Section 179 vs Bonus Depreciation vs Cost Segregation
Real estate investors often hear three related terms: Section 179, bonus depreciation, and cost segregation. They are connected, but they are not interchangeable, and the differences matter for compliance and ROI.
The phrase cost segregation bonus depreciation is common because cost segregation can identify shorter-life assets and bonus depreciation can accelerate deductions for eligible classes. Section 179 adds another layer because it is an election with its own limits and rules.
TL;DR – Key Takeaway
Section 179 is an election with specific constraints, bonus depreciation is a timing rule that can change by year, and cost segregation is a classification process that identifies depreciation lives. cost segregation bonus depreciation describes the combination of cost segregation results and bonus rules on eligible property. Investors should choose among these tools based on eligibility, ability to use deductions, and ROI sensitivity, not on generalized claims.
Definitions: Section 179, Bonus, and Cost Segregation
Section 179 is an election that can allow expensing of certain qualifying property, subject to limits and other constraints under current law. Bonus depreciation is a separate rule that can allow accelerated deductions for certain eligible property placed in service in particular years.
Cost segregation is not an expensing rule by itself. It is a classification method that separates building costs into different asset classes with different depreciation lives. That classification can set the stage for cost segregation bonus depreciation, but cost segregation is distinct from the timing rules.
How They Interact in Real Estate
In real estate, the building shell is typically long-life real property. Cost segregation can identify shorter-life personal property and land improvements, which are often the categories where accelerated rules might apply under current law.
This is why cost segregation bonus depreciation is best understood as a sequence. First, identify eligible shorter-life classes. Then, apply the appropriate timing rules for the placed-in-service year. Section 179 may apply to certain assets as an election, while bonus depreciation may apply as an automatic rule depending on current law and elections.
Eligibility and Constraint Differences
Why constraints matter
The best strategy is often determined by constraints rather than by a headline benefit. Section 179 can be limited by income and other rules. Bonus depreciation can change by year and may not be available at the state level. Cost segregation depends on facts and classification.
Investor checklist
- Confirm property facts and which asset classes are present.
- Confirm placed-in-service timing for cost segregation bonus depreciation assumptions.
- Confirm taxpayer ability to use deductions in the current year.
- Model state conformity if state income tax is relevant.
Comparison Table: Side-by-Side
| Feature | Section 179 | Bonus depreciation | Cost segregation |
|---|---|---|---|
| What it is | An election to expense qualifying property, subject to limits. | A timing rule for accelerated deductions on eligible property. | A classification method that changes depreciation lives. |
| Main constraint | Eligibility and limitations can restrict use in some cases. | Percentage can vary by year and can phase out under current law. | Depends on property facts and defensible allocations. |
| How it relates to cost segregation bonus depreciation | May apply to some short-life property identified via classification. | Applies timing acceleration once eligible assets are identified. | Identifies the eligible short-life assets that may drive the timing benefit. |
| Best use case | When elections and limits align with the taxpayer profile. | When bonus is available and timing is favorable. | When classification can materially change the schedule. |
Educational summary only. Eligibility and limitations depend on facts and current law.
Investor Decision Framework
An investor decision process should start with goals and constraints. If the goal is early-year after-tax cash flow, cost segregation bonus depreciation may matter more when bonus is higher. If the goal is multi-year optimization, classification can matter even when bonus is lower.
A disciplined decision order
- Confirm property facts and estimate eligible basis range.
- Confirm timing assumptions using placed-in-service rules.
- Check constraints: ability to use losses, elections, and state conformity.
- Compute payback and ROI sensitivity.
For the broader financial picture, see Cost Segregation Benefits.
How This Connects to ROI
The ROI of cost segregation bonus depreciation is the after-tax cash value of accelerated deductions relative to costs and constraints. Section 179 and bonus depreciation can change the timing of cash flows, while cost segregation changes the underlying depreciation schedule.
Use Cost Segregation Return on Investment (ROI) to evaluate payback and sensitivity instead of relying on a single outcome.
Compliance and Risk Management
Compliance is a practical part of the decision because aggressive positions can create audit and documentation risk. The goal is to keep classification and timing assumptions consistent with the rules and with the facts. That is especially important for cost segregation bonus depreciation in phase-out years.
If state treatment matters, review state conformity when bonus depreciation does not apply.
Frequently Asked Questions
Is Section 179 the same as cost segregation bonus depreciation?
No, Section 179 is not the same as cost segregation bonus depreciation. Section 179 is an election with specific limits and eligibility rules, while cost segregation changes asset classification and bonus depreciation is a timing rule that can apply to certain classes.
Can Section 179 and bonus depreciation both apply to the same property?
Yes, both can apply in some cases, but not necessarily to the same costs in the same way. The correct result depends on asset class, placed-in-service timing, and current law rules.
Does cost segregation make bonus depreciation available for the whole building?
No, cost segregation does not make bonus depreciation available for the entire building. It identifies eligible shorter-life components, while the building shell typically remains long-life property.
Which is usually better for real estate investors: Section 179 or cost segregation bonus depreciation?
Neither is universally better because they solve different problems and have different constraints. Investors typically choose based on property type, eligibility, taxpayer limitations, and ROI modeling.
What is the main benefit of combining cost segregation and bonus depreciation?
The main benefit is earlier deductions on eligible components compared to standard depreciation. The cash value depends on tax rate, ability to use losses, and the bonus percentage in the placed-in-service year.
Can cost segregation help even if Section 179 is limited or not available?
Yes, cost segregation can still help by changing depreciation lives, even if Section 179 is limited or not applicable. The benefit may be spread over several years instead of concentrated in year one.
How do placed-in-service rules affect Section 179 and bonus depreciation?
Placed-in-service timing can affect eligibility and the bonus percentage for a given year. If you are planning around cost segregation bonus depreciation, timing should be documented and modeled.
Where can I learn how to evaluate these strategies by ROI?
Use a payback-based ROI model that converts incremental deductions into after-tax cash flow and compares it to costs and constraints. The ROI page provides a structured framework with sensitivity ranges.