund. He is the author of the Amazon bestseller Commercial Real Estate Investing and host of the CREative Commercial Real Estate Show. mike@cre-fund.com