The One Big Beautiful Bill Act (OBBBA) has permanently restored 100% bonus depreciation for qualifying property obtained and placed in service after January 19, 2025, eliminating the previous phase-down schedules. This change means new property owners can immediately expense their short-life building components and Qualified Improvement Property (QIP), significantly increasing the value of cost segregation studies.
Commercial real estate strategy shifted materially in 2026. Under the Tax Cuts and Jobs Act of 2017, bonus depreciation was set to decline 20 percentage points a year after 2022, 60% in 2024, 40% in 2025, 20% in 2026, and nothing from 2027 onward. The OBBBA eliminated that sunset entirely.
The restoration applies to assets acquired and placed in service after January 19, 2025. One timing caveat matters: property under a written binding contract before January 20, 2025 may remain subject to the prior-law phase-down rates, so the closing date alone does not determine which rate applies. For commercial property owners, the reversal creates a clearer path toward protecting income, improving first-year cash flow, and optimizing asset valuations.
Identifying Qualifying Property Categories
If you’ve recently acquired a commercial building, you might be wondering how to enjoy the benefits of this newly reinstated 100% bonus depreciation. As a commercial real estate owner, you can’t apply accelerated depreciation to a building’s primary shell, which depreciates over the span of 39 years. The foundational rule is that bonus depreciation only applies to qualified property with a recovery period of 20 years or less.
This rule explains why a building’s primary structural shell, which depreciates over a 39-year straight-line schedule, is excluded, while shorter-life internal components and land improvements qualify.
5-Year Property
Tangible personal property, including:
- Specialty electrical systems
- Decorative indoor lighting
- Security systems
- Carpeting
- Dedicated data wiring
7-Year Property
Certain furniture, fixtures and equipment that are not structural building components, like:
- Office desks
- Operational machinery
- Specialized decorative assets
15-Year Property
Land improvements surrounding the building, such as:
- Sidewalks
- Fences
- Gates
- Paved parking lots
- Stormwater drainage structures
- Exterior landscaping
Qualified Improvement Property (QIP)
Any internal improvement made to an existing commercial building, provided the work occurs after the building is placed in service and does not alter the structural frame, expand the building footprint or involve elevators or escalators.
Depreciation Recapture: Deferral, Not Forgiveness
Accelerated depreciation moves deductions forward in time; it does not eliminate the tax. When the property is sold, the gain attributable to depreciation previously claimed is recaptured, and the treatment differs by asset class.
Gain attributable to depreciation on Section 1245 personal property, which encompasses the 5- and 7-year assets a cost segregation study identifies, is generally recaptured as ordinary income. Depreciation on the real property itself may produce unrecaptured Section 1250 gain, taxed at a federal maximum rate of 25%, before state tax and any applicable surtaxes.
A properly structured Section 1031 exchange can defer gain on qualifying real property. It is not a complete answer to recapture because, following the TCJA, Section 1031 generally doesn’t apply to personal property, so the Section 1245 components that a study creates require separate planning. Owners who assume that an exchange neutralizes all recapture exposure are often surprised at disposition.
None of this makes acceleration a poor decision. The time value of a large first-year deduction frequently outweighs a later depreciation recapture liability, particularly for owners with a long holding period. But the analysis belongs at acquisition, alongside passive activity, basis, and at-risk limitations, and not at the closing table years later.
What the Numbers Look Like
Consider a $2,000,000 commercial property investment, with $400,000 allocated to land. That leaves a depreciable basis of $1,600,000. If a cost segregation study identifies 22% of that basis ($352,000) as qualifying short-life property, the full amount is deductible in year one under 100% bonus depreciation.
The remaining $1,248,000 stays on the 39-year schedule at $32,000 per year, bringing the first-year deduction to $384,000. Without a study, first-year depreciation would have been $1,600,000 divided by 39, or roughly $41,026. The study produces about $342,974 in additional first-year deductions, which amounts to roughly $126,900 in tax deferred for an owner at a 37% marginal rate.
The contrast with the old schedule is stark. Had the phase-down held, 2026 bonus depreciation would have been 20%, allowing only $70,400 of that $352,000 in the first year rather than the full amount. The 22% reclassification rate is illustrative and varies considerably by property type.
Analytical Summary and Strategic Considerations
The restoration of 100% bonus depreciation under the OBBBA gives commercial real estate investors a clear path to deferring significant tax liabilities, provided they navigate the timing rules correctly. Maximizing these deductions requires a detailed cost segregation study to isolate 5-, 7-, and 15-year MACRS assets from the 39-year structural shell.
However, property owners must balance immediate deductions against the distinct ordinary income recapture rules governing Section 1245 property upon sale, noting that modern Section 1031 exchanges will not defer this specific liability.
Disclaimer: This article is for educational purposes only and does not constitute formal tax advice; readers should consult a qualified tax professional regarding their specific situation.
