Bonus Depreciation in 2025: What STR Investors Need to Know

Bonus depreciation is the engine that makes cost segregation so powerful. It allows investors to deduct 100% of the cost of qualifying assets in the year they are placed in service — turning what would be decades of gradual deductions into an immediate, substantial tax write-off. But the bonus depreciation landscape has shifted dramatically in recent years, and 2025 is a pivotal year for STR investors. Here is everything you need to know.

A Brief History: TCJA and the Phase-Down

The Tax Cuts and Jobs Act (TCJA) of 2017 was a landmark moment for real estate investors. It expanded bonus depreciation to 100% for qualifying property placed in service after September 27, 2017, and — crucially — extended it to used property for the first time. Previously, only new property qualified. This change meant that investors purchasing existing buildings could apply bonus depreciation to the components identified through cost segregation.

However, the TCJA included a built-in sunset. The 100% rate was scheduled to phase down as follows:

This phase-down created urgency for investors to complete cost segregation studies while the higher rates were still available. Many assumed the rate would continue declining through 2025 and beyond.

The OBBBA: 100% Bonus Depreciation Returns

In January 2025, Congress passed the One Big Beautiful Bill Act (OBBBA), which retroactively reinstated 100% bonus depreciation. This was a major win for real estate investors and fundamentally changed the calculus for anyone considering a cost segregation study.

However, the OBBBA created a bifurcated rate structure for 2025 that investors need to understand:

• Property placed in service before January 20, 2025 — Subject to the original TCJA phase-down rate of 40%.
• Property placed in service on or after January 20, 2025 — Eligible for the restored 100% bonus depreciation rate.

How Bonus Depreciation Works with Cost Segregation

Bonus depreciation and cost segregation are complementary strategies that work together:

1. Cost segregation identifies the assets — The study breaks your property into components and reclassifies qualifying items into 5-, 7-, or 15-year recovery periods.
2. Bonus depreciation accelerates the deduction — Instead of depreciating those reclassified assets over 5, 7, or 15 years using MACRS, bonus depreciation allows you to deduct the entire amount in year one.
3. The remaining basis continues on straight-line — Components that stay in the 27.5-year category continue depreciating normally.

Without a cost segregation study, bonus depreciation has almost no impact on a residential rental property. The 27.5-year residential real property class does not qualify for bonus depreciation. Only the components reclassified by a cost segregation study — the 5-, 7-, and 15-year property — are eligible. This is why cost segregation and bonus depreciation are always discussed together.

Catch-Up Studies: Claiming Missed Depreciation

If you purchased a property in prior years and have been claiming straight-line depreciation, you can still benefit from both cost segregation and bonus depreciation. By filing Form 3115 (Application for Change in Accounting Method), you can claim all of the accelerated depreciation you would have been entitled to — going all the way back to the year the property was placed in service — as a single adjustment in the current tax year.

This is called a "catch-up" study, and it is an automatic consent filing. You do not need IRS approval. The cumulative missed depreciation (the difference between what you claimed and what you could have claimed with cost segregation) is taken as a one-time Section 481(a) adjustment on your current-year return. For properties placed in service during years when 100% bonus depreciation was available, this catch-up can be enormous.

Planning for 2025 and Beyond

With 100% bonus depreciation restored for property placed in service on or after January 20, 2025, this is an excellent time to pursue a cost segregation study. Whether you are acquiring a new STR property or have owned one for years, the ability to deduct the full value of reclassified components in a single year makes the math overwhelmingly favorable.

For investors who placed property in service between January 1, 2023 and January 19, 2025 — during the phase-down period — it is worth discussing with your CPA whether catch-up strategies or other planning opportunities exist. The OBBBA did not retroactively change the rates for property placed in service during the phase-down period, but there may be other planning options available.

For a step-by-step overview of the process, see our getting started guide. To understand the unique advantages for STR investors, read our dedicated guide.

Frequently Asked Questions