Bonus Depreciation Phase-Out Checker

Understanding Bonus Depreciation and Cost Segregation Schedules

The Basics of Depreciation

When a commercial or residential property is acquired, the IRS mandates a depreciation schedule. Without cost segregation, the cost basis (Purchase Price minus Land Value) is depreciated using a straight-line method. This typically spans 27.5 years for long-term residential rentals or 39 years for commercial properties. Notably, most short-term rentals fall into the 39-year class due to the transient-use exclusion under IRC § 168(e)(2)(A).

While straight-line depreciation is the default, it ignores the reality that different components of a building degrade at different rates. A roof, flooring, or cabinetry does not last as long as the building's structure.

How Cost Segregation Works

Cost segregation is an engineering-based study that reclassifies assets within the property. Instead of a single 39-year bucket, assets are identified and moved into shorter recovery periods:

• 5-Year Property: Personal property (e.g., carpeting, appliances).
• 7-Year Property: Specific fittings and assets.
• 15-Year Property: Land improvements (e.g., landscaping, paving).
• 39-Year (or 27.5-Year) Property: The remaining building structure.

By accelerating these costs, investors can front-load depreciation expenses, significantly reducing taxable income in the early years of ownership.

The Impact of Bonus Depreciation

Bonus depreciation allows investors to deduct a specific percentage of eligible assets (typically the 5, 7, and 15-year classes) in the very first year.

However, the "Tax Cuts and Jobs Act" initiated a phase-down of bonus depreciation for properties acquired under specific rules. Determining your specific bonus rate depends heavily on two factors: your Acquisition Date (Contract Date) and your In-Service Date.

Learn more about how this applies to short-term rentals in our STR Loophole guide.

A Note on Form 3115

If you have filed tax returns for a property in previous years using the standard straight-line method, you are effectively changing your accounting method when switching to cost segregation. This requires filing Form 3115 (Application for Change in Accounting Method) with the IRS.

This form allows you to "catch up" on missed depreciation from prior years (Section 481(a) adjustment) without amending previous tax returns. If this is your first year filing taxes for the property, Form 3115 is generally not required. Learn more about our Form 3115 preparation service, or contact us to discuss your property.

Why Cost Segregation Is the Only Way to Maximize What Remains

As bonus depreciation phases down, the window to capture substantial first-year deductions narrows. But here's the critical point: bonus depreciation only applies to assets that have been properly identified and reclassified through a cost segregation study. Without the study, 100% of your depreciable basis stays in the 39-year bucket — and bonus depreciation doesn't touch it.

Even at 40% (2025) or 20% (2026), the first-year deduction from a properly executed cost segregation study will significantly outperform straight-line depreciation. The study is what unlocks the accelerated schedules. Bonus depreciation simply amplifies the result. Contact us to understand how much you can still capture with current rates.