100% Bonus Depreciation Is Now Permanent: A Definitive Guide for Developers

For years, the real estate development community has operated under a cloud of fiscal uncertainty. The sunsetting provisions of the Tax Cuts and Jobs Act (TCJA) meant that bonus depreciation (the ability to immediately expense a percentage of capital costs) was scheduled to vanish entirely by 2027. Developers were forced to rush projects or settle for diminishing returns as the rate dropped from 80% to 60%, and then to 40%.

However, the legislative landscape of 2025 has undergone a seismic shift. With the permanent reinstatement of 100% bonus depreciation, the federal government has handed developers the most powerful tax planning tool in a generation. This change transforms the “Time Value of Money” equation, allowing for immediate tax savings that can be reinvested into new acquisitions or debt service.

For successful developers, this is not just a technical change; it is a fundamental shift in how projects are underwritten and exited. Understanding the nuances of this permanent era is essential for maximizing ROI and staying competitive in a high-interest-rate environment.

The End of the Phase-Out: A New Era for Real Estate

Before the recent legislative updates, bonus depreciation was a “use it or lose it” proposition that penalized long-term construction timelines. The scheduled phase-out created a bottleneck in the construction industry as developers scrambled to place assets in service before year-end deadlines.

By making 100% bonus depreciation permanent, the tax code now rewards efficiency and scale without the pressure of an arbitrary expiration date. According to the IRS guidance on depreciation, taxpayers can recover the costs of certain property through annual deductions. The bonus aspect allows for that recovery to happen in year one, rather than over decades.

This permanent status provides a level of predictability that has been missing from tax strategy for nearly a decade. Developers can now forecast cash flows with the certainty that their 5, 7, and 15-year assets will generate massive upfront deductions, regardless of when the project is finalized.

Cost Segregation: The Engine of Bonus Depreciation

The secret to unlocking the power of 100% bonus depreciation lies in a sophisticated cost segregation study. While a commercial building is typically depreciated over 39 years, a cost segregation study identifies components of the building that can be reclassified as personal property or land improvements.

By breaking down a $10 million acquisition, a tax strategist might find that 20% to 30% of the costs qualify for shorter recovery periods. Under the new permanent rules, that $2 million to $3 million in reclassified assets can be fully deducted in the very first year.

This immediate expense creates a massive tax loss on paper, even if the property is generating positive rental income. This loss can often be used to offset other passive income or, for those with Real Estate Professional Status (REPS), it can offset high levels of ordinary income from other sources.

Qualified Improvement Property (QIP) and Interior Build-Outs

One of the most significant wins for developers in the 2025 landscape involves Qualified Improvement Property (QIP). This category includes any improvement made to the interior of a non-residential building after it has been placed in service.

QIP specifically excludes building enlargements, elevators, escalators, and internal structural frameworks. However, it covers almost everything else: lighting, flooring, internal walls, and plumbing upgrades. Because QIP is classified as 15-years property, it is eligible for 100% bonus depreciation.

This makes the value-add play incredibly lucrative. A developer can purchase an aging office building or retail center and immediately write off the entire cost of the interior renovation. As noted in research by the Congressional Research Service (CRS), accelerated depreciation is intended to stimulate investment by reducing the user cost of capital.

The Synergy Between Bonus Depreciation and 163(j)

Tax planning for developers must also account for interest expense limitations under Section 163(j). Generally, the deduction for business interest is limited to 30% of adjusted taxable income (ATI). In recent years, the calculation for ATI became more restrictive, as it began to include deductions for depreciation and amortization.

However, the recent legislative package has provided relief for real estate businesses. Many developers can elect out of the 163(j) limitations by becoming an electing real property trade or business. While this election requires the use of the Alternative Depreciation System (ADS)—which traditionally disallows bonus depreciation—new provisions have smoothed this transition.

Navigating the intersection of interest deductions and bonus depreciation is a high-stakes tax strategy. Choosing the wrong election can trap a developer in a higher tax bracket or limit their ability to leverage debt effectively. Consulting a specialist is no longer optional; it is a requirement for project viability.

Impact on ROI and Internal Rate of Return (IRR)

The mathematical impact of 100% bonus depreciation on a project’s IRR cannot be overstated. By moving tax savings from year 20 to year 1, the developer increases the Net Present Value (NPV) of the investment. This upfront cash can be used to pay down high-interest construction loans or to fund the equity portion of the next deal.

Consider a developer in the 37% tax bracket. An immediate $1 million deduction represents $370,000 in actual cash that stays in the developer’s bank account rather than being sent to the IRS. In a world where capital is expensive, this interest-free loan from the government acts as a powerful catalyst for growth.

Furthermore, permanent bonus depreciation makes Section 1031 Exchanges even more effective. A developer can sell a property, roll the gains into a new project via a 1031 exchange, and then use cost segregation on the new project to create an immediate deduction that wipes out any remaining tax liability.

Addressing the “Recapture” Trap

While bonus depreciation offers incredible benefits, it is not a free lunch. Developers must plan for Depreciation Recapture upon the sale of the asset. When you sell a property for more than its depreciated basis, the IRS recaptures the depreciation you took as ordinary income, usually taxed at a 25% rate for real estate.

Proactive tax strategy involves planning for this exit years in advance. Many developers use the “Buy, Build, Refinance, Repeat” model, where they never actually sell the asset, thereby deferring recapture indefinitely. Others use installment sales or charitable remainder trusts to mitigate the tax hit at the time of disposition.

It is also worth noting that 100% bonus depreciation applies to both new and used property. This means that even if you are not developing from the ground up, an acquisition of an existing property can trigger these massive tax savings. The key is the first use by the taxpayer, not the first use of the property itself.

Strategic Timing and the “Placed in Service” Requirement

To claim the 100% deduction, the property must be placed in service within the tax year. For a developer, this generally means the building has received its Certificate of Occupancy and is ready for its intended use. Merely completing construction is not enough; the asset must be available for tenants or business operations.

Strategic timing at year-end is critical. If a project is 98% complete in December, it may be worth accelerating the final inspections to ensure it is placed in service before January 1st. This allows the developer to claim the full 100% bonus depreciation a full year earlier than if the project had slipped into the following quarter.

Find Your Expert Tax Strategist

The permanence of 100% bonus depreciation has created a Golden Era for American developers, but the complexity of cost segregation and 163(j) elections requires elite-level guidance. One misstep in asset classification or election timing can result in millions of dollars in lost tax savings. The Top Tax Planners Directory is designed to connect you with the nation’s most prestigious tax strategists, professionals who specialize in real estate development and high-stakes wealth preservation. Our directory features only those experts who have passed a rigorous multi-point vetting process, ensuring they have the certifications and experience necessary to handle complex real estate portfolios. Visit the Top Tax Planners Directory today to secure a verified strategist who can help you master the new depreciation landscape and maximize your project’s ROI.