OBBB Act Interest in Alts Part 4b ~ Bonus Depreciation is Back

Impact for investors on 100% bonus depre­ci­a­tion needs to be under­stood. Here are a few exam­ples of uti­liza­tion. 

August 6, 2025

By Al DiNi­co­la, AIF®
1031 Tax Deferred Exchange Spe­cial­ists & DST Advi­sor
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

In  Part 4a ~ Bonus Depre­ci­a­tion is Back, we pro­vid­ed an intro­duc­tion of the impor­tance of the OBBB. We will take a deep­er dive in this post with respect to acquir­ing a new prop­er­ty as well as prop­er­ty via a sec­tion 1031 exchange.

Cost seg­re­ga­tion is a tax-plan­ning tool used to accel­er­ate depre­ci­a­tion deduc­tions by allo­cat­ing costs to short­er-lived assets and assets that qual­i­fy for bonus depre­ci­a­tion. The prop­er­ty own­er engages a qual­i­fied engi­neer­ing firm to allo­cate their cost basis (typ­i­cal­ly pur­chase price), The goal is to increase the allo­ca­tion to the short­er-lived assets that will accel­er­ate depre­ci­a­tion deduc­tions or qual­i­fy for bonus depre­ci­a­tion: Land improve­ments 15 years, Per­son­al prop­er­ty 5 and 7 years. There are sev­er­al options and opin­ions on how to get a cost seg­re­ga­tion study com­plet­ed.  There are DIY or soft­ware-based study (for less expen­sive prop­er­ties) to an engi­neer­ing firm doing a com­plete study. What may be impor­tant to an investor would be some sort of IRS audit pro­tec­tion with good doc­u­men­ta­tion.

Intro­duc­tion to Bonus Depre­ci­a­tion

Bonus depre­ci­a­tion accel­er­ates depre­ci­a­tion deduc­tions. Assets with a MACRS recov­ery life of 20 years or less qual­i­fy for bonus depre­ci­a­tion. Cost seg­re­ga­tion does not lim­it Sec­tion 1031 exchanges. The cost seg­re­ga­tion study only impacts depre­ci­a­tion deduc­tions, not the qual­i­fi­ca­tion of “like kind” prop­er­ty as required by Sec­tion 1031.

Non-cash tax deduc­tion.

As a reminder depre­ci­a­tion is a non-cash tax deduc­tion that allows you to write off the cost of that asset over many years or is use­ful life accord­ing to the IRS.

The IRS has dif­fer­ent prop­er­ty class­es which are used to cal­cu­late your annu­al depre­ci­a­tion deduc­tion rang­ing from three-year prop­er­ty all the way up to 39-year prop­er­ty and your deduc­tion would be lim­it­ed to the pur­chase price of that asset divid­ed by its use­ful life in years under the most basic form of depre­ci­a­tion. This is called straight line depre­ci­a­tion. Tax­pay­er may con­tin­ue to use straight line depre­ci­a­tion and for­go the bonus depre­ci­a­tion.  

Qual­i­fy­ing for bonus depre­ci­a­tion.

As always, we sug­gest to do your research or get­ting a CPA involved if nec­es­sary.  Here are a few basis require­ments and com­ments:

• The pur­chase must be for qual­i­fied prop­er­ty. Prop­er­ty con­nect­ed to land, even the land itself or build­ings attached to it, does not qual­i­fy for bonus depre­ci­a­tion, but some prop­er­ty inside those build­ings do qual­i­fy.
• With real estate, all the fix­tures, appli­ances and things con­nect­ed to your invest­ment prop­er­ty are usu­al­ly lumped togeth­er and the entire build­ing is depre­ci­at­ed accord­ing to the use­ful life of the build­ing, which is either 27 1/2 years or 39 years depend­ing on the prop­er­ty.
• With a cost seg­re­ga­tion study, you actu­al­ly sep­a­rate those com­po­nents from the build­ing and use bonus depre­ci­a­tion against cer­tain com­po­nents inside of it.
• The prop­er­ty must be new to you. Now this does not mean that this only applies to brand new prop­er­ty because you can use bonus depre­ci­a­tion if you pur­chase used prop­er­ty as well. But the key here is that that prop­er­ty must be new to you or in oth­er words, it can­not be pre­vi­ous­ly used by you, your busi­ness or a relat­ed par­ty, even like your fam­i­ly mem­ber or anoth­er enti­ty you con­trol.
• The prop­er­ty must be placed in ser­vice after Jan­u­ary 19th of 2025. Now placed in ser­vice means that the prop­er­ty is ready and avail­able for this intend­ed use in your trade or busi­ness in the year that that prop­er­ty was placed in ser­vice, not when it was pur­chased.
• Now if you meet these require­ments, you should be able to claim 100% bonus depre­ci­a­tion.

Here is a quick exam­ple.

