OBBBA: How the One Big Beautiful Bill Saved Cost Segregation

The One Big Beautiful Bill Act (OBBBA) is a comprehensive tax and budget reconciliation bill enacted in 2025 that modified substantial portions of the Internal Revenue Code. Named for its ambitious scope of consolidating numerous tax policy objectives into a single legislative vehicle, OBBBA addressed expiring provisions from the Tax Cuts and Jobs Act, extended business tax incentives, and made structural changes to real estate taxation.

For cost segregation practitioners and real estate investors, OBBBA bonus depreciation provisions were the most significant aspect of the legislation. The bill extended bonus depreciation availability beyond the scheduled TCJA phaseout, preserving the first year tax benefits that make cost segregation economically viable. Without this extension, bonus depreciation would have declined to 20% in 2026 and zero in 2027.

The legislative process behind OBBBA involved extensive negotiation over competing tax priorities. Real estate industry groups and business coalitions advocated strongly for bonus depreciation extension, arguing that the scheduled sunset would undermine capital investment and reduce the effectiveness of cost segregation. The final enacted provisions reflected a compromise that preserved meaningful bonus depreciation while addressing budget constraints.

OBBBA tax changes extended beyond depreciation to include modifications to interest deduction limitations, qualified improvement property rules, opportunity zone provisions, and like kind exchange requirements. For investors using bonus depreciation and cost segregation, the depreciation provisions were the primary focus, but the broader tax changes create important coordination considerations for comprehensive tax planning.

Before OBBBA, cost segregation faced an existential threat from the scheduled bonus depreciation phaseout established by TCJA. Under the original TCJA timeline, bonus depreciation would decline from 100% in 2022 to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and zero in 2027 and beyond. This phaseout would have eliminated the substantial first year deductions that drive cost segregation adoption.

Without bonus depreciation, cost segregation benefits would revert to the acceleration provided by regular MACRS depreciation alone. A building component reclassified from 39 years to 5 years would still provide faster deductions, but instead of 100% immediate expensing, the owner would receive 20% in year one under regular MACRS declining balance. The dramatic reduction in first year benefit would make many cost segregation studies uneconomical.

The cost segregation industry projected that study volume would decline by 70% or more if bonus depreciation sunset as originally scheduled. Properties with modest component reclassification potential would no longer generate sufficient tax benefit to justify study costs. Only properties with extremely high personal property content or unique circumstances would continue to pursue cost segregation in a zero bonus environment.

The One Big Beautiful Bill saved cost segregation by preventing this scenario. By extending bonus depreciation at meaningful percentages, OBBBA ensured that cost segregation remained valuable for the broad population of commercial and residential rental properties. The extension preserved the cash flow benefits, ROI multiples, and planning opportunities that made cost segregation a mainstream strategy following TCJA enactment.

The specific OBBBA bonus depreciation provisions extended the availability of accelerated first year deductions beyond the TCJA phaseout schedule. While the exact percentages and timelines depend on the final enacted language, OBBBA ensured that property placed in service in 2026, 2027, and subsequent years would continue to receive meaningful bonus depreciation on qualifying components identified through cost segregation.

OBBBA maintained the core structure of bonus depreciation eligibility established by TCJA. Property must have a MACRS recovery period of 20 years or less to qualify. Used property continues to be eligible provided it is new to the taxpayer and acquired by purchase from an unrelated party. The fundamental mechanics of applying bonus depreciation on top of regular MACRS remain unchanged.

The 2025 tax bill bonus depreciation percentage for property placed in service in specific years should be verified with current tax law, as the enacted provisions may differ from preliminary proposals. Property owners planning acquisitions or renovations should coordinate with tax advisors to determine the applicable percentage for their intended placed in service date and structure transactions accordingly.

OBBBA also addressed the interaction between bonus depreciation and other tax provisions, including passive activity loss rules, alternative minimum tax considerations, and state tax conformity issues. These technical provisions affect how bonus depreciation benefits flow through to property owners and should be evaluated as part of comprehensive cost segregation planning. For understanding how reduced percentages affect strategy, review cost segregation with lower bonus rates.

