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Cost Segregation for Real Estate Investors: Faster Depreciation & Smarter Tax Planning in 2025
Editor’s Note (Updated October 2025):
This article reflects the provisions of the One Big Beautiful Bill Act (OBBB), signed into law on July 4 2025, which permanently reinstated 100 percent bonus depreciation and expanded Section 179 expensing limits for qualifying property placed in service after January 19 2025.
Why Real Estate Investors Are Re-Evaluating Depreciation in 2025
The 2025 tax landscape has changed dramatically. Interest rates remain high, construction costs keep climbing, and the IRS continues to intensify real-estate audits. But the OBBB restored one of the most powerful incentives available to property owners: full 100 percent bonus depreciation.
For landlords and investors across Nassau County, Suffolk County, Queens, and the greater Long Island region, this revival transforms cost segregation from a niche tactic into a core wealth-building strategy. When executed correctly, it accelerates deductions, improves cash flow, and strengthens long-term return on investment.
Cost Segregation Basics — Accelerating Depreciation the Right Way
Ordinarily, the IRS requires that buildings be depreciated over long timelines: 27.5 years for residential rentals and 39 years for commercial property. Those extended schedules delay deductions and keep more taxable income on your books.
A cost segregation study breaks that cycle. Using an engineering-based analysis, it reclassifies building components—such as flooring, wiring, lighting, plumbing, cabinetry, and landscaping—into shorter-life categories of 5, 7, or 15 years.
When paired with the OBBB’s reinstated 100 percent bonus depreciation, those components can now be fully expensed in the year placed in service, delivering immediate tax relief and stronger liquidity.
Standard Depreciation vs. Cost Segregation (2025 Rules)
| Feature | Standard Depreciation | Cost Segregation under OBBB |
|---|---|---|
| Depreciation Schedule | 27.5 yrs (residential) / 39 yrs (commercial) | 5, 7, 15, 27.5, or 39 yrs based on asset class |
| Bonus Depreciation | None beyond default schedules | 100 percent for qualifying assets placed in service after Jan 19 2025 |
| Cash-Flow Impact | Deductions spread over decades | Large up-front deductions free cash for reinvestment |
| IRS Documentation | Minimal but low savings | Audit-ready engineering study required but high savings |
| Planning Flexibility | Limited to hold/sell | Integrates with 1031 exchange and recapture strategy |
| Local Application | Generic federal rules | Tailored for NY state and city filing requirements via Long Island CPA |
How the OBBB Changed Bonus Depreciation in 2025
Before July 2025, bonus depreciation was on a scheduled decline—from 60 percent in 2024 to 40 percent in 2025. The OBBB reversed that slide.
Key provisions:
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Permanent 100 percent expensing. Property acquired and placed in service after January 19 2025 qualifies for full immediate deduction.
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Transitional rule. Assets placed in service between Jan 1 and Jan 19 2025 remain under the previous 40 percent allowance.
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Eligible property. Tangible personal property with a recovery period of 20 years or less (including qualified improvement property, or QIP).
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Elect-out flexibility. Taxpayers may still elect out on a class-by-class basis.
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Enhanced Section 179. Deduction limits and phase-outs were significantly raised, allowing smaller investors to expense more equipment and software in addition to real-property improvements.
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New production property benefit. A separate 100 percent expensing incentive now applies to certain manufacturing and industrial real property—typically outside standard rental portfolios.
For real-estate investors, the reinstated rule means accelerated deductions with no sunset date. Proper documentation remains critical, but the opportunity is larger than it has been in years.
Top Tax Advantages of Cost Segregation under the OBBB
| Advantage | How It Works | Investor Benefit |
|---|---|---|
| Immediate 100 Percent Expensing | Short-life assets reclassified to 5-, 7-, or 15-year property | Full deduction in year placed in service |
| Depreciation Recapture Planning | Coordinates future sale or 1031 exchange timing | Minimizes tax on recaptured depreciation |
| Partial Asset Disposition | Write off remaining basis of replaced components | Reduces taxable income during renovations |
| 1031 Exchange Integration | Aligns segregation benefits with deferral rules | Keeps cash flow while deferring gains |
| Qualified Improvement Property (QIP) | Interior improvements eligible for 100 percent bonus depreciation | Encourages upgrades and tenant retention |
How Cost Segregation Strengthens Cash Flow
Accelerating depreciation means keeping more money in play.
A property owner who invests $1 million in renovations may now deduct that entire amount immediately if properly categorized. The after-tax cash preserved can fund new acquisitions, pay down debt, or cover rising interest costs.
Example
A Nassau County investor places a mixed-use property in service in March 2025.
Engineering analysis identifies $420,000 of 5-, 7-, and 15-year components.
