TCJA Bonus Depreciation Rules Explained

TCJA bonus depreciation refers to the bonus depreciation provisions enacted as part of the Tax Cuts and Jobs Act, signed into law on December 22, 2017. The centerpiece of these provisions was an increase in the bonus depreciation percentage from 50% to 100% for property placed in service after September 27, 2017 and before January 1, 2023.

Under the tax cuts jobs act depreciation framework, qualifying property with MACRS recovery periods of 20 years or less became eligible for full expensing in the year placed in service. For real estate investors using cost segregation, this meant building components reclassified into 5, 7, or 15 year lives could be immediately deducted rather than depreciated gradually over those periods.

The TCJA 100 bonus depreciation provision represented a dramatic expansion of the tax incentive. Prior bonus depreciation regimes typically offered 50% or less, and the duration of high percentage periods was often limited. TCJA provided a full five year window at 100%, creating substantial planning opportunities and driving widespread interest in cost segregation studies.

Beyond the percentage increase, TCJA bonus depreciation included other significant changes such as used property eligibility and modifications to qualified improvement property treatment. These changes worked together to make bonus depreciation and cost segregation more valuable for a wider range of property owners and transaction types than ever before.

The 2017 tax reform bonus depreciation changes represented one of the most significant alterations to depreciation law in decades. Prior to TCJA, bonus depreciation had been limited to 50% and applied only to new property. The combination of these restrictions meant that most real estate transactions, which involve existing buildings, received no bonus depreciation benefit even with cost segregation.

TCJA eliminated the new property requirement, allowing used property to qualify for bonus depreciation as long as it was new to the taxpayer and not acquired from a related party. This single change opened cost segregation benefits to the vast majority of commercial and residential rental property transactions, transforming the economics of these studies.

The increase from 50% to 100% doubled the first year benefit for qualifying components. A building component with $100,000 of allocated basis that qualified for bonus depreciation would generate a $50,000 deduction under prior law versus $100,000 under TCJA. When applied across all reclassified components in a cost segregation study, the aggregate difference was substantial.

TCJA also established a scheduled phasedown beginning in 2023, with bonus depreciation percentages decreasing by 20 percentage points per year until reaching zero in 2027. This predictable sunset created urgency for property owners to complete acquisitions or cost segregation studies during the high bonus years, though subsequent legislation has modified parts of this schedule.

The TCJA 100 bonus depreciation period began on September 27, 2017, the date the bill was introduced in Congress. Property placed in service on or after that date through December 31, 2022 qualified for 100% bonus depreciation, provided all other requirements were met. This timing created a retroactive benefit for property placed in service in the final months of 2017.

For cost segregation purposes, the placed in service date is the critical trigger date. A property purchased on December 15, 2022 remains eligible for 100% bonus depreciation on qualifying components even if the cost segregation study is completed in 2024 or 2025. The percentage is locked in based on when the property was placed in service, not when the study is performed or when the deduction is claimed.

Starting January 1, 2023, TCJA established a scheduled phasedown with bonus depreciation decreasing to 80% for property placed in service in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027 and beyond unless extended by Congress. Property owners evaluating MACRS depreciation should verify current law with their tax advisors.

Long production period property and certain aircraft received special treatment under TCJA with an additional year of 100% bonus depreciation. For most real estate, the standard timeline applies. Subsequent legislation, including the One Big Beautiful Bill Act, has modified elements of the phasedown schedule, making it important to consult current law and coordinate with tax professionals when planning acquisitions or cost segregation timing.

The expansion of bonus depreciation to used property under TCJA was arguably the most impactful change for real estate investors. Prior law limited bonus depreciation to new property, meaning components in newly constructed buildings. Because most real estate transactions involve existing buildings rather than new construction, the vast majority of potential cost segregation candidates received no bonus depreciation benefit before TCJA.

Under TCJA, used property qualifies for bonus depreciation if the property is new to the taxpayer. This means the taxpayer or a predecessor cannot have previously used the property, and the property cannot be acquired from a related party as defined under Section 179(d)(2). For practical purposes, when an investor purchases an existing building from an unrelated seller, the building components identified through cost segregation qualify as used property eligible for bonus depreciation.

The used property rules require that the taxpayer acquire the property by purchase as defined in Section 179(d)(2). This generally means the buyer must acquire the property for cash or incur debt, and certain transactions like gifts, inheritances, or related party transfers do not qualify. Like kind exchanges under Section 1031 require special consideration because the exchanged basis may not qualify for bonus depreciation.

For cost segregation, the used property expansion meant that retroactive studies on properties purchased during the TCJA 100% period became extremely valuable. An investor who purchased a $3,000,000 building in 2021 and completed a cost segregation study in 2024 could still claim 100% bonus depreciation on qualifying components by filing Form 3115, creating substantial tax savings even years after acquisition.

TCJA made significant but initially confused changes to qualified improvement property. The legislation intended to classify QIP as 15 year property eligible for bonus depreciation, but a drafting error omitted QIP from the list of 15 year properties in the statute. This error meant that QIP was inadvertently assigned a 39 year recovery period without eligibility for bonus depreciation from 2018 through 2020.

The CARES Act of 2020 corrected this drafting error retroactively, confirming that QIP has a 15 year recovery period and qualifies for bonus depreciation. This correction applied back to property placed in service after December 31, 2017, allowing taxpayers to amend prior year returns or file Form 3115 to capture the missed bonus depreciation on qualifying QIP.

Qualified improvement property is defined as any improvement to an interior portion of a nonresidential building placed in service after the building is placed in service. QIP does not include expenditures for elevators, escalators, internal structural framework, or enlargement of the building. For cost segregation purposes, QIP is particularly valuable for tenant improvement allowances, remodels, and renovations.