The One Big Beautiful Bill saved cost segregation by preserving the economic viability of these studies for mainstream properties. Cost segregation requires significant engineering effort, detailed documentation, and professional fees ranging from $5,000 to $50,000 or more depending on property complexity. Without substantial first year tax benefits, the study cost cannot be justified for most properties.

OBBBA bonus depreciation extension maintained the favorable return on investment multiples that drive cost segregation adoption. Even at reduced percentages like 60% or 80% compared to the peak 100% rate, bonus depreciation combined with cost segregation produces first year tax savings that exceed study costs by factors of 5 to 15 for typical properties. This economic return makes the strategy accessible to small investors, not just institutional buyers.

The legislation also provided certainty for long term planning. Before OBBBA, the looming bonus depreciation sunset created hesitation among investors considering property acquisitions or cost segregation studies. The extension removed this uncertainty, allowing investors to evaluate properties and plan acquisitions with confidence about available tax benefits rather than guessing about potential future extensions.

For the cost segregation industry, OBBBA preserved the professional infrastructure that supports these studies. Engineering firms, tax advisors, and specialized software providers had invested substantially in cost segregation capabilities following TCJA. Without OBBBA extension, much of this infrastructure would have been dismantled. The bill ensured continuity of expertise and resources necessary for quality study execution.

Beyond bonus depreciation, OBBBA tax changes for real estate included modifications to interest deduction limitations under Section 163(j), adjustments to qualified improvement property treatment, refinements to opportunity zone incentives, and clarifications regarding like kind exchange requirements. These provisions interact with cost segregation and affect overall real estate tax planning.

The OBBBA qualified improvement property provisions confirmed and extended the 15 year recovery period and bonus depreciation eligibility established by TCJA and corrected by the CARES Act. Interior improvements to commercial buildings remain valuable cost segregation opportunities, and OBBBA ensured this treatment continues for properties placed in service in future years. The stability of QIP rules supports planning for tenant improvement allowances and building renovations.

OBBBA addressed passive activity loss limitations that affect many real estate investors who do not qualify as real estate professionals. While the core Section 469 framework remained intact, certain modifications affected how large depreciation deductions interact with passive loss suspension rules. Investors subject to passive loss limitations should evaluate how OBBBA changes affect the timing of tax benefit realization from cost segregation.

State tax conformity considerations also factored into OBBBA planning. Some states automatically conform to federal bonus depreciation changes, while others require specific legislative action. Property owners in non-conforming or partial conformity states may face different state tax consequences than federal, creating book-tax differences that must be managed. OBBBA did not mandate state conformity, so multi-state property owners need state specific guidance.

The Trump tax bill cost segregation legacy spans both the 2017 TCJA and the 2025 OBBBA provisions. Together, these legislative acts created the most favorable cost segregation environment in decades by dramatically increasing bonus depreciation, expanding used property eligibility, and extending high percentage availability across multiple years. This dual legislative impact transformed cost segregation from a niche strategy to a mainstream tax planning tool.

TCJA laid the foundation by increasing bonus depreciation to 100% and allowing used property to qualify. This initial expansion drove explosive growth in cost segregation study volume as investors recognized the substantial first year tax benefits available on building acquisitions. Properties that would have generated modest benefits under prior law suddenly produced tax savings 10 to 20 times the study cost.

OBBBA preserved this legacy by preventing the scheduled sunset that would have reversed much of TCJA's impact. Without the 2025 extension, the cost segregation boom following TCJA would have been remembered as a temporary phenomenon, valuable only for properties placed in service during the narrow 100% bonus window. OBBBA ensured the enhanced benefits would continue, cementing cost segregation as a permanent element of real estate tax planning.

The combined impact of the 2017 tax reform bonus depreciation expansion and the 2025 OBBBA extension created long term confidence in cost segregation planning. Investors can acquire properties knowing that meaningful bonus depreciation will be available, even if specific percentages vary by year. This stability supports better capital allocation decisions and encourages property improvements that generate additional depreciation benefits. For evaluating properties across different depreciation environments, explore depreciation class strategy.

