Bonus Depreciation for Rental Property: The Tax Strategy That's Sunsetting

If you own rental property and haven't looked into bonus depreciation, you might be leaving tens of thousands of dollars on the table. But here's the catch: this powerful tax strategy is phasing out.

Let me explain what you need to know—and why acting now matters.

What Is Bonus Depreciation?

Normal depreciation spreads the cost of an asset over its useful life. A residential rental building? That's 27.5 years. Commercial? 39 years.

Bonus depreciation lets you deduct a large percentage of certain property costs in the first year instead of spreading them out.

Example:

• You buy a $500,000 rental property
• A cost segregation study identifies $100,000 of assets eligible for bonus depreciation
• In 2024, you can deduct $60,000 (60% bonus) in Year 1
• Without bonus depreciation, you'd deduct about $3,600 per year

That's a massive acceleration of tax deductions.

The Bonus Depreciation Phase-Out Schedule

Here's the critical timeline:

Year	Bonus Depreciation Rate
2022	100%
2023	80%
2024	60%
2025	40%
2026	20%
2027+	0% (unless Congress acts)

The clock is ticking. Each year that passes means a smaller deduction.

What Property Qualifies?

Bonus depreciation applies to property with a recovery period of 20 years or less. In the rental property context, this typically includes:

Eligible (Through Cost Segregation)

• Land improvements (parking lots, landscaping, fencing)
• Personal property (appliances, carpeting, cabinetry)
• Certain building components (electrical, plumbing for specific fixtures)

Not Eligible

• The building structure itself (still 27.5 or 39-year depreciation)
• Land (never depreciable)

This is why cost segregation studies are essential. They break out the components that qualify for accelerated depreciation.

Real Example: DFW Rental Property

Let's look at a typical Dallas-area rental property purchase:

Property Details

• Purchase price: $400,000
• Land value: $80,000
• Building value: $320,000

Without Cost Segregation

• Annual depreciation: $320,000 ÷ 27.5 = $11,636/year
• First-year deduction: $11,636

With Cost Segregation (2024)

• Building (27.5-year): $220,000 → $8,000/year
• 5-year property: $50,000 → 60% bonus = $30,000 Year 1
• 15-year property: $50,000 → 60% bonus = $30,000 Year 1
• First-year deduction: $8,000 + $30,000 + $30,000 = $68,000

That's an extra $56,364 in deductions in Year 1.

At a 32% tax bracket, that's approximately $18,000 in tax savings.

Who Benefits Most?

Bonus depreciation is most valuable if you:

1. Have high W-2 or business income — More income means higher tax brackets, making deductions more valuable

2. Qualify as a Real Estate Professional — Can offset unlimited W-2 income with rental losses

3. Are acquiring new properties — Bonus depreciation applies to the year property is placed in service

4. Have multiple properties — The math compounds with scale

5. Anticipate lower income in future years — Front-loading deductions makes sense

The Real Estate Professional Advantage

Most rental losses are "passive" and can only offset passive income. But if you qualify as a Real Estate Professional, you can use rental losses to offset any income—including your salary.

Requirements:

• 750+ hours in real estate activities annually
• Real estate must be your primary occupation (more than 50% of working hours)
• Material participation in rental activities

For DFW investors who meet this threshold, bonus depreciation becomes extraordinarily powerful.

Cost Segregation Studies: Worth the Investment

A cost segregation study costs $3,000-$7,000 depending on property size and complexity. Is it worth it?

Rule of Thumb: If your building value exceeds $500,000, almost always yes. For properties $200,000-$500,000, run the numbers with your CPA.

The study pays for itself many times over in most cases.

Finding a Provider:

• Ask your CPA for referrals
• Look for engineers experienced in your property type
• Ensure they provide audit-defensible documentation

Strategic Timing Considerations

Given the phase-out, consider these strategies:

If You're Buying in 2025

• Close before December 31, 2025 to get 40% bonus
• Every month you wait in 2025 doesn't matter—just the year counts
• A January 2026 closing drops to 20%

If You Already Own Property

• You can do a cost segregation study on property you've owned for years
• You'll get a "catch-up" deduction for missed depreciation
• Still valuable, though less dramatic than year-of-purchase

If You're Considering Major Improvements

• Improvements placed in service qualify for bonus depreciation
• Roof replacement, HVAC, major renovations
• Time these strategically before rates drop further

Depreciation Recapture: The Trade-Off

There's no free lunch. When you sell the property, you'll face depreciation recapture—taxed at up to 25%.

But here's the thing:

• You're trading future dollars for today's dollars (time value of money)
• Tax rates might change
• You might 1031 exchange and defer indefinitely
• The math usually favors acceleration

Work with your CPA to model your specific situation.

Action Steps for DFW Investors

If you purchased property in 2024:

1. Get a cost segregation study done ASAP
2. File an amended return if you missed the deduction
3. Document everything for potential IRS review

If you're buying in 2025:

1. Factor bonus depreciation into your investment analysis
2. Budget for a cost segregation study at closing
3. Consult with a CPA before closing on timing implications

If you're planning for 2026+:

1. Understand you'll have reduced (20%) or no bonus depreciation
2. Adjust your investment models accordingly
3. Watch for potential Congressional action to extend

The Bottom Line

Bonus depreciation is one of the most powerful tax strategies for rental property investors—but it's disappearing. The 2024 rate of 60% is already reduced from 100%, and by 2027, it's scheduled to hit zero.

If you own rental property in the DFW area and haven't explored bonus depreciation, now is the time. Each year you wait costs you money.

This is exactly the kind of strategy I implement for my real estate investor clients. The tax savings can be substantial, but the rules are complex.

The window is closing. If you own rental property in DFW and haven't explored bonus depreciation, let's run the numbers before the rates drop further.

Schedule a strategy call →

— Krystal Le, CPA

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LeCPA helps real estate investors across Plano, Richardson, Frisco, Carrollton, and Dallas maximize tax savings through strategic planning.