Taxpayers are dealing with a great deal of uncertainty, and clarity is unlikely to emerge until well after the upcoming election.
| Placed-in-Service Year |
Bonus Rate |
| 2018-2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
One major area of interest is the future of bonus depreciation in real estate. An additional incentive beyond accelerated depreciation, bonus depreciation permits the immediate write-off of a percentage of the cost of eligible assets in the year they were placed-in-service. Eligible assets must have a MACRS class life of 20-years or less.
Until the Tax Cuts and Jobs Act (TCJA), the incentive was renewed in piecemeal fashion at varying rates. The TCJA established 10 years of predictable rates, beginning with a 5 year stretch of 100% bonus rates. Thereafter, bonus rates would decline 20% annually.
In recent years, real estate professionals, small business owners, and many politicians agreed that a return to 100% bonus would be ideal. This led to a flurry of legislative activity, including the Tax Relief for American Families and Workers Act.
The Act passed the House 1/31/2024, but lingered in the Senate, despite bipartisan support. This Act would have extended 100% bonus depreciation for qualified property placed-in-service after 12/31/2022 and before 1/1/2026:
- Properties placed-in-service in TY 2023 would benefit from a retroactive 100% bonus rate
- Properties placed-in-service in TY 2024 and TY 2025 would enjoy 100% bonus as well
- Property placed-in-service in TY 2026 would be treated with a bonus rate of 20%.
Only time will tell if these provisions will be reinstated in the post-election period, and if/how they might be modified.
At this point, taxpayers can only rely on the facts as they stand, and would be wise to keep the following in mind:
- Barring any governmental intervention, bonus rates will continue to decline 20% annually though 2026.
- Cost segregation will continue to bring benefit at any bonus rate
- When possible, projects should be placed-in-service before the end of a calendar year to capture the higher bonus rate
Consider the following example.
A garden apartment complex was acquired and placed-in-service in 2018 with a depreciable basis of $37,445,200.
Engineers moved:
- 5% of assets into 5-year personal property
- 7% of assets into 15-year land improvements
In 2018, the property was eligible for 100% bonus, resulting in a first-year tax savings of $3,142,872.
Declining bonus rates will certainly impact the first-year tax savings:
| Placed-in-Service Year | Bonus Rate | First-Year Tax Savings |
| 2018-2022 | 100% | $3,142,872 |
| 2023 | 80% | $2,608,664 |
| 2024 | 60% | $2,074,555 |
| 2025 | 40% | $1,540,246 |
| 2026 | 20% | $1,006,038 |
However, it must be emphasized that even at the lowest bonus rates, cost segregation continues to bring significant benefit.
Taxpayers should be encouraged to plan ahead and avoid crossing into the next tax year whenever possible:
- When considering an end-of-year acquisition, be mindful of timing
- In a renovation scenario, the importance of on-time project completion should be communicated to contractors early in the process
- In some situations, a temporary certificate of occupancy can be obtained before year-end
Real estate professionals are hoping to see the reinstatement of 100% bonus depreciation next year. However, it’s crucial to remember that cost segregation remains an important savings strategy regardless of bonus rate.
Terri S. Johnson, CRE
Partner, Capstan Tax Strategies
Terri works closely with commercial real estate owners and accounting firms to provide practical, creative, and customized engineering-based tax solutions. She can be reached at tjohnson@capstantax.com.