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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
The 2025 One Big Beautiful Bill Act restored 100 percent bonus depreciation for eligible property acquired after January 19, 2025. It did not make every DST investment fully deductible. Your result depends on your assets, dates, basis, tax choices, and loss limits, so a sponsor’s estimate needs to be checked against your own return.
The law changed the first-year write-off under Section 168(k). For covered property, it restored a 100 percent allowance and removed the scheduled phase-down. IRS Notice 2026-11 explains the change and provides interim guidance on dates, acquisition rules, and certain elections. [1]
In this setting, “permanent” means the law does not schedule that restored allowance to phase out for covered property. It does not mean Congress can never change the rule. It also does not mean every dollar spent on real estate qualifies.
The tax law still treats land, buildings, and shorter-life assets differently. It still asks when property was acquired and placed in service. It still limits deductions in some situations. An investor using a 1031 exchange also brings a tax basis that can be far below the value of the property purchased.
I would treat a bonus-depreciation claim as the start of a review. The useful questions are how much of your basis qualifies and when you can use the write-off. The headline rate alone cannot answer either part.
Depreciation generally lets an owner recover eligible property basis through deductions over time. Bonus depreciation allows a larger portion of qualifying basis to be deducted in the first year. It changes when a cost is written off. It does not create cash rent or raise a building’s market value.
For a simple example outside the exchange setting, assume a taxpayer buys a qualifying asset for $40,000. Assume all requirements for the restored 100 percent allowance are met, no election changes the result, and no other rule limits the deduction. The first-year bonus deduction is $40,000.
That does not mean the IRS sends the taxpayer $40,000. A deduction reduces taxable income when usable. Its tax value depends on the taxpayer’s return. Nor can the same $40,000 basis be deducted again over later years after it has been fully recovered. [2]
A marketing statement about “tax-sheltered income” can leave out this timing issue. A large deduction now may leave less basis to write off later. Selling the asset can also trigger gain and recapture. Review the holding period, not just the first tax year.
Land is not depreciable. Residential rental buildings generally use a 27.5-year recovery period under the general system, while nonresidential real property generally uses 39 years. Section 168(k) includes a category for qualifying property with a recovery period of 20 years or less, among other specified categories. [2] [3]
That means a typical apartment or warehouse building does not become entirely eligible for ordinary bonus depreciation just because the allowance is 100 percent. Some assets associated with the property may have shorter recovery periods and may qualify if the other requirements are met.
A cost-segregation study can help identify and support asset classifications. But the study needs to explain the assets and the allocated costs. A round percentage copied from another property does not establish the correct treatment for this one.
Qualified improvement property has its own definition and limits. Not every renovation fits it. Likewise, the separate rules for qualified production property are not a blanket write-off for every leased industrial building. A property’s marketing category does not establish its tax category.
Ask for a schedule that separates nondepreciable land, long-life building basis, and proposed shorter-life assets. That schedule links the property facts to the tax math. Without it, a large deduction estimate is hard to evaluate.
The restored allowance generally applies to eligible property acquired after January 19, 2025. Notice 2026-11 explains how acquisition-date rules apply, including written binding contracts, cancellation periods, conditions, and special rules for self-constructed property. [1]
The wire date is not always the whole answer. A prior binding contract can matter. So can the point when conditions are satisfied. A sponsor may buy the property before an investor buys an interest. Review both steps under the actual legal and tax structure. Do not assume they are the same event.
Placed in service is another test. IRS Publication 946 describes it as the time property is ready and available for its specific use. A payment made before year-end does not by itself prove that an unfinished asset was ready for use in that year. [2]
For a DST, obtain the dates and supporting records relevant to the investor’s tax treatment. A brief offering summary may not contain enough detail. If the planned deduction depends on a particular date, resolve that question before you use the estimate in your cash plan.
Revenue Ruling 2004-86 analyzes a trust whose beneficial owners are treated as owning shares of the underlying real estate for federal tax purposes. It is the facts and limits of that structure that support the result. It is not a ruling that every Delaware trust has the same tax treatment. [4]
For a trust that fits the relevant treatment, an investor’s own exchange history matters. Two investors can buy equal interests in the same property but have different bases. One may invest new cash. Another may exchange low-basis property. Their depreciation results need not match.
This is why an offering-level example should state its assumed buyer. Is it based on a fresh taxable purchase, an exchange with added basis, or some other case? An example prepared for one cannot simply be applied to all the others.
The tax records from the trust should give your CPA the property facts needed to do the math. Your CPA also needs the records that came from the property you sold. Neither set of records can stand in for the other.