OBBBA depreciation rules maintained the MACRS framework established by decades of prior law while modifying the bonus depreciation overlay. Buildings still use 27.5 or 39 year straight-line depreciation. Personal property and land improvements still follow 5, 7, or 15 year MACRS lives. The change was in the bonus depreciation percentage available for the shorter life property, not in the underlying classification rules.

Under OBBBA, cost segregation engineering methodology and documentation requirements remained consistent with IRS guidance developed over the past two decades. The detailed cost estimate or engineering approach must still properly allocate property basis among components. Components must be classified into appropriate MACRS lives based on their function, not taxpayer preference. The quality and defensibility standards for studies did not change.

The interaction between OBBBA bonus depreciation and regular MACRS works the same as under prior law. Bonus depreciation is claimed first on qualifying property, and regular MACRS applies to any remaining basis. If a component has $100,000 of allocated basis and 60% bonus applies, the taxpayer claims $60,000 bonus depreciation in year one and then depreciates the remaining $40,000 under regular MACRS over the recovery period.

OBBBA preserved the flexibility to elect out of bonus depreciation on a class by class basis. Taxpayers who cannot use large first year deductions due to insufficient income or passive loss limitations can elect out and use regular MACRS instead. This election must be made on a timely filed return and generally cannot be revoked, so the decision should be made carefully in consultation with tax advisors.

Planning strategies under OBBBA focus on timing property acquisitions and cost segregation studies to maximize bonus depreciation benefits while coordinating with other tax provisions. Even with extended availability, the specific bonus percentage may vary by placed in service year, creating opportunities to optimize acquisition timing when practical business considerations allow.

Retroactive cost segregation remains valuable under OBBBA for properties placed in service during high bonus years. Investors who purchased properties in 2020, 2021, or 2022 when 100% bonus was available can still capture that benefit through Form 3115 catch-up adjustments, even if the study is completed years later. The placed in service date locks in the applicable bonus percentage, making older properties with favorable dates attractive candidates for catch-up studies.

Qualified improvement property planning takes on added importance under OBBBA because interior improvements continue to receive favorable 15 year treatment with bonus eligibility. Property owners planning major renovations should structure work to maximize QIP qualification and consider whether phasing improvements across multiple tax years provides better tax outcomes than completing everything in a single year.

Coordination with passive activity loss rules matters more when bonus depreciation percentages are lower. At 100% bonus, large deductions often trigger passive loss suspensions for investors who are not real estate professionals. At reduced percentages, the deductions may be more manageable within passive loss limitations, allowing more immediate benefit without triggering suspensions. Tax modeling should evaluate optimal bonus percentages for individual circumstances.

The long term impact of the One Big Beautiful Bill cost segregation preservation will be measured in decades. By preventing the bonus depreciation sunset, OBBBA ensured that multiple generations of real estate investors will have access to accelerated depreciation through component level analysis. This continuity allows the development of sophisticated planning techniques, refined engineering methodologies, and mature professional practices around cost segregation.

OBBBA created a stable foundation for real estate investment pro formas that incorporate cost segregation benefits as a standard assumption. Before the extension, underwriting models struggled with how to project depreciation benefits beyond the phaseout period. With OBBBA, investors can model cost segregation benefits with reasonable confidence about availability, improving capital allocation decisions and property valuation accuracy.

The legislative precedent established by OBBBA suggests that bonus depreciation has become a permanent feature of tax policy rather than a temporary incentive. While specific percentages may be adjusted in future legislation, the political and economic consensus supporting accelerated depreciation appears durable. This expectation supports long term investment in cost segregation expertise and infrastructure.

Looking forward, the combination of TCJA and OBBBA provisions has positioned cost segregation as a core element of real estate tax strategy comparable to like kind exchanges or opportunity zones. Educational efforts to train tax professionals, industry standards for study quality, and IRS guidance refinements will continue to evolve within the framework OBBBA preserved, creating a more sophisticated and reliable planning environment for investors.