Reducing your tax bill is one of the most satisfying wins in real estate investing. Whether it comes from mileage write offs, marketing costs, or operating expenses, every dollar saved improves cash flow.
One of the most powerful tax tools available to real estate investors is bonus depreciation, and as of 2025 and moving into 2026, it just became even more valuable.
With permanent 100 percent bonus depreciation restored, investors now have the opportunity to significantly reduce taxable income in the year they buy or improve a property, while using strategic mortgage and non QM financing to scale faster.
Let’s walk through how bonus depreciation works, what qualifies, and how to align your tax strategy with smart real estate financing.
What Is Bonus Depreciation
Bonus depreciation allows real estate investors to deduct the full cost of qualifying property and improvements in the year they are placed in service, rather than spreading deductions over decades.
Under traditional depreciation rules, residential rental properties are depreciated over 27.5 years, and commercial properties over 39 years. Bonus depreciation accelerates those deductions for qualifying components, allowing investors to recover costs immediately.
Think of it as pulling years of depreciation forward into year one.
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What Changed in 2025
In July 2025, the One Big Beautiful Bill Act permanently restored 100 percent bonus depreciation for qualifying property.
This removes the uncertainty created by phase outs in prior years and gives real estate investors a stable, long term planning advantage.
To qualify for the permanent 100 percent deduction, property must be acquired and placed in service on or after January 20, 2025. Timing matters, especially for investors actively buying or renovating properties.
Why 100 Percent Bonus Depreciation Matters to Investors
With 100 percent bonus depreciation, investors can:
- Significantly reduce taxable income in acquisition year
- Improve after tax cash flow immediately
- Offset high income years strategically
- Reinvest tax savings into additional properties
- Accelerate return on investment
This strategy is especially powerful when paired with non QM loan programs such as DSCR loans, bank statement loans, and asset based financing, allowing investors to grow without relying on W two income.
Which Real Estate Assets Qualify
While the building itself does not qualify due to its long useful life, many components within a property do.
Common Qualifying Property Categories
- Appliances, flooring, fixtures, and equipment
- Certain electrical, plumbing, and HVAC systems
- Land improvements such as parking, fencing, and landscaping
- Interior non structural improvements in commercial buildings
These assets fall under MACRS recovery periods of 5, 7, or 15 years, making them eligible for bonus depreciation.
A major addition in 2025 is Qualified Production Property, which allows certain industrial and manufacturing buildings to qualify for full first year depreciation.
For investors in warehouses, industrial real estate, and manufacturing facilities, this can result in six figure tax savings in the first year alone.
Repairs vs Improvements, Why Classification Matters
Understanding the difference between repairs and improvements is critical.
Improvements
- Add value or extend useful life
- Adapt the property for a new use
- Are capitalized and depreciated
- May qualify for bonus depreciation
Repairs
- Maintain existing condition
- Are immediately deductible
- Do not require depreciation
Proper classification protects you from IRS scrutiny and ensures you maximize deductions legally.
How Cost Segregation Unlocks Bonus Depreciation
A cost segregation study breaks a property into individual components and reclassifies parts of the building into shorter life assets.
Instead of depreciating most of the property over 27.5 years, you accelerate depreciation for eligible components into year one using bonus depreciation.
For many investors, this creates dramatic tax savings that far exceed the cost of the study.
Cost segregation is most valuable when done:
- At acquisition
- After construction
- After major renovations
- As a look back study on previously purchased assets
How Bonus Depreciation Works with Mortgage and Non QM Financing
This is where tax strategy and financing align.
Using Bonus Depreciation to Improve Cash Flow
Bonus depreciation does not reduce your actual mortgage payment, but it lowers your tax liability, effectively putting more cash back into your pocket.
This added liquidity helps investors:
- Service DSCR loans more comfortably
- Scale portfolios faster
- Reinvest without selling assets
Non QM Lending and Depreciation Friendly Structures
Programs like DSCR loans qualify you based on property cash flow rather than taxable income, making them ideal when depreciation lowers reported income.
Using tools like a DSCR calculator or property cash flow analysis tool helps investors model the impact of depreciation and financing together.
Bonus Depreciation vs Section 179
While both allow accelerated depreciation, bonus depreciation is often more flexible for real estate investors.
Bonus depreciation has:
- No dollar cap
- No income limitation
- Broader eligibility through cost segregation
- Automatic application unless elected out
Section 179 is more restrictive and limited in real estate use cases.
Potential Drawbacks to Consider
Bonus depreciation is powerful, but not for every situation.
Possible downsides include:
- Depreciation recapture at sale
- Passive activity loss limitations
- Timing mismatches with future income
That said, unused losses carry forward indefinitely, and strategies like 1031 exchanges can defer recapture taxes.
Why Expense Tracking Is Critical
Accurate records are essential to support depreciation claims.
Investors should track:
- Purchase and closing documents
- Improvement invoices and contracts
- In service dates
- Asset classifications and allocations
Clean documentation protects you during audits and simplifies collaboration with your CPA.
Final Thoughts, Putting It All Together
The permanent return of 100 percent bonus depreciation is one of the most meaningful tax advantages real estate investors have seen in years.
When paired with smart mortgage planning, non QM lending, DSCR loans, and cost segregation, it becomes a powerful engine for growth, cash flow, and portfolio expansion.
These benefits only work if you take action. Missed depreciation cannot always be recovered later.
If you are planning a purchase, renovation, or short term rental strategy, now is the time to align your tax planning and financing.
SEI Mortgage offers flexible non traditional loan programs designed for real estate investors, including DSCR loans, bank statement loans, and other asset based solutions that work hand in hand with depreciation strategies.
Disclaimer
This article is for general educational purposes only and does not constitute tax, legal, or financial advice. Always consult with a qualified CPA, tax advisor, or legal professional regarding your specific situation.