Section 1031 generally preserves deferred gain through the replacement property’s basis. In a simple fully deferred exchange, replacement value minus deferred gain helps show the resulting basis. Additional cash, debt changes, recognized gain, and costs can change the final basis. [5]
Publication 946 makes a key point about the bonus allowance. For used qualified property received in a like-kind exchange, only excess basis is eligible for the special allowance under the described rule. The carryover basis can still be relevant for regular depreciation. New qualified property has different treatment. [2]
Excess basis is not the same as all the equity you invest. It reflects additional consideration under the relevant rules. It can arise through more cash, liabilities, or other consideration. How that basis is split among land and other assets still matters.
You may be able to elect a different way to write off carryover basis. That choice does not, by itself, make all the basis qualify for the bonus allowance. Publication 946 separates the regular depreciation rules from the special allowance. Have your CPA check both rules. An election does not create a new basis equal to the price.
Assume an investor sells qualifying investment land worth $1 million with a $250,000 adjusted basis. Ignore selling costs, debt, and other adjustments. The investor completes a fully deferred exchange into $1 million of used qualifying replacement real estate.
The deferred gain is $750,000. The replacement basis is $250,000, not $1 million. In this simplified model there is no excess basis. The new asset allocation and regular depreciation still need to be worked out, but the full price is not new basis to write off. [5]
For used qualified property within this example, the exchange rule does not produce bonus depreciation on carryover basis simply because the investor acquired it this year. That remains true even if an offering example assumes a much larger write-off for a buyer investing new cash. [2]
The lesson is not that exchange investors never get depreciation. It is that their old basis follows them and has to be allocated and recovered under the relevant rules. A low-basis exchange can still serve a purpose, but the tax example must use the right starting point.
Keep the same $1 million relinquished property and $250,000 basis. Now assume the investor adds $200,000 of outside cash and buys $1.2 million of replacement real estate. The exchange fully defers the $750,000 gain, with no costs, debt, or other adjustments in this example.
Total replacement basis is $450,000: the $250,000 carried basis plus $200,000 of added basis. Suppose, only for this example, the CPA’s supported asset allocation places $40,000 of that excess basis in used qualified assets eligible for the restored 100 percent allowance. Do not assume the rest of the excess basis qualifies.
The bonus deduction in this model is $40,000. It is not $200,000, $450,000, or $1.2 million. Every one of those numbers has a role, but only the stated eligible basis drives this example’s allowance.
| Item | Illustrative amount |
|---|---|
| Replacement value | $1,200,000 |
| Deferred gain | $750,000 |
| Total replacement basis | $450,000 |
| Excess basis | $200,000 |
| Assumed eligible part of excess basis | $40,000 |
| Modeled 100% bonus deduction | $40,000 |
This is a teaching example, not an expected split for any property type or DST. It assumes the relevant assets qualify for both their exchange and depreciation treatment, all date tests are met, and no election or deduction limit changes the result. The actual split can differ sharply.
Continue with an unrelated hypothetical year of operations. Assume an investor’s share of rental income after deductible operating costs and interest, but before depreciation, is $50,000. Assume $5,000 of loan principal is also paid, leaving $45,000 of cash, with no reserves, other cash items, or fees left out.
If allowable regular depreciation is $10,000 and allowable bonus depreciation is $40,000, modeled taxable rental income is zero: $50,000 minus $50,000. Cash remains $45,000 in this simple case. Principal repayment affects cash but is not treated as interest paid.
Without the $40,000 bonus deduction, the same model would show $40,000 of taxable rental income after the $10,000 regular deduction. The property’s cash did not change. The timing of the deduction changed.
Do not turn that one-year example into a promise of ten years of tax-free distributions. Later depreciation may be smaller, operating results may change, and a sale can create gain. Your own loss limits and state rules must also be checked before you work out the tax.
Rental real estate is generally subject to passive-activity rules, with exceptions and detailed tests. A passive loss does not normally offset wages or portfolio income merely because it was created by bonus depreciation. IRS Publication 925 also explains that relevant basis and at-risk limits apply before the passive-loss rules. [6]
Assume a passive rental activity has $30,000 of income before $80,000 of otherwise allowable deductions. The activity shows a $50,000 loss. If the taxpayer has no usable passive income, no relevant exception, and no qualifying disposition that releases losses, the model does not assume a current wage offset. The loss may be suspended under the rules.
