Cost Segregation and 100% Bonus Depreciation: What Changed in 2025, and What It Means for Your Next Deal
Updated September 2026 for the One Big Beautiful Bill Act and the IRS’s 2025 audit guide.
The one-paragraph version
Buildings depreciate over 27.5 or 39 years. Much of what is inside and around a building does not have to. A cost segregation study is an engineering-based breakdown of a property into its components, so the parts with shorter tax lives, carpet, cabinets, parking, fencing, site lighting, can be depreciated over 5, 7, or 15 years instead. Bonus depreciation then lets you take those short-life amounts in a single year. In 2025, the law that governs how much of that you can take changed in your favor.
What changed, and when
The 2017 tax law had 100% bonus depreciation phasing down: 80% in 2023, 60% in 2024, 40% at the start of 2025, headed to zero. On July 4, 2025 the One Big Beautiful Bill Act, Public Law 119-21, reversed that and made 100% bonus depreciation permanent for qualified property acquired and placed in service after January 19, 2025.
2025
onward
The phase-down under the 2017 law was reversed mid-year. Property acquired under a binding contract signed before January 20, 2025 still uses the old 40% rate even if it closed later.
The date matters more than people realize. If you signed a binding purchase contract before January 20, 2025, the property stays on the old 40% schedule even if it closed months later. New construction has its own tests: physical work of a significant nature, or a safe harbor where ten percent of construction cost is incurred after the cutoff. The IRS issued Notice 2026-11 clarifying the mechanics, so this is settled ground now, but the paperwork proving your dates is what an examiner will ask for first.
Cost segregation, explained without the jargon
When you buy a building, the IRS sees one asset with one long life. A study looks at the same building the way an engineer would and asks: which of these components are really personal property or land improvements, and which are structural? The answer reclassifies a meaningful slice, typically twenty to forty percent of the depreciable basis on the kinds of properties I buy, into the shorter buckets.
Everything in the green buckets has a recovery period of twenty years or less, which is what makes it eligible for bonus. The blue bucket, the actual structure, does not qualify and never has. That distinction is the entire study.
The math, on a real-sized deal
Roughly eight times the first-year deduction, on the same building, for the same total depreciation over the life of the asset. That is timing, not free money, and timing is worth a great deal when the alternative is paying tax now and recovering it over 27 years.
Depreciation is timing, not free money. But when you would otherwise pay tax now and recover it over twenty-seven years, timing is worth a great deal.
Section 179 got bigger too
Alongside bonus, the same law raised the Section 179 expensing limit to $2.5 million, with the phase-out beginning at $4 million. Section 179 reaches some things bonus does not, notably roofs and HVAC on nonresidential property, so a good CPA runs both. This is also the provision I used on the truck: a vehicle over 6,000 pounds gross weight, used mostly for the business, can be expensed heavily in year one. Keep the mileage log and the weight rating; that is what gets audited.
What the IRS now expects
In February 2025 the IRS published an updated Cost Segregation Audit Techniques Guide, the manual its examiners use to review these studies. It was written before the July law and still describes the old phase-down percentages, so ignore those numbers, but the rest of it tells you exactly what a defensible study looks like. It lists thirteen principal elements of a quality study, and the theme running through them is the same: engineering-based work, by qualified people, reconciled to actual costs, with the reasoning documented.
Two updates in that guide matter for the assets I own. Stand-alone open-air parking structures are 39-year property, full stop. And electrical switchgear should be allocated by actual load between the building and the equipment it serves, not guessed. Neither is dramatic; both are the kind of detail a rule-of-thumb study gets wrong and an examiner catches.
The limits nobody mentions in the sales pitch
How I actually use it
Every acquisition over about a million in basis gets a study in the first year, ordered before we close so the engineer can walk the property during diligence. On storage that means the paving, fencing, gates, lighting, and security systems come out as 15-year and 5-year property, and that is a large share of what a facility is. On apartments, it is flooring, appliances, cabinetry, and the site work. The deduction lands in the year I most need cash flow, which is always year one.
Then I do the unglamorous part: I hold, so recapture stays theoretical, and I keep the study, the photographs, the invoices, and the placed-in-service dates in one folder per property. If an examiner ever asks, the answer is a PDF, not a scramble.
This is education from an operator, not advice from a professional. Every situation here turns on your entity, your state, your income type, and your exit, so run all of it past a CPA who owns real estate and files these returns constantly. The good ones will tell you in ten minutes whether a study pays on your building.
Part XIII of The REbuild covers depreciation, cost segregation, the vehicle write-off, entity structure, and the tax questions to bring your CPA, with the math worked in the appendix.
