Bonus Depreciation in 2025: What to Know as a Real Estate Investor

What Is Bonus Depreciation and How Does It Work?

Bonus depreciation is a powerful tax incentive that allows real estate investors to deduct 100% of the cost of eligible assets in the same year they’re placed in service. Investors can use bonus depreciation to deduct 100% of things like:

• Equipment
• Appliances
• Building improvements

Real estate investors can leverage 100% bonus depreciation to significantly reduce taxable income and increase after-tax cash flow, especially when they strategically acquire and place assets into service at the right time.

How Bonus Depreciation Works in 2025

Here’s a quick overview of how 100% bonus depreciation works in 2025:

• 100% deduction applies to qualifying assets placed in service on or after January 20, 2025.
• Used property qualifies, as long as it’s new to the taxpayer.
• No phase-out schedule, 100% bonus depreciation is now permanent under federal law.
• Qualified Improvement Property (QIP) and assets with a MACRS recovery period of 20 years or less are eligible.

Bonus depreciation was a key provision of the 2017 Tax Cuts and Jobs Act (TCJA) that enhanced bonus depreciation for qualified property or assets placed into service. The prior phase‑out schedule (40% in 2025, 20% in 2026, 0% in 2027) has been eliminated.

Bonus Depreciation vs. Section 179: Key Differences in 2025

Both bonus depreciation and Section 179 allow for accelerated expensing of business assets, but they serve different purposes.

Like bonus depreciation, Section 179 of the U.S. Internal Revenue Code (IRC) offers an immediate expense deduction for business owners purchasing depreciable business assets:

• Section 179 Definition: Unlike standard depreciation, which spreads the deduction over time, Section 179 allows businesses to deduct up to the full purchase price of qualifying assets in the year they’re placed in service. This immediate deduction reduces the current-year tax liability, providing tax relief for businesses.
• Section 179 Limitations: The asset must be used more than 50% of the time for business purposes to qualify. There are also yearly limits placed on how much you can deduct.
• How Section 179 Differs From Bonus Depreciation: Bonus depreciation allows for immediate deductions but is not limited to specific assets. It generally allows you to deduct a certain percentage of the cost of qualifying assets placed in service in the year of purchase. The special depreciation allowance has no annual limit and can be larger than your income. Bonus depreciation is often used for shorter-lived assets or improvements to real estate, such as new roofs or heating systems.

Which Real Estate Assets Qualify for 100% Bonus Depreciation?

To be eligible for bonus depreciation, an asset must be qualified property that is acquired and placed into service in the same year that it’s claimed. Additionally, the property is required to have a maximum useful life of 20 years or less. Both new and used assets can qualify if they’re new to the taxpayers and not acquired from a related party.

For real estate investors, some of the most common eligible assets include:

• 5-Year Property: Appliances, cabinets, carpeting, fixtures.
• 7-Year Property: Office furniture, equipment.
• 15-Year Property: Land improvements like fences, sidewalks, landscaping, and parking lots.
• Qualified Improvement Property (QIP): Interior non-structural improvements to commercial buildings.

Residential buildings themselves don’t qualify for 100% bonus depreciation because their maximum useful life exceeds 20 years. However, cost segregation studies can help identify other components within a property that qualify, such as home renovations and upgrades.

Tangible property purchased for business use, including within rental properties, is deductible through the bonus depreciation for real estate. This applies to both new and newly acquired used property, provided it hasn’t been used personally before being placed in the rental. In other words, 100% bonus depreciation provides real estate investors an incentive to invest in improving and upgrading their property.

Examples of qualifying assets include:

• Appliances, furniture, lighting fixtures, HVAC systems
• Smart home technology and televisions
• Business operation assets like company vehicles, hardware, and office equipment
• Land improvements like landscaping, irrigation systems, fences and walls, outdoor lighting, and security systems

What Doesn’t Qualify for 100% Bonus Depreciation

Certain assets are explicitly disqualified, such as those used in furnishing or selling utilities and those used in trades involving gas or steam distribution.

For bonus depreciation in real estate, it’s important for investors to understand that residential properties themselves don’t qualify for bonus depreciation because they have a longer useful life than 20 years. So, whether you have a DSCR loan or want to refinance your investment property, it doesn’t matter. What matters is the type of asset and its useful life.

Note that Qualified Improvement Property (QIP) placed in service after December 31, 2017, is now eligible for bonus depreciation, thanks to the CARES Act amendment that retroactively assigned QIP a 15-year recovery period, fixing the original TCJA drafting error.

