Depreciation Explained: How Real Estate Investors Can Save Big on Taxes
6 Minute Read
Depreciation has long been one of the most powerful tools in a real estate investor’s tax strategy—but as of July 2025, it’s become even more valuable. The One Big Beautiful Bill Act, signed into law on July 4, 2025, made sweeping updates to bonus depreciation, business deductions, and real estate tax incentives.
If you’re a real estate investor, here’s how to take full advantage of the new rules and save big on taxes.
What Is Depreciation?
Depreciation is a non-cash deduction that lets you recover the cost of income-producing property over time. Even as your property appreciates, the IRS allows you to write off a portion of its value every year—reducing your taxable income and increasing your cash flow.
Standard Depreciation Timelines
Residential rental property: 27.5 years
Commercial property: 39 years
For example, if your rental property's structure (excluding land) is worth $400,000, you can deduct about $14,545 each year for 27.5 years.
New in 2025: 100% Bonus Depreciation Is Back—Permanently
The One Big Beautiful Bill Act reinstated 100% bonus depreciation permanently for qualifying property placed in service after January 19, 2025. That means you can deduct the full cost of certain property components—like appliances, HVAC systems, flooring, or landscaping—in the first year.
Previously, bonus depreciation was phasing out (60% in 2024, 40% in 2025). Now, it’s fully restored and here to stay through at least 2030.
Cost Segregation + Bonus Depreciation = Massive Deductions
A cost segregation study breaks down your property into parts with shorter lifespans (5, 7, or 15 years). These assets now qualify for 100% bonus depreciation, giving you huge front-loaded tax deductions.
Example:
If a $1 million property has $250,000 in short-lived components, you could deduct all $250,000 in year one with bonus depreciation.
Section 179 Expensing Limit Increased
Section 179 also saw a boost under the new law, allowing investors to deduct more in the year assets are placed in service. While traditionally used for business property, some real estate-related assets qualify, especially when used in short-term rentals or real estate businesses.
Qualified Business Income (QBI) Deduction Made Permanent
If your rental activity qualifies as a business, you may be eligible for the 20% QBI deduction. The One Big Beautiful Bill Act made this deduction permanent, and it’s expected to increase to 23% in future years.
SALT Deduction Cap Raised to $40,000
The State and Local Tax (SALT) deduction cap, previously limited to $10,000, has been increased to $40,000 through 2029. This is a major win for real estate investors in high-tax states.
What About Depreciation Recapture?
When you sell a property, the IRS may “recapture” some of the depreciation you claimed—taxed up to 25%. However, this can be deferred using strategies like a 1031 exchange, which lets you roll gains into another investment property.
Real-World Example
Let’s say you purchase a small apartment building for $1.2M in early 2025. A cost segregation study reveals $300,000 of assets that qualify for bonus depreciation. You could:
Deduct the full $300,000 in Year One
Claim another ~$25,000 from traditional depreciation
Save well over $100,000 in federal taxes (depending on your bracket)
Final Thoughts: Depreciation in a Post-Bill World
The One Big Beautiful Bill Act has supercharged the benefits of depreciation—restoring full bonus depreciation, expanding deductions, and creating a more stable landscape for long-term planning.
But these strategies require careful coordination. At Cornerstone CPA, we specialize in helping real estate investors leverage depreciation and navigate complex tax law changes to keep more of what they earn.
Let’s build your tax plan. Contact us today.
