Bonus Depreciation Phase-Out: What It Means for Cost Segregation
Bonus depreciation has been a major driver of early year tax deductions for real estate owners when eligible components are identified through cost segregation. As the bonus percentage declines under current law, the immediate value of those deductions can change.
cost segregation bonus depreciation phase out is best framed as a timing and planning problem. Investors want to know what changes when bonus is 80%, 60%, or lower, and what does not change. Cost segregation still changes depreciation lives, but the mix of first year versus multi year benefit shifts, which affects cash flow and ROI.
TL;DR – Key Takeaway
cost segregation bonus depreciation phase out reduces the percentage of eligible property that can be deducted immediately, under current law. That means cost segregation strategies often shift from first year savings optimization to multi year depreciation planning and ROI analysis. Placed in service dates become more important, and state conformity can matter more for the net outcome. Cost segregation can still be valuable without 100% bonus, but investors should model payback using conservative ranges.
Phase-Out Schedule and Key Terms
The phrase cost segregation bonus depreciation phase out refers to the decline in the bonus percentage applied to certain qualifying property. Under current federal law, the percentage has been stepping down over time. The exact dates and percentages are subject to legislative change.
For cost segregation planning, the key term is qualifying property that is placed in service in a given year. Cost segregation can identify eligible components, but the bonus percentage depends on timing rules and eligibility.
What Changes and What Does Not
What changes
- The immediate deduction percentage for bonus eligible components can be lower during the cost segregation bonus depreciation phase out.
- The value of front loaded deductions can decline if the bonus percentage declines, especially when study fees remain similar.
What does not change
- Cost segregation still reclassifies eligible components into shorter lives, which still accelerates depreciation compared to standard depreciation.
- Taxpayer limitations, state conformity differences, and documentation requirements still matter.
This is why investors should not treat cost segregation bonus depreciation phase out as a binary event. It changes the shape of the benefit curve, not the existence of potential cost segregation benefits.
Timing Considerations and Traps
The most common operational mistake is confusing purchase dates with placed in service dates. For bonus depreciation purposes, the placed in service date is often the controlling factor for which percentage applies.
Placed in service can be straightforward for stabilized acquisitions and complex for renovations, construction, and phased improvements. If cost segregation bonus depreciation phase out is part of your planning, confirm the timing rules before relying on a model.
See placed in service date rules for bonus depreciation and cost segregation for a deeper explanation of timing traps.
Strategy Adjustments as Bonus Declines
As the bonus percentage declines, investor strategy often becomes more focused on the underlying cost segregation work: eligible basis, documentation quality, and multi year cash flow planning. In other words, cost segregation bonus depreciation phase out pushes investors toward disciplined forecasting rather than first year only thinking.
Practical adjustments investors consider
- Model low, base, and high cases for reclassified basis rather than relying on a single estimate.
- Include state tax impacts if you are in a nonconforming state.
- Consider whether a lookback study or method change is more relevant than a current year study.
- Focus on study quality because the benefit is spread over more years when bonus declines.
ROI Under the Phase-Out
cost segregation bonus depreciation phase out affects ROI by changing how quickly deductions turn into after tax cash flow. If bonus is lower, payback can be slower unless reclassified basis is high or the study cost is low relative to basis.
The correct question is not, is bonus less attractive. The question is, what is the present value of the cash flow improvement created by cost segregation under current bonus percentages. For an ROI framework, see cost segregation ROI.
Year-by-Year Bonus Percentage Table
Educational summary. Percentages reflect the commonly referenced federal schedule under current law and may change. Confirm current rules with your CPA.
| Placed-in-Service Year | Typical Bonus Percentage (Federal) | What it implies for strategy |
|---|---|---|
| 2022 and earlier | 100% | Maximizes first year effect when eligible and usable. |
| 2023 | 80% | Still strong, but first year effect is smaller than 100%. |
| 2024 | 60% | Multi year planning becomes more important. |
| 2025 | 40% | Cost segregation benefit curve flattens without perfect timing. |
| 2026 | 20% | Emphasis shifts to shorter lives, state impacts, and documentation. |
| 2027 and later | 0% (if unchanged) | Cost segregation still accelerates via lives, not bonus. |
If you want to see how cost segregation works when bonus is partial or absent, review how cost segregation works without 100% bonus depreciation.
Frequently Asked Questions
What does the cost segregation bonus depreciation phase out mean?
The cost segregation bonus depreciation phase out means the bonus percentage declines over time under current law, reducing the immediate first year deduction that bonus can provide. Cost segregation can still accelerate depreciation through shorter lives, but the mix of immediate versus multi year benefit changes.
Does cost segregation still make sense during the phase out?
Yes, cost segregation can still make sense during the phase out because it changes depreciation lives even without 100% bonus. The decision depends on study cost, eligible basis, and your ability to use deductions.
Is the phase out schedule guaranteed?
No, tax law can change and the phase out schedule can be modified by legislation. Treat the schedule as a planning assumption and update it with your CPA each year.
What is the biggest timing trap during the phase out?
The biggest timing trap is misunderstanding placed in service dates. The bonus percentage generally depends on when qualifying property is placed in service, not when it is purchased or when a contract is signed.
How does the phase out affect cost segregation ROI?
The phase out can reduce the immediate cash flow benefit, which can lower cost segregation ROI if the study cost stays the same. ROI can still be strong when reclassified basis is high and the owner can use deductions early.
Does the phase out change recapture rules?
No, the phase out changes the timing of deductions, not the basic structure of depreciation recapture. Your exit strategy still matters for net after tax outcomes.
How should investors adjust strategy as bonus declines?
Investors often shift from single year savings thinking to multi year cash flow modeling. They also focus more on study quality, eligible basis, and state conformity impacts.
Where can I learn the basics before modeling the phase out?
Start with the primer on cost segregation and bonus depreciation and then review the placed in service rules. Those pages define the mechanics that drive the cost segregation bonus depreciation phase out decision.