Understanding Accelerated Depreciation

A newly passed federal tax law has reinstated 100% bonus depreciation for qualifying property—offering a huge incentive for real estate developers and small business owners. But here's the key:

The property must be placed in service on or after January 1, 2025.

If your project is completed and ready for use before the end of 2024, it won't qualify. But with the right planning, you could potentially write off hundreds of thousands of dollars in year one.

What “Placed in Service” Means

The IRS defines “placed in service” as the date a property is ready and available for its intended use. For buildings, this typically means a certificate of occupancy has been issued—even if tenants haven't yet moved in.

Critical Tip: It's not about when you bought the asset. It's about when it becomes operational.

Case Study: Short-Term Rental Development

Let's walk through a real-world example of how the new rule and 100% bonus depreciation can create significant tax savings.

📌 Project Summary:

• Land Purchase: $250,000 (not depreciable)

• Cabin Construction: $200,000 (27.5-year recovery period for residential rental)

• Infrastructure Improvements: $50,000 (includes a private access road and drainage systems)

Total Project Investment: $500,000
Total Depreciable Basis: $200,000 (building) + $50,000 (improvements) = $250,000

Step-by-Step: Depreciation and Tax Savings

1. Land Exclusion

Land is never depreciable. The $250,000 paid for the land won't generate depreciation deductions.

2. Building Depreciation

Under normal rules, a short-term rental (if considered residential rental property) is depreciated over 27.5 years. But under the new law, if placed in service on or after January 1, 2025, certain components may qualify for 100% bonus depreciation through a cost segregation study.

3. Cost Segregation Study

A cost segregation study breaks the building and site improvements into categories with shorter depreciable lives, many of which qualify for bonus depreciation.

A typical breakdown (for illustration purposes) might look like this:

• Building Structure (not bonus-eligible): $150,000 (27.5-year straight-line depreciation)

• Bonus-Eligible Property:

  • Appliances, flooring, cabinetry: $30,000 (5-year property)

  • Electrical and plumbing tied to equipment: $20,000 (5–15-year property)

  • Road & drainage: $50,000 (15-year property)

Bonus-Eligible Total: $100,000
Eligible for 100% deduction in 2025.

4. Tax Savings Estimate

Let's assume the owner is in a 35% marginal tax bracket.

Year One Deduction (2025):

• $100,000 (bonus-eligible property)
  × 35% tax rate
  = $35,000 in immediate tax savings

Remaining Depreciation (Over 27.5 years):

• $150,000 ÷ 27.5 = ~$5,455/year in additional deductions

Key Insights

• Timing is everything: If this short-term rental is placed in service on December 30, 2024, the owner misses the $35,000 year-one deduction.

• Infrastructure matters: Site improvements like roads and drainage—often overlooked—can be fully expensed if properly classified.

• Tax-free cash flow: For short-term rentals generating income, bonus depreciation allows you to shelter earnings from tax in the first few years.

Final Thoughts

The reinstated bonus depreciation rule creates a window of opportunity—especially for real estate investors and small developers. But the key is aligning your project timeline with the January 1, 2025 placed-in-service requirement.

✔ Planning Checklist:

• Delay certificate of occupancy if completion is near year-end

• Schedule infrastructure installation strategically

• Invest in a cost segregation study

• Model year-one tax impacts with your CPA

💬 Want help evaluating your project timeline or preparing for a 2025 placement? Let's discuss your real estate project together.