How 100% Bonus Depreciation Came Back in 2025: A Step-by-Step OBBBA Guide for Real Estate Investors

The two-regime structure after OBBBA

OBBBA created a clean before-and-after split. Property whose binding acquisition contract was signed on or before January 19, 2025 remains under the phase-down rate schedule that Congress originally enacted in the Tax Cuts and Jobs Act of 2017. Property whose binding contract is on or after January 20, 2025 qualifies for permanent 100% bonus depreciation under the amended Section 168(k). Closing date does not control. The binding contract date controls.

What changed beyond bonus depreciation

OBBBA raised the Section 179 expensing cap to $2.5 million with a $4 million phaseout threshold, up from $1 million / $2.5 million under prior law. Section 168(n) was added for Qualified Production Property: nonresidential real property used in qualified production qualifies for 100% bonus if construction begins after January 19, 2025 and before January 1, 2029 and the property is placed in service before January 1, 2031.

The 40% election

For the first tax year ending after January 19, 2025, taxpayers may elect 40% bonus instead of 100% under Section 168(k)(10) added by OBBBA. The election is useful when taking the full 100% would waste a net operating loss the taxpayer would prefer to preserve. The election is annual; consult your CPA before relying on it.

State conformity

OBBBA is a federal change. State conformity varies. Rolling-conformity states like Colorado, Alabama, and Tennessee automatically follow OBBBA. Decoupling states like California (per Grant Thornton's October 2025 conformity update), New York, and Massachusetts require an addback of the federal bonus deduction on the state return. The federal benefit is preserved either way, and the state benefit depends on conformity. Roughly 18 states conform fully to federal bonus, about 12 fully decouple, and the rest fall somewhere between. See the state pages for state-by-state treatment.

Worked example

An investor signs a binding contract on February 5, 2025 to acquire a $2M short-term rental, closing March 15, 2025 and placing the property in service April 1, 2025. The $1.6M depreciable basis (after backing out $400K of land) qualifies for 100% bonus under amended Section 168(k). A cost segregation study reclassifies 25% of basis ($400K) to 5-year personal property and 10% ($160K) to 15-year land improvements. The combined $560K reclassified portion becomes a first-year deduction. At a 37% combined federal and state marginal rate, the first-year tax savings are roughly $207K.

Common mistakes

• Confusing the binding contract date with the closing date. Only the binding contract date determines whether OBBBA's permanent 100% applies.
• Assuming state benefits follow federal. About a dozen states fully decouple from Section 168(k).
• Taking 100% bonus when an NOL would otherwise carry forward. The 40% election may produce more usable deductions over time.
• Pursuing bonus depreciation without first establishing loss usability via REPS or the STR loophole.

Frequently asked questions

What is bonus depreciation in 2026?

100% for property acquired and placed in service after January 19, 2025 under Public Law 119-21 (OBBBA). The legacy phase-down (40% in 2025, 20% in 2026, 0% thereafter) still applies to property under a binding contract entered before January 20, 2025.

What is OBBBA?

The One Big Beautiful Bill Act, Public Law 119-21, signed July 4, 2025. It permanently restored 100% bonus depreciation under amended Section 168(k), raised the Section 179 cap to $2.5 million with a $4 million phaseout, and added Section 168(n) Qualified Production Property for nonresidential real property used in qualified production.

What is the January 19, 2025 cliff?

Property under a binding acquisition contract signed on or before January 19, 2025 stays on the legacy phase-down. Property with a binding contract signed on or after January 20, 2025 qualifies for permanent 100% bonus. The binding-contract date controls, not the closing date.

Can I elect 40% instead of 100%?

Yes. For the first tax year ending after January 19, 2025, taxpayers may elect 40% bonus (60% for long-production-period property and certain aircraft) under Section 168(k)(10) added by OBBBA. The election is useful when 100% would waste a net operating loss.

Does used property qualify?

Yes. Used property qualifies for 100% bonus under a five-year acquisition lookback rule per Section 168(k). The five-year lookback prevents related-party or repeat-purchase abuse.

What is Section 168(n) Qualified Production Property?

OBBBA added Section 168(n) which allows 100% bonus on nonresidential real property used in qualified production if construction begins after January 19, 2025 and before January 1, 2029, and the property is placed in service before January 1, 2031. Manufacturing facilities are the typical use case.

What did IRS Notice 2026-11 say?

IRS Notice 2026-11 (January 14, 2026) provides interim guidance on the additional first-year depreciation deduction under amended Section 168(k). It addresses transition rules, the binding contract definition, and the 40% election mechanics.

How does this interact with cost segregation?

A cost segregation study reclassifies 20-40% of basis into 5, 7, and 15-year property. The reclassified portion qualifies for 100% bonus depreciation, becoming a first-year deduction. The combination is why investors pursue cost seg.