The One Big Beautiful Bill Act just reinstated 100% bonus depreciation — but the January 20, 2025 cutoff, California’s non-conformity, and Section 1250 recapture can silently gut your savings if you’re not prepared. 🏢
Here’s the full end-to-end picture — from how a cost segregation study mechanically generates deductions to the exit strategies that keep the tax bill deferred indefinitely.
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📋 CHAPTERS
[00:00] Introduction & 100% Bonus Depreciation Returns in 2025
[00:22] The January 20, 2025 Effective Date Cutoff (40% vs. 100%)
[01:07] How Real Estate Lets You Borrow Your Way to a Deduction
[01:41] Cost Segregation Study Mechanics: The $2M Property Example
[02:23] Calculating Your Bonus Depreciation Deduction & Tax Savings
[03:25] Passive Loss Rules & Real Estate Professional Status (Section 469)
[04:31] Qualifying as a Real Estate Professional: The Two-Part Test
[05:09] California Bonus Depreciation Add-Back: The Non-Conformity Problem
[06:02] Federal −$1M Loss vs. $2M California Taxable Income (Real Client Outcome)
[06:46] Section 1250 Recapture, Tax Deferral, and the 1031 Exchange Exit Strategy
[07:07] Next Steps with Advise RE
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Topics covered:
• One Big Beautiful Bill Act bonus depreciation — what changed and when it applies
• How a cost segregation study reallocates building assets to 5-, 7-, and 15-year property
• The $300K deduction / $111K tax savings math on a $1M building allocation
• Section 469 passive loss rules and why real estate sits in its own category
• The 750-hour and 50%-of-all-work tests for real estate professional status
• California’s bonus depreciation add-back and what it means for your state return
• The 25% Section 1250 recapture rate on sale — and how a 1031 exchange defers it
For personalized help on your next acquisition, reach out to Advise RE. 👇
www.advisere.tax
contact@advisere.tax
TRANSCRIPT:
[00:00] Welcome back, everybody. Stefan Morris here at Advise RE. Today, we're gonna talk about your favorite subject, which is bonus depreciation. We love bonus depreciation because it substantially lowers or potentially eliminates all of our taxable income. And in tax year 2025, we got the reintroduction of the 100% bonus depreciation rate as prescribed by the One Big Beautiful Bill Act. [00:22] Prior to 01/20/2025, if you had any property that you placed in the service during those years, you were subject to potential phase down limitations after tax year 2022. And so if you were unfortunate enough to buy a property on, let's say, January 1 through January 19, unfortunately, bonus depreciation for you on those specific properties is limited to 40%. However, January 20 and forward, now you'll be able to realize or unlock the benefits of 100 bonus depreciation. Let's dive into the mechanics of how this works and what are some tips and tricks on how to understand it better. So we love bonus depreciation because, especially in the real estate world, we're able to generate these deductions by borrowing money from the bank in order to achieve this outcome. [01:07] Normally, in the tax world, 99.9% of the cases, in order for you to achieve a deduction, you first have to spend the money. And this is the very reason why we typically don't at advisory prescribe you going out to spend something solely to gain a deduction. However, in the real estate world, we kinda get to have our cake and eat it too. And in that instance, borrowing money, getting this huge deduction, and then using the tax benefits of that deduction or to buy out more real estate fuels this engine and allows us to keep our taxable income low. So let's talk about the specific mechanics of how this works. [01:41] You buy a property in, well, you know, we're in LA here, so let's choose Los Angeles as an example, and the property is $2,000,000 of it is allocated to the land, as we know land is not depreciable. $1,000,000 of it is gonna be allocated to the building. In the absence of doing anything else, we would have a $1,000,000 building asset, unit of property, which would be depreciable over a twenty seven and a half year or thirty nine year life depending on the use, whether it's residential use or commercial use. However, if we employ a cost segregation study, then we get the benefits of bonus depreciation. That doesn't mean we get to immediately depreciate $1,000,000. [02:23] Instead, what's gonna end up happening is a portion of that building, typically around 25 to 30% of it is generally the back of the napkin math, will be reallocated from the building to shorter lived assets, personal property at five years, land improvements at fifteen years, those type of assets are immediately eligible for bonus depreciation, and to the extent that you're able to allocate it from the building would be at a rate of 100%, assuming you got it after 01/20/2025. Therefore, if we use this 30% number, we would generally generate about a $300,000 tax deduction from a result of the bonus depreciation, which is immediately deductible against our income taxes. Therefore, with