State-by-State Breakdown: Bonus Depreciation Conformity in 2025

While the One Big Beautiful Bill Act (2025) restored 100% bonus depreciation for federal tax purposes (effective for qualified property placed in service on or after January 20, 2025), each state has its own rules about whether to conform to this federal provision.

This means real estate investors and business owners must understand state-level depreciation rules to avoid costly errors and maximize tax efficiency.

Which States Allow 100% Bonus Depreciation?

Here’s how popular states currently treat the 2025 bonus depreciation provisions:

• California: Does not conform to the current Internal Revenue Code (IRC). Taxpayers must add back any federal bonus depreciation and use a separate depreciation schedule for California state returns. California follows static conformity (as of January 1, 2015) unless Senate Bill 711 is passed.
• Colorado: Fully conforms to the current IRC and allows 100% federal bonus depreciation for state income tax purposes, no add-back required.
• Kansas & Louisiana: Both states conform to the federal IRC and allow taxpayers to claim full bonus depreciation at the state level.
• Texas, Nevada, Alaska, South Dakota, Wyoming, Washington, New Hampshire, Tennessee, Florida: These no-income-tax states either have:
  • No personal or corporate income tax (such as Texas and Nevada), or
  • Income tax systems that do not apply to depreciation conformity (such as Washington and New Hampshire).
  • Therefore, bonus depreciation conformity is not applicable, and no state-level adjustment is required.
    Note: Florida is the exception for corporations, which do file, but it conforms.
• Illinois, New Jersey, Pennsylvania, and New York: These states have decoupled from the federal bonus depreciation rules. Federal expensing must be added back, and state-specific depreciation must be calculated separately
• Arkansas, Connecticut, Kentucky (and others): These states follow partial or static conformity. Bonus depreciation may be allowed in limited years or under special rules, but not fully adopted.

Pros and Cons of Using Bonus Depreciation in Real Estate

Pros of taking the bonus depreciation deduction include:

• Immediate tax deductions: Using bonus depreciation allows investors to deduct a significant portion of their property’s costs in the first year, reducing taxable income and potentially lowering their tax liability.
• Accelerated returns: By front-loading deductions, investors can enjoy higher deductions upfront, allowing them to generate profits sooner and reinvest resources into expanding their real estate portfolio.
• Flexibility: Bonus depreciation offers flexibility in managing taxes and cash flow, especially for those with fluctuating income or substantial capital expenditures.
• Net operating loss (NOL) creation: Claiming bonus depreciation in a year with losses can create or increase a net operating loss, which can be carried forward to offset future taxable income.

Potential disadvantages of using bonus depreciation include:

• Depreciation recapture: Upon selling the property, investors who claim bonus depreciation may be subject to depreciation recapture, requiring them to repay a portion of the deducted value.
• Can’t be used again: You can’t depreciate the asset again in the future if you use bonus depreciation. Therefore, using bonus depreciation can lead to future tax challenges, particularly if a business experiences fluctuations in income or fails to anticipate future depreciation needs.
• Disparities in taxable income: For larger companies with significant capital expenses, bonus depreciation deductions may exceed current taxable income, resulting in unnecessary losses that may be difficult to manage.

2025 Tax Planning Strategies for Real Estate Investors

Now that 100% bonus depreciation is back for good, investors should consider these strategic moves:

1. Time asset purchases to ensure placed-in-service dates fall on or after January 20, 2025.
2. Order cost segregation studies early in the process to accelerate depreciation on 5, 7, and 15-year property.
3. Maximize deductions by combining bonus depreciation with Section 179 for qualifying improvements.
4. Review passive activity rules and income limits with a CPA to ensure you’re eligible to use the full deduction in the current year.
5. Reinvest tax savings into additional properties to compound wealth over time.

Example: A residential real estate investor in a single-family home who spends $250K on unit renovations can now write off the full $250K in the same tax year, slashing their taxable income dramatically.

Take Advantage of 100% Bonus Depreciation in 2025

With the return of 100% bonus depreciation, real estate investors have a powerful tool to:

• Boost after-tax ROI
• Accelerate equity building
• Reduce federal income tax liability
• Create a reinvestment snowball effect

The bottom line is that 100% bonus depreciation is an excellent tax benefit that allows you to reduce taxable income and improve cash flow when investing in real estate.

Considering investing in real estate? It’s always important to consider the tax implications by speaking to your tax professional. Partnering with a trusted mortgage lender like Griffin Funding can provide invaluable support and help you navigate today’s housing market.

Whether you’re looking to secure an investment property loan for acquisitions or optimize your investment portfolio, we offer tailored solutions to meet your needs. Contact Griffin Funding today or download the Griffin Gold app to unlock the full potential of your real estate investments.

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 24 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 12 years in business.