Bonus Depreciation for Real Estate Investors: When the Write-Off Backfires

A 100% write-off in year one makes bonus depreciation for real estate investors sound like an easy win. This past tax season, some investors learned the hard way that it isn’t that simple.

During a recent live episode, Kyle Paxton, CPA, broke down the 2026 tax reset and the mistakes he’s seeing investors make right now. The discussion highlighted the importance of looking at the full deal cycle, not just the first-year deduction.

Why Investors Are Leaning So Hard on Bonus Depreciation

Kyle explained that bonus depreciation is back at 100% for the 2025 tax year, which means an investor who buys a property can write off a significant portion of it in year one.

The problem is that many investors stopped there. Kyle described clients and prospects this tax season who got burned by “hanging on to those buzzwords, bonus depreciation is going to do magic,” without seeing the full picture. Part of it, he said, is a lag in expectations, with investors still carrying a 2023 and 2024 mindset into 2025 tax execution.

“We all know tax law [is] super complicated. Anything that’s too good to be true probably is,” Kyle said.

Bonus Depreciation Is a Timing Difference

Kyle’s central point was simple: “This is a timing difference.” Bonus depreciation and cost segregation give investors the opportunity to play around with when deductions are taken. That flexibility only helps if the timing fits the rest of your situation.

He noted that the traps depend on whether you’re a real estate professional, your level of activity in a particular deal and what the rest of your income looks like, including significant investment income outside of real estate. “I still see experienced real estate professionals just kind of entering deals without really seeing that full picture and then getting surprised,” he said.

When the Rest of Your Income Can’t Use It

Kyle walked through a high-level example. On a $1 million acquisition with $800,000 allocable to the building, an investor may get a 30% cost recovery in year one through bonus depreciation. But if that investor has losses elsewhere and not much income, the deduction may only save tax at 10% or 12%, potentially 0%, while adding to a net operating loss.

Waiting to take bonus depreciation the following year, when income is taxed at 37%, “moves the dial much more,” Kyle said.

When You’re Not Planning to Hold

Hold period matters too. “If you’re not expecting to hold property for a long time, a one or two year tax deferral may not make sense,” Kyle said. He acknowledged that time value of money usually favors having your cash now, but depending on your investment strategy, accelerating the deduction may not be worth it.

The Bill Comes Due When You Sell

Kyle is seeing this play out now with properties acquired between 2018 and 2020, when the Tax Cuts and Jobs Act allowed 100% bonus depreciation before it started phasing down. Investors are exiting those deals without understanding that the bonus depreciation has to be recaptured, and as Kyle put it, “that can be a big tax dollar.”

State Taxes Add Another Layer

“States want their slice of the pie,” Kyle said. If you hold real estate in a partnership with several partners, you may have to withhold tax and remit it to states on behalf of those partners. That’s one more piece of exit planning that belongs in the conversation from the start.

Getting the Timing Right Before the Next Deal

According to Kyle, deciding when to take bonus depreciation comes down to “making sure you have a really good grasp on your whole tax picture in order to make the decision around timing.” That means keeping your data up to date, understanding how your entities are set up and having a good pulse on your income streams.

He also wants tax in the room early. “I typically don’t like tax driving the investment decisions, but I want it to be the passenger,” he said, adding that tax should be part of the picture before the LOI is signed. That includes asking what depreciation recapture would look like if cost segregation had been in play.

Kyle covered much more in the full conversation, including the SALT cap increase, state nexus and why entity structuring can make or break a deal. Watch the full episode and subscribe to the JMCO Real Estate YouTube channel for future episodes. If you’re planning an acquisition or exit, connect with the James Moore real estate team to map out your timing before the deal closes.

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