Cost Segregation and Bonus Depreciation: What Real Estate Investors Need to Know Now

With 100% bonus depreciation back on the table, cost segregation and bonus depreciation have become two of the most talked-about tools in real estate tax planning. But are investors using them the right way, or just chasing a headline?

During a recent LinkedIn Live, Kyle Paxton, CPA shared valuable insights on how real estate investors should approach tax strategy. The discussion highlighted why timing deductions wisely matters more than rushing to claim the biggest write-off in year one.

The Buzz Around 100% Bonus Depreciation

The One Big Beautiful Bill Act restored 100% bonus depreciation, and the real estate world has taken notice. As Paxton put it, “100% bonus depreciation’s back in real estate. Everybody runs with that. I have conversations about that every single day.”

It is easy to see why. When an investor purchases a property and completes a cost segregation study, certain building components can be reclassified into shorter depreciation categories. The result can be a significant deduction early in the ownership period. “It can be 30% of the purchase price in year one,” Paxton noted.

But excitement alone is not a tax strategy.

Why the Sound Bite Can Be Misleading

Paxton cautioned that grabbing the largest possible deduction right now does not always make financial sense. “It doesn’t work. It doesn’t make sense for everybody’s tax,” he said. “We’re looking at optimizing tax rates across years.”

The core issue is timing. A deduction taken at a lower tax rate this year could have been more valuable at a higher rate next year. Paxton framed it simply: “Would you rather get a 10% deduction this year or a 37% deduction next year?”

Real estate investors who fixate on the current year without considering how deductions play out over time risk leaving real savings on the table.

How Cost Segregation Fits Into a Bigger Strategy

Cost segregation studies are typically performed by engineering firms that can break a building into its individual components and identify which pieces qualify for accelerated depreciation. The resulting report provides the documentation needed to support the deduction on a tax return.

But the real power of cost segregation comes from pairing it with a broader investment strategy. Paxton described a common approach: an investor sells one property and recognizes a large gain, then acquires another property and uses the accelerated depreciation from a cost segregation study to offset that gain in year one. “And that’s kind of the timing game,” he explained. “In years two through six, you may not have much, you have a much lower deduction, but you’re just kind of bringing in rental income, have your typical expenses, all that kind of stuff. And then you do it again.”

This cycle of selling, acquiring and strategically depreciating is a core piece of the real estate tax playbook for investors who plan ahead.

It Is Not Too Late for 2025

For investors who acquired property in 2025 but have not yet explored a cost segregation study, Paxton emphasized that the window is still open. “It’s not too late to do cost segregations for 2025,” he said, though he noted that the firms performing these studies are busy right now and there may be a waiting period.

Even for properties where a 2025 tax return has already been filed, there are mechanisms to catch up on missed depreciation in future years. “Looking forward to 2026, you can still do a cost segregation after that initial startup,” Paxton explained. “There’s mechanisms to kind of catch up what that depreciation should have been in years past.”

Make It Part of the Plan, Not an Afterthought

The investors seeing the best results right now are the ones treating tax planning as part of their overall investment process rather than reacting to headlines. Paxton recommended revisiting this conversation with a CPA at least once a year and ideally on a quarterly basis.

“The investors who are winning right now are the ones who are planning early, they stay flexible and just treat tax as a piece of the pie,” Paxton said. “They don’t fixate too much on tax and the buzzwords and everything else.”

If you are investing in real estate or considering your next acquisition, now is the time to have this conversation with your tax advisor. Watch the full episode to hear more from Kyle Paxton on tax planning in today’s market.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.