Debt adds another layer. Not every nonrecourse loan increases the taxpayer’s amount at risk, though qualified nonrecourse financing secured by real property can qualify under stated conditions. A large allocated debt amount is not proof that every planned loss can be deducted now. [6]
Ask your CPA what the deduction would offset on your actual return and what happens to any unused amount. A deduction that may be used later can still have value, but it should not be presented as tax savings now.
Taxpayers can elect out of bonus depreciation for a class of property under the relevant rules. Election timing and the person entitled to make the election matter. The notice also describes a special transition election for the first tax year ending after January 19, 2025. That is not a standing choice to use any preferred percentage in every later year. [1] [2]
Business-interest elections can affect depreciation too. IRS guidance covers the real property trade or business election. It requires the alternative depreciation system for three listed classes: residential rental property, nonresidential real property, and qualified improvement property. Those listed assets are not eligible for Section 168(k) bonus depreciation under that election. [7]
This does not mean every asset associated with that business automatically receives identical treatment. Review the actual asset classes and elections. A short tax summary may not show every choice that affects an investor’s deductions.
Federal and state depreciation can differ. California’s 2025 Publication 1001 states that California does not conform to the restored federal 100 percent bonus-depreciation provision. It directs taxpayers to calculate the relevant state adjustment. [8]
That means a federal deduction should not simply be multiplied by a combined federal-and-California rate to advertise savings. The California deduction, basis, and later gain may follow a different schedule. Other states need their own review rather than an assumption that all states follow one pattern.
Keep both sets of basis records. A difference created in the first year can matter years later when the property is sold. The state result depends on the taxpayer and source of income as well as where a property is located.
Depreciation reduces basis under the relevant rules. A later sale can therefore produce more gain than it would if less basis had been recovered. Sections 1245 and 1250 govern important recapture rules for different classes of depreciable property. [9] [10]
It is not accurate to say that all real estate depreciation comes back at one flat 25 percent rate. Some gain can be ordinary recapture. Other building-related gain can involve different rules. The asset type, deductions, holding period, and transaction matter.
Another exchange may defer some gain when its conditions are met, but recapture coordination needs review. Do not assume that calling the next transaction a 1031 exchange automatically shelters every dollar arising from shorter-life assets.
A useful comparison shows the early deduction, later deductions, expected holding period, and an exit-tax sensitivity. It can show the benefit of timing without treating the first-year reduction as permanent tax elimination.
Ask the person showing you the estimate to walk from the price to your basis, then from your basis to the amount you can write off. Each step should have a clear reason. If the answer starts and ends with “the law allows one hundred percent,” part of the work is missing.
Also ask what happens next year. Will the same cash be paid if rents are flat? Which tax deductions will be left? What if the sale comes sooner than planned? You do not need to know every tax code section to ask those questions. You do need answers that match your facts.
Keep the property review beside the tax review. Tenant quality, debt, reserves, fees, and exit choices still determine whether the investment makes sense. A valid deduction cannot make an overpriced building less expensive or guarantee the return of capital.
Yes, for eligible property acquired after January 19, 2025, subject to the relevant rules. Notice 2026-11 explains the change and acquisition requirements. Older acquisition dates and special circumstances can produce different treatment, so the year an investor sends money is not enough by itself. [1]
Not merely because it is a DST. Land, long-life buildings, asset classification, basis, dates, elections, and loss limits all matter. An exchange investor may have a carryover basis far below the replacement value. Calculate the basis that qualifies before applying the allowance. [2]
Used property can qualify when the statutory acquisition and other requirements are met. In a like-kind exchange, Publication 946 limits the special allowance for used qualified property to excess basis under the described rule. It does not give a fresh full-price deduction for the carried basis. [2]
No. Added cash can create added basis, but that basis must be allocated among the acquired assets. Only the part allocated to eligible property can support bonus depreciation, and other requirements still apply. A land allocation does not become depreciable because it was funded with new cash.
Do not assume so. Rental losses are generally subject to passive-activity limits, with exceptions and other rules. Basis and at-risk limits may apply first. Your CPA should identify which income a deduction can offset now and which amounts must be carried forward. [6]
California’s cited 2025 guidance does not conform to the restored federal bonus-depreciation provision. Separate state calculations and basis records are needed. Check the rules for the actual return year and all relevant states before estimating combined tax savings. [8]
It does not create rent or reduce the loan payment. It may reduce the investor’s current tax if the deduction is usable. Cash distributions and taxable income are different figures, so compare both and avoid treating an early deduction as a higher property return.
Depreciation affects basis, and a later sale can create gain or recapture under the relevant asset rules. A future exchange requires its own review. The early deduction should be evaluated alongside later deductions and exit taxes rather than treated as permanent tax-free income. [9] [10]
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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