Bonus depreciation in commercial real estate lets you deduct 100% of the cost of qualifying building components and land improvements in the year they are placed in service, rather than spreading those costs over decades. The One, Big, Beautiful Bill signed in 2025 made the 100% rate permanent for property acquired after January 19, 2025.1Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill The building shell itself does not qualify; the deduction lives inside the property, in the shorter-lived assets that a cost segregation study is designed to identify.
What Actually Qualifies
The building structure follows a 39-year depreciation schedule under Section 168 and is off the table for bonus treatment.2Cornell Law Institute. 26 USC 168 – Accelerated Cost Recovery System What qualifies are components with a recovery period of 20 years or less: assets classified as Section 1245 personal property, and land improvements. A rough test: anything you could remove without damaging the structure is probably personal property; anything embedded in the walls, foundation, or framing is probably structural.
Inside a commercial building, common qualifying assets include removable carpeting, decorative lighting, specialized electrical wiring that serves equipment rather than the building itself, and dedicated plumbing for specific business operations. Outside, paved parking lots, fencing, sidewalks, and landscaping qualify as 15-year land improvements.
Qualified Improvement Property
Qualified Improvement Property is the category most owners underuse. QIP covers improvements to the interior of an existing nonresidential building made after the building was first placed in service.3Internal Revenue Service. Topic no. 704, Depreciation New flooring, updated lighting, and reconfigured office layouts all fall under it. QIP carries a 15-year MACRS life, which puts it inside the bonus depreciation window.
Three types of interior work are excluded from QIP: anything that enlarges the building, elevators and escalators, and modifications to the internal structural framework. When a renovation mixes qualifying and excluded work, the costs need to be separated on the books. Lumping them together risks losing the deduction or drawing an audit.
Used Property
Used property has qualified for bonus depreciation since the 2017 Tax Cuts and Jobs Act. When you buy an existing building, the personal property and land improvements that come with it can qualify even though the prior owner already used them.4Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ Anti-churning rules block a few situations: you cannot have used the property yourself before, you cannot acquire it from a related party, and your basis cannot be carried over from the seller. Property received by inheritance is also excluded.
The Permanent 100% Rule and the Acquisition Cutoff
The 100% rate applies to qualified property acquired after January 19, 2025, with no sunset date.1Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill Property placed in service in 2026, 2030, or later years qualifies at the full first-year rate if it meets the other requirements.
The acquisition date is the pivot, not the placed-in-service date. Property acquired before January 20, 2025, but placed in service later still falls under the old TCJA phase-down. A building closed on in December 2024 and renovated in March 2025 pulls its QIP and personal property in at the 40% rate that applied to 2025 under the prior schedule, not the restored 100%. Owners who acquired property in 2023 or 2024 should sit down with a tax advisor to confirm which rate governs which assets.
Cost Segregation: How You Actually Claim the Deduction
Bonus depreciation is only worth what you can identify and defend. That is the purpose of a cost segregation study, an engineering-based analysis that breaks a property’s total cost into its tax-relevant components. Without one, most owners default to depreciating the entire purchase price over 39 years and leave the deduction on the table.
A typical study starts with a site visit by an engineer or construction specialist who inspects the property and identifies every qualifying component. The resulting report assigns a dollar value and a recovery period to each category: five-year property such as carpeting and certain fixtures, seven-year property such as office furniture and specialized equipment, and 15-year property including land improvements and QIP, all separated from the 39-year building shell.
The study is built on documentation. Owners need to pull together construction invoices, contractor payment records, architectural drawings, closing statements, and appraisals. Those records establish both the physical nature of each component and the cost allocated to it. The report itself becomes the backbone of the depreciation claim and the first thing an IRS examiner asks for if the return is selected for audit.
Fees for a study generally run between $5,000 and $15,000 for a typical commercial property, depending on size, complexity, and location. The fee is deductible as a business expense, and for most commercial properties worth $1 million or more, the tax savings outrun the study cost several times over.