The interaction between QIP and cost segregation creates layered planning opportunities. Interior improvements can first be evaluated under QIP rules for 15 year treatment with bonus depreciation. Then, a cost segregation study can further identify components within the improvement that qualify for 5 or 7 year treatment, accelerating deductions even beyond the QIP benefit. For strategies on navigating these rules, consider exploring approaches for depreciation under current legislation.

Under TCJA depreciation rules, the core mechanics of cost segregation remain unchanged, but the tax benefit of the analysis increased substantially. Cost segregation still involves an engineering based analysis to identify building components that qualify for shorter MACRS lives. The difference is that components reclassified into 5, 7, or 15 year lives now receive 100% bonus depreciation (during the high bonus years) rather than being depreciated over their recovery periods.

The engineering methodology and supporting documentation requirements for cost segregation studies did not change under TCJA. Studies must still comply with IRS guidelines, properly allocate basis, and provide adequate substantiation for the classification of components. What changed was the magnitude of the first year deduction generated by the study, making detailed engineering analysis more valuable to investors.

TCJA depreciation rules require that the placed in service date be properly documented because it determines the applicable bonus depreciation percentage. Properties placed in service during the 100% period remain eligible for that percentage even if the cost segregation study is completed years later. This makes understanding your property timeline essential for maximizing tax benefits.

Property owners can elect out of bonus depreciation on a class by class basis if TCJA 100 bonus depreciation creates deductions they cannot use. The election must be made on a timely filed return including extensions and cannot be revoked without IRS consent. For investors subject to passive activity loss limitations or with insufficient income, strategic election out may preserve deductions for higher value future years.

The impact of tax cuts jobs act depreciation rules on real estate investors was immediate and substantial. Properties that previously generated modest cost segregation benefits suddenly produced deductions 5 to 20 times the study cost in the first year. This dramatic increase in return on investment drove widespread adoption of cost segregation across residential rental properties, commercial buildings, and mixed use developments.

For investors in residential rental property, TCJA bonus depreciation transformed the economics of cost segregation. A typical apartment building might have 20 to 30 percent of its basis reclassified into bonus eligible categories. With 100% bonus depreciation, that entire amount became deductible in year one, creating substantial tax savings that could fund additional acquisitions, accelerate debt paydown, or improve cash reserves.

Commercial property investors saw similar benefits plus the added value of the QIP correction. Interior improvements to office buildings, retail centers, and other nonresidential properties became significantly more valuable from a tax perspective. Build to suit leases and major renovations could be structured to maximize QIP benefits combined with component level cost segregation.

The 2017 tax reform bonus depreciation changes also created strategic planning opportunities around acquisition timing, renovation scheduling, and disposition planning. Investors began considering bonus depreciation percentages as a factor in acquisition decisions alongside traditional metrics like cap rate and cash on cash return. For context on how these deductions affect investment value, review approaches to evaluating cost segregation with reduced bonus percentages.

One of the most valuable aspects of TCJA bonus depreciation is the ability to capture benefits retroactively through Form 3115 and a Section 481(a) adjustment. Property owners who purchased buildings during the 100% bonus period but did not complete cost segregation studies at the time can still claim the full benefit by changing their accounting method.

The Form 3115 process allows taxpayers to correct their depreciation method for property placed in service in prior years. The adjustment captures all depreciation that should have been claimed using the correct method, effectively catching up missed deductions in a single year. For a property placed in service in 2020 with a cost segregation study completed in 2024, the Section 481(a) adjustment would include the missed bonus depreciation from 2020 plus the difference in regular depreciation for intervening years.

This retroactive capability makes cost segregation valuable even several years after acquisition, provided the property was placed in service during a favorable bonus depreciation period. The economics often work because the accumulated tax benefit still substantially exceeds the study cost, and the lump sum deduction in the adjustment year can be strategically valuable for offsetting other income.

Property owners should coordinate with their CPAs to evaluate retroactive cost segregation opportunities. The analysis should consider the placed in service date, applicable bonus depreciation percentage, current tax position, and the likelihood of being able to use the deduction. Properties placed in service from late 2017 through 2022 represent the highest value retroactive opportunities due to the 100% TCJA bonus depreciation rate.

TCJA bonus depreciation must be coordinated with other tax provisions to maximize overall benefits and avoid unintended consequences. Section 179 expensing, if claimed, is applied first and reduces the basis eligible for bonus depreciation. For most real estate cost segregation, Section 179 is not the primary planning tool because it has dollar limitations and does not apply to buildings, but it can be relevant for certain equipment and personal property.

Passive activity loss rules under Section 469 interact significantly with TCJA bonus depreciation. Real estate investors who do not qualify as real estate professionals may find that large bonus depreciation deductions create or increase passive activity losses that cannot be used against non-passive income. These losses are carried forward and can be used against future passive income or released on disposition, but the immediate cash benefit is reduced.

Like kind exchanges under Section 1031 require special attention when combined with cost segregation and bonus depreciation. The exchanged basis generally does not qualify for bonus depreciation because it is not considered acquired by purchase. However, additional cash or debt used in the exchange (new basis) does qualify. The allocation of basis between exchanged and new components affects the available bonus depreciation benefit.

State tax conformity varies significantly across jurisdictions. Some states fully conform to federal bonus depreciation rules, others partially conform, and some require complete addbacks of bonus depreciation for state tax purposes. Property owners with multi-state operations or properties in non-conforming states need to evaluate both federal and state tax consequences when planning TCJA depreciation rules implementation.