One of the most consequential tax law changes affecting real estate investors over the past several years was the passage of the One Big Beautiful Bill Act (OBBBA), which made 100% bonus depreciation permanent. Before OBBBA, bonus depreciation was phasing down on a
defined schedule: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and zero in 2027. The phase-down was disrupting real estate tax planning across the country. OBBBA reset the structure entirely.
AE Tax Advisors, the Billings, Montana, tax advisory firm specializing in real estate tax strategy, has integrated the OBBBA bonus depreciation rules into its planning framework, and the implications for real estate investors are significant enough that the strategy warrants a structured walkthrough.
The mechanics of bonus depreciation under current law are worth understanding clearly.
Bonus depreciation allows immediate Year 1 deduction of qualifying property, generally property with a recovery period of 20 years or less under the Modified Accelerated Cost Recovery System (MACRS). This includes most personal property used in a business, qualifying improvement property, and the components of real estate identified through cost
segregation studies as falling into 5-year, 7-year, or 15-year MACRS classes.
The combination with cost segregation is where the strategy becomes powerful for real estate investors. A standard real estate purchase results in depreciation over 27.5 years (residential) or 39 years (commercial), far too slow to yield meaningful current-year tax benefits. But a cost segregation study identifies the building components that actually qualify for shorter recovery periods, and bonus depreciation then accelerates those components into Year 1 deductions.
The math under OBBBA is meaningful. Consider a $2 million residential rental property with $1.6 million of depreciable basis. A 27.5-year depreciation schedule produces roughly $58,000 in annual depreciation. With cost segregation identifying 30% of the basis ($480,000) as 5-, 7-, or 15-year property, and 100% bonus depreciation applied to those components, the Year 1 depreciation jumps to approximately $480,000 plus the standard depreciation on the remaining 70%, roughly $521,000 total in Year 1.
The strategic implications are substantial. For real estate investors with sufficient material participation to qualify for active loss treatment, including short-term rental investors and real estate professionals, the Year 1 depreciation can offset other active income, including W-2 wages, business income, and active investment income. The strategy produces tax savings in the year of acquisition that can fundamentally change the investment economics.
AE Tax Advisors’ role is to execute the strategy correctly across multiple dimensions.
The first is identifying qualifying property at the time of acquisition. Not all real estate qualifies for the full benefit. New construction qualifies. Properties acquired from unrelated parties qualify. Properties acquired in like-kind exchanges are subject to specific rules. AE Tax Advisors evaluates each acquisition against the qualifying criteria.
The second is executing the cost segregation study. The firm coordinates with engineering professionals to produce IRS-defensible studies that accurately identify the accelerated components. The quality of the study matters because aggressive or improperly documented cost segregation can be disallowed during an audit.
The third is the active loss treatment structure. Bonus depreciation produces deductions, but whether those deductions can offset active income depends on the investor’s overall tax structure. AE Tax Advisors works through the material participation analysis, the §469
grouping elections, and the documentation requirements that determine whether the deductions actually flow through to active income offset.
The fourth is the multi-property coordination. Investors with multiple properties need to coordinate the bonus depreciation strategy across the portfolio, and the firm’s annual $7,800 advisory engagement includes ongoing coordination for acquisitions, dispositions, and operational changes.
The fifth is the Form 3115 catch-up opportunity for property already in service. Properties acquired before cost segregation was performed can often be brought into compliance retroactively, capturing the missed depreciation as a current-year deduction without amending prior returns.
For real estate investors evaluating their tax strategy in light of OBBBA’s permanent 100% bonus depreciation, the AE Tax Advisors framework is among the more substantive technical resources currently available. The strategy is permanent. The execution is technical. And the team, IRS Enrolled Agents and licensed CPAs serving clients in all 50 states, has developed the expertise needed to cleanly capture the available benefit.
Disclaimer: The content in this article is provided for general knowledge. It does not constitute legal advice, and readers should seek advice from qualified legal professionals regarding particular cases or situations.
