The April 15 tax filing deadline is less than two weeks away. Forms, receipts, and in some cases an impending tax bill can make this a stressful time for Americans. But for real estate investors in 2025, at least one thing got better.
With the One Big Beautiful Bill Act (OBBBA), 100% bonus depreciation was permanently reinstated for what the IRS labels “certain qualified property acquired and placed in service after January 19, 2025.” This is a big change from the 2017 Tax Cuts and Jobs Act (TCJA), which placed bonus depreciation at 100%, but with phaseouts beginning in 2023. Those phaseouts were set to hit 40% in 2025.
The Jan. 19 distinction, outlined in IRS Publication 946, is one of several important nuances experts are warning real estate investors to keep in mind when attempting to accelerate depreciation.
With the ability, in some cases, to write off 20% to 30% of a property’s purchase price in year one, investors could be sitting on six-figure tax deductions. But as experts warn, these savings are only available to those who understand how they’re achieved.
“But here’s the thing most investors are missing: Bonus depreciation is only as powerful as your ability to use it correctly,” said Ashley Kehr of Bigger Pockets’ Real Estate Rookie podcast.
This ability can be limited by everything from when the asset was purchased, to how its value is allocated, to whether the owner meets specific requirements that allow the losses to actually benefit their situation in 2026.
Experts warn against bonus depreciation mistakes
Any real estate investor looking to use bonus depreciation must first understand the role of a cost segregation study.
Rather than taking straight-line depreciation over the course of 27.5 years for residential property or 39 years for commercial property, real estate investors can accelerate depreciation with a cost segregation study that separates a property’s components by their useful life, omitting land that is not depreciable.
For an investment property, this can classify components of the building as a five, seven, or 15-year property, all of which can be eligible for 100% bonus depreciation if certain requirements are met — one being the study itself. Without this, the strategy falls apart.
“While 100% bonus depreciation is back permanently, a deduction you don’t know how to capture is a deduction you don’t get,” Kehr added in her warning to investors.
Understanding which components of a building can qualify for bonus depreciation allows investors to begin estimating how much a cost segregation study could impact their tax situation. The list often includes, but is not limited to, the following components (via EisnerAmper).
5-year assets:
- Carpet, flooring
- Countertops
- Breakroom sinks
- Cabinetry and decorative moldings
- Specialty lighting
- Dedicated outlets
- Fire extinguishers
7-year assets:
- Office furniture
15-year assets:
- Drainage pipes
- Parking lots
- Landscaping
- Outdoor swimming pools
- Protective bollards
- Sidewalks
Tax rules can limit cost segregation benefits
A cost segregation study identifies bonus-eligible property components, but does not guarantee how that year-one loss can be used for an individual taxpayer. This is where the warning list grows for those looking to take advantage of this strategy.
The IRS details perhaps the biggest element of this in Publication 925 (2025), Passive Activity and At-Risk Rules.
Generally, real estate is considered a passive activity. This comes with IRS limitations on how losses related to real estate activity can be used. One limitation is that in most cases, the losses cannot offset ordinary earned income, like that from a W-2 job or active business.
“For most investors, rental activity losses created by bonus depreciation are ‘passive’ and can only offset passive income,” Thomas Castelli of Hall CPA wrote last month. “However, investors who qualify as Real Estate Professionals (REPS) under IRC §469(c)(7) can use these losses to offset active income, including W-2 wages. Short-term rental (STR) investors may also have a pathway to non-passive treatment.”
With the tax filing deadline approaching fast, this is the most urgent warning real estate investors are receiving from experts, imploring them to understand the details before assuming large tax deductions against their active income.
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IRS has passive activity loss rules
“If you are considering a cost segregation study on a rental property, and that activity is considered a passive activity, your tax deduction is limited to $25,000 (passive loss limit),” WCG CPAs & Advisors CEO Jason Watson recently emphasized. “If you earn over $150,000 as a household, your tax deduction might be limited to $0. Yes, you are reading that zero correctly.”
This is another warning to investors that details one of the most common mistakes associated with cost segregation and bonus depreciation. However, passive activity loss rules do not automatically eliminate an investor’s path to significant tax savings.
“First, if you qualify as a real estate professional, then your passive activity loss limits go away,” Watson adds. “To be a real estate professional as defined by the IRS and not what you hear at the bar, an individual must spend more than half of the personal services performed in all businesses and activities during the year in real estate activities.”
The following activities qualify as real property trades or businesses under the IRS definition, according to the 2025 Schedule E Instructions.
- Real property development
- Redevelopment
- Construction
- Reconstruction
- Acquisition
- Conversion
- Rental
- Operation
- Management
- Leasing
- Brokerage trade or business
In addition to requiring that more than half of one’s personal services are in real estate activities, real estate professional status (REPS) also requires at least 750 hours of this work each year.
For business owners or full-time W-2 employees, it would be nearly impossible. Without this next strategy, the effort of buying a property, renting it out, and performing a cost segregation study could result in little to no impact on an investor’s tax liability.
Short-term rentals and non-passive activities
“The other way to get around the passive loss limits is to have the activity not be considered passive,” Watson continues. “… To be a nonpassive activity, the average stay in the rental must be 7 days or less. Your typical VRBO Airbnb situation. However, you must also materially participate (there’s that darn word again) in the activity.”
This comes directly from the IRS in Publication 925.
Often referred to as the “short-term rental loophole,” this is how certain full-time W-2 employees and business owners can offset their active income with real estate losses. It does not require REPS, but does require material participation, which can be achieved in different IRS-outlined ways.
Among the most common tests are the requirements for 100 hours and “at least as much” participation as anyone else.
“You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year,” the IRS outlines in the previously cited Publication 925.
For real estate investors who qualify, the return of 100% bonus depreciation can create massive tax savings. But pitfalls exist, and experts are warning against them as April 15 nears.
Related: UBS reveals how real estate kills 2 tax problems with 1 investment
