The Big Tax Break: What Is It?
Think of bonus depreciation as a giant, instant coupon for your taxes.
Normally, when you buy a rental property, you get to lower your taxes a little bit each year for many years. But with 100% bonus depreciation, you can take a huge chunk of that tax savings all at once, in the very first year you own the property. This new rule is now permanent, which helps you plan.
Step 1: Buy Your Property at the Right Time
This is the first and most important rule. To get the 100% tax break, you must buy your property and have it ready to rent after January 19, 2025.
If you buy it before that date, you fall under the old rules and get a much smaller tax break. The date you close the deal and get the keys is what matters.
Step 2: Find the "Bonus" Parts of Your Property
You can't use the 100% tax break on the entire building structure. It only works on certain parts of the property.
This is where you need something called a cost segregation study.
Think of it like this: You buy a big box of Legos. The box itself is just a box. But inside, you have wheels, windows, and cool figures. A cost segregation study is like making a list of all the cool parts inside the box.
An expert looks at your property and lists all the things that aren't part of the main building. This includes things like:
Appliances (fridge, stove)
Carpets and flooring
Fences and driveways
Landscaping
All these smaller parts are what you can use the 100% bonus depreciation on. Without this study, you can't get the tax break.
Step 3: Unlock Your Tax Break with "Real Estate Pro" Status
Getting the tax break on paper is easy. Using it is the hard part.
The government sees a rental property as a "passive" activity. This creates a problem. It means any tax losses from your rental (like the big one you get from bonus depreciation) are trapped. You can only use them to lower the tax on other rental profits, not on the money you make from your main job.
To unlock that trapped tax break, you must prove you are a Real Estate Professional. This shows the government that real estate isn't just a hobby for you—it's a major part of your work.
You must meet two tests every year:
The 50% Test: You must spend more than half of your total working time on real estate tasks. If you have a full-time job, this can be hard to do.
The 750-Hour Test: You must spend more than 750 hours a year working in real estate. That's about 15 hours every week.
You must keep a detailed log of your time to prove this. If you meet these tests, your tax break is unlocked. You can now use the big loss from your property to lower the taxes on your main job's income.
Step 4: Plan for When You Sell
The tax break you get now is not totally free. When you sell the property later, you will have to pay taxes back on the amount you deducted. This is called depreciation recapture. Think of it as paying back the tax discount you got in the first year. Be prepared for this tax bill when you decide to sell.
Your Action Plan
Follow these steps to get the tax break.
Buy a rental property and make sure it's ready to rent after January 19, 2025.
Hire an expert to do a cost segregation study right away.
Meet the tests to become a Real Estate Professional. Track every hour you spend on your real estate work.
Work with a tax professional who understands these rules. They will file the right forms to make sure you get the tax break and use it correctly.