Filing the Deduction
The figures from the study are reported on Form 4562, Depreciation and Amortization, filed with your annual federal income tax return.5Internal Revenue Service. About Form 4562, Depreciation and Amortization The form asks for total asset cost, recovery periods, and the specific bonus depreciation amount claimed.
Keep the cost segregation report and the supporting documents for as long as you own the property and for at least three years after filing the return for the year of disposition. Losing the underlying study during an audit can lead to disallowance of the deduction, and the accuracy-related penalty for a substantial understatement of tax is 20% of the underpayment, plus interest.6Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
Catching Up on Missed Depreciation
If you already own a commercial property and never ran a cost segregation study, you do not have to amend prior returns. File Form 3115, Application for Change in Accounting Method, with the current-year return.7Internal Revenue Service. Instructions for Form 3115 That triggers a Section 481(a) adjustment: a one-time catch-up equal to the difference between the depreciation you actually took and what you could have taken under the accelerated method. The full adjustment lands in the year you file, which can produce a very large single-year deduction on a property held for several years.
Section 179 as a Companion Tool
Section 179 also lets you expense qualifying assets in the year they are placed in service, but with different rules. For 2026, the maximum Section 179 deduction is $2,560,000, with a phase-out beginning at $4,090,000 of qualifying property placed in service. Section 179 cannot create or increase a net operating loss; it is capped at your taxable income from active business operations.
For commercial real estate, Section 179 applies to QIP and to certain building improvements including roofs, HVAC, fire protection and alarm systems, and security systems. With 100% bonus depreciation permanent, the two provisions overlap heavily. The reason to use Section 179 alongside bonus is selectivity: you can elect it on specific assets while leaving others on standard schedules, which gives you finer control over the size and timing of deductions in a given year.
Two Limits That Can Absorb the Deduction
Passive Activity Losses
A large bonus depreciation deduction can push a rental property into a paper loss, but rental real estate is generally treated as a passive activity, and passive losses only offset passive income.8Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited
Two exceptions matter. First, an owner who actively participates in the rental with modified AGI of $100,000 or less can deduct up to $25,000 of passive rental losses against non-passive income; that $25,000 phases out at $1 for every $2 of modified AGI above $100,000 and disappears at $150,000.8Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited For six-figure bonus depreciation deductions, that cap is small.
The larger exception is qualifying as a real estate professional: more than 750 hours per year in real property trades or businesses in which you materially participate, and more than half of your total personal services time in those activities.9Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules Meeting both tests makes rental losses non-passive, deductible against wages and other active income. The IRS audits this status closely; detailed contemporaneous time logs are essential, and travel time, license study, and non-managerial review of financials do not count. Unused passive losses carry forward and free up either against future passive income or on a taxable sale of the property.
The 163(j) Interest Trade-Off
Section 163(j) caps business interest expense deductions at 30% of adjusted taxable income. Real property trades or businesses can make an irrevocable election out of the cap and deduct all interest.10Internal Revenue Service. 11Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property $200,000 of bonus depreciation on carpeting, fixtures, and specialized electrical systems returns as ordinary income on sale at a gain, taxed at rates up to 37%.
For Section 1250 real property, including QIP, the gain attributable to prior depreciation is unrecaptured Section 1250 gain, taxed at a maximum rate of 25%.12Internal Revenue Service. Topic no. 409, Capital Gains and Losses Gain above the total depreciation taken is taxed at regular capital gains rates.
Recapture is where the real cost of bonus depreciation shows up. The deduction is a timing benefit: it accelerates the write-off into the current year and creates a future tax liability on sale. For owners who plan to hold long-term or defer the gain through a Section 1031 exchange, the up-front value usually beats the recapture cost. For a short holding period, the math is closer.
When to Elect Out
Not every owner wants the largest possible deduction now. If current-year taxable income is already low, or a much higher bracket is expected in future years, 100% bonus depreciation can waste deductions that would be worth more later. Taxpayers can elect out of bonus depreciation on a class-by-class basis for any tax year and depreciate those assets over their regular MACRS lives instead. The election applies to every asset in the chosen class placed in service that year; you cannot pick individual assets within a class. It is made on the return for the placed-in-service year and, once made, can only be revoked with IRS consent.