If you acquire a $1,000,000 prop­er­ty (on Feb­ru­ary 20, 2025) there is an allo­ca­tion for the land. For this exam­ple, lets allo­cate 20% for the land.  That leaves $800,000 for the struc­ture. Typ­i­cal­ly, that would be depre­ci­a­tion over 27.5 years for res­i­den­tial (aver­age $29,000 per year) and over 39 years for com­mer­cial (aver­age of $20,500 per year). There are minor adjust­ments for mid-year in ser­vice date.  How­ev­er, there are com­po­nents that make up the $800,000 that may qual­i­fy for or be allo­cat­ed to a five- 7- and 15-year prop­er­ty, which is all less than 20 years. Thus, it all qual­i­fies for bonus depre­ci­a­tion. You may expect 20% and pos­si­ble 30% to be allo­cat­ed to this allo­ca­tion. Keep­ing this allo­ca­tion sim­ple let’s use a hypo­thet­i­cal amount of $250,000 to the cost seg­re­ga­tion and if a five-year depre­ci­a­tion sched­ule that would be $50,000 per year for five years. With the 100% bonus depre­ci­a­tion the entire $250,000 may be tak­en in year one of being in ser­vice.

There is a word of cau­tion and a poten­tial sur­prise tax bill from using this strat­e­gy and it’s called depre­ci­a­tion recap­ture. This would hap­pen if you sell the prop­er­ty with­out any type of §1031 exchange to defer the depre­ci­a­tion recap­ture.  Please con­sult your CPA on how this may affect your indi­vid­ual sit­u­a­tion.  If you sell the prop­er­ty, the you may be reclaim­ing the accel­er­at­ed depre­ci­a­tion and pay­ing tax as ordi­nary income.  

What is some­what con­fus­ing is the process of a §1031 exchange, and how to take advan­tage of bonus depre­ci­a­tion. Using a Delaware Statu­to­ry Trust (DST) may sim­pli­fy if you can locate a DST with a cost seg­re­ga­tion. More on that top­ic lat­er.   If you sell a prop­er­ty, you will car­ry for­ward any basis into the new prop­er­ty.  Some investors may have ful­ly depre­ci­at­ed an asset because of the length of time being held. Here are a few quick exam­ples of a poten­tial sale of a prop­er­ty that has been ful­ly depre­ci­at­ed for a sales price (or relin­quished prop­er­ty val­ue) of $1M prop­er­ty using a §1031 exchange. You acquire the replace­ment prop­er­ty in August 2025. You also use all the pro­ceeds from the sale ($1M).

1.  Acquire via §1031 exchange a replace­ment prop­er­ty for $1M. You car­ry for­ward a basis of $0 so your new depre­ci­a­tion basis is $0.
2.  Acquire a $1.5M replace­ment prop­er­ty via §1031 exchange. Car­ry over basis $0 plus addi­tion­al val­ue $500,000. (Investor elects to add cash or obtain financ­ing to com­plete the acqui­si­tion).
3. Acquire a $2M inter­est in a DST in a §1031 exchange that has 50% LTV (non-recourse debt). Car­ry over basis is $0 and new basis is $1M attrib­uted to the addi­tion­al non-recourse debt.

Cost seg­re­ga­tion and DSTs

Not all spon­sors cur­rent­ly engage with cost seg­re­ga­tion stud­ies. This was more preva­lent a few years ago when the 100% bonus depre­ci­a­tion was in effect for a lim­it­ed peri­od of time.  There is expense involved as well as the time to com­plete the engi­neer­ing stud­ies.  How­ev­er, if a DST spon­sor elects to com­plete a Cost Seg­re­ga­tion study the finan­cial impact could be ben­e­fi­cial for the indi­vid­ual investor. Using the exam­ple about and with a broad assump­tion that 15% of the new basis may be attrib­uted to the cost seg­re­ga­tion (less than 20-year life) that would be an amount equal to $150,000 (of the $1M new basis).  If the cash dis­tri­b­u­tion from the DST is 5% ($50,000 of the cash equi­ty annu­al­ly) then the investor may be in a posi­tion to off­set the dis­tri­b­u­tion. The $150,000 depre­ci­a­tion shields all of the dis­tri­b­u­tion for 2–3 years.  This would be for pas­sive income from invest­ments and any unused por­tion caries for­ward indef­i­nite­ly against pas­sive income (accord­ing to PAL rules).

There is a word of cau­tion for all invest­ments. All real estate invest­ments need to make finan­cial sense.  Even if there is a real strong need to pull the trig­ger sim­ply for tax rea­sons, we con­duct full due dili­gence on the offer­ing. There are cer­tain investors look­ing at increas­ing their basis for tax plan­ning. If you have ques­tion regard­ing DST, 1031 exchanges or near­ing the end of your 45-day iden­ti­fi­ca­tion peri­od please con­tact us. We mon­i­tor avail­able DST on a week­ly basis are we are here to offer edu­ca­tion and poten­tial strate­gies. 

NAMCOA® is a SEC reg­is­tered invest­ment advi­so­ry firm that pro­vides com­pre­hen­sive port­fo­lio man­age­ment, finan­cial plan­ning, and fidu­cia­ry deci­sion-mak­ing ser­vices on behalf of retire­ment plan spon­sors. Our Dif­fer­ence is sum­ma­rized by our fidu­cia­ry approach which enables us to bet­ter meet port­fo­lio and retire­ment plan objec­tives, result­ing in stronger risk adjust­ed returns for investors and peace of mind for Clients. We also focus on alter­na­tive real estate invest­ment. Many real estate investors are seek­ing tax deferred solu­tions uti­liz­ing §1031 exchanges or Oppor­tu­ni­ty Zones.

DSTs are not for all investors.  The acqui­si­tion of a DST is for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus.  Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor.   NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 5 Cen­ter­pointe Dri­ve, Ste. 400 Lake Oswego, OR, 97035MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.