this $300,000 deduction, we're looking at a up to $111,000 tax savings, dollar for dollar tax savings, assuming a 37% top rate. So does that mean you should start going out and buying real estate tomorrow to generate substantial tax savings? The answer is maybe. [03:25] And the reason why it is maybe is because we have these passive loss rules that we have to consider too under code section four sixty nine. And in this particular instance, real estate has a little special place in hell in the code where it's considered to be passive regardless if you're actually working on it. So let's say you had a w two job, you're working in tech, you're working in sales, and on the side you have this apartment building that you've been working on. Saw my video, and you stopped just about a minute before I told you about this part here, and you decide to go for this cost segregation study, you got this massive deduction. And when your tax preparer is working on the return, assuming he or she does it correctly, you're gonna see that this loss goes into the passive bucket. [04:04] Why? Because you have this full time job, and it has nothing to do with real estate, and there's a lot of rules that you gotta get around it, specifically around the real estate professional status. And so for you to unlock real estate losses, you'd have to be considered a real estate professional under the code. And in that instance, you'd have to have over seven hundred and fifty hours in real estate trades or businesses. You gotta be doing real estate stuff, Property management, construction, asset management, all that sort of stuff. [04:31] Also, all those hours of real estate stuff have to be more than 50% of all the stuff you do for money. So if you're spending two thousand hours a year in your full time job in sales, and five hundred hours, or let's say seven hundred and fifty hours, I should say, in real estate, you're gonna fail the test. Because although you met test number one on the seven hundred and fifty hours, you're gonna fail the 50% rule because the seven hundred and fifty hours you spent, for example, in real estate are gonna be less than 50% of the overall work that you're doing. I should mention one more thing. A lot of our viewers here have California real estate, and they're very excited to live here on this part of the country. [05:09] And they're assuming that if taxable income drops for the federal as a result of bonus depreciation, then certainly the same must follow for state of California's taxable income. Unfortunately, we have a huge problem. California does not respect bonus depreciation at all. In fact, they specifically exclude it, and so when they're doing a reconciliation of California taxable income to federal taxable income, they're gonna add back the effect of all the bonus depreciation that you took on your federal income tax return. Now does that mean that a cost segregation study is completely worthless for California purposes? [05:41] No. Because remember, we're moving these assets from a twenty seven and a half year life to a five, seven, ten, fifteen year sort of bucket. And at the very minimum, California is gonna respect the reallocation of those assets, and so you're gonna accelerate your depreciation in California. You're just not gonna get that big one time shot like you did on the federal income tax return. So it's still useful. [06:02] It's just that a lot of times, especially our major sophisticated, real estate investor clients have an outcome where federal taxable income is, like, minus 1,000,000 in terms of loss, and then you'll see on their California tax return $2,000,000 of taxable income. They end up paying a lot to the state of California, even though they did a a bonus depreciation cost segregation study. One last thing to wrap up this whole discussion. Remember that all these types of deductions and methods are more on the tax deferral side than they are on straight up tax savings. Now what ends up happening is if when one day when you sell the property, the effect of you having bonus depreciation on property and having substantially taken so many losses decreases the adjusted basis of your asset. [06:46] And when it comes time to sell it, you're gonna have to pay all that back at a 25% section twelve fifty recapture rate. However, it's still coming back unless you do a ten thirty one exchange. So we love this type of strategy. Ten thirty one allows us to keep kicking the bucket down the road, and that's the very reason why we love real estate investing so much. It is just such a tax advantaged investment. [07:07] So if this helps you out or you find that you want a little little bit more about how bonus depreciation works, especially as it relates to the one big beautiful bill act, then feel free to contact us right here, and we'll be more than happy to assist you on your next acquisition. Thanks so much for watching, and look forward to seeing you in our next video. So make sure to like and subscribe to our channel for all the content relating to real estate investment and tax saving strategies.