Under OBBB, the investor deducts the full $420,000 in 2025, reducing taxable income by six figures and freeing cash for the next down payment.
That same property under pre-OBBB rules would have spread those deductions over 5–39 years—tying up capital instead of compounding it.
Depreciation Recapture and Exit Strategy
Accelerated deductions increase the need for disciplined exit planning. When property is sold, the IRS may recapture prior depreciation as ordinary income.
Best practices:
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Time sales in lower-income years.
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Use installment sales to spread liability.
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Leverage 1031 exchanges to defer recapture altogether.
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Maintain detailed component records to support basis allocations.
A Long Island real-estate CPA ensures your segregation study and depreciation schedules align with these long-term strategies, turning tax deferral into continuous growth.
CAPEX vs. Repairs — Getting the Line Right
Many investors still blur the boundary between capital expenditures and deductible repairs.
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CAPEX: Extends asset life or adds value; depreciate but now eligible for 100 percent bonus if classified as short-life property.
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Repairs: Maintain existing condition; immediately deductible.
Accurate classification prevents both under-deduction and audit exposure. A Suffolk County CPA can review invoices, improvement schedules, and vendor records to document intent and IRS-recognized criteria.
Portfolio-Level Strategy for Multi-Property Owners
Applying cost segregation across multiple holdings compounds results:
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Prioritize high-basis or newly improved properties.
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Layer studies annually to maximize deductions without overwhelming taxable income.
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Coordinate depreciation schedules with financing cycles.
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Integrate with 1031 exchanges for seamless reinvestment.
Tri-state investors benefit most from continuous coordination among their CPA, property manager, and engineering firm, ensuring each acquisition immediately aligns with depreciation and cash-flow objectives.
Financial Impact in 2025 and Beyond
1. Improved Cash-on-Cash Returns
Front-loaded deductions reduce tax drag and boost liquidity—capital that compounds faster than deferred tax liabilities.
2. Better Financing Options
Stronger free cash flow improves debt-service coverage ratios, allowing refinances at better terms.
3. Portfolio Expansion
Early deductions fuel new down payments and diversification across markets.
4. Enhanced Audit Defense
Professional engineering studies with itemized schedules withstand IRS review, a crucial factor amid increased enforcement.
Risks and Compliance Challenges
While the reinstated 100 percent expensing magnifies benefits, improper application can trigger costly disputes.
Common errors include:
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Overstating allocations without engineering basis.
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Mixing personal property and structural components.
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Failing to maintain documentation for partial asset dispositions.
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Ignoring state-specific decoupling from federal rules.
Partnering with a New York real-estate CPA ensures segregation reports meet IRS engineering-based standards and remain defensible if audited.
TL;DR — 2025 Cost Segregation & Bonus Depreciation Decision Matrix for Real Estate Investors
| Decision Factor | Standard Depreciation (Pre-OBBB) | Cost Segregation with 2025 OBBB Updates | Investor Impact | Best Use Case |
|---|---|---|---|---|
| Depreciation Method | 27.5 years (residential) / 39 years (commercial) | 5-, 7-, 15-, 20-year classes eligible for permanent 100% bonus depreciation | Immediate deductions; 100% write-off for qualifying property | All property owners seeking faster cash-flow recovery |
| Bonus Depreciation Status | Phasing down after 2023 (temporary) | Permanently reinstated at 100% under OBBB for property placed in service after Jan 19 2025 | Eliminates prior phase-out; enables full expensing for new & used assets | Real estate investors purchasing or improving property in 2025 + |
| Eligible Assets | Tangible property ≤ 20-year life | Tangible property ≤ 20-year life + Qualified Improvement Property (QIP) + some “qualified production property” | Expands eligibility; boosts deductions for commercial renovations | Landlords, developers, manufacturing property owners |
| Section 179 Expensing | $1.16 M deduction / $2.89 M phaseout (2024 limits) | Significantly increased thresholds under OBBB (final IRS tables pending) | Larger immediate deductions for equipment & software purchases | Investors combining property improvements + equipment acquisitions |
| Depreciation Recapture Exposure | High upon sale if accelerated depreciation used | Still applies, but mitigated with 1031 exchange & recapture planning | Manageable with proactive strategy | Long-term portfolio investors, 1031 participants |
| Partial Asset Disposition | Rarely used | Deducts remaining basis of replaced assets during renovations | Converts lost basis into deductible expense | Property renovators / multi-unit landlords |
| CAPEX vs. Repairs Classification | Manual, high audit risk | Guided by engineering-based cost segregation reports | Strengthens compliance and maximizes deductions | Investors performing frequent upgrades or tenant improvements |
| QIP (Qualified Improvement Property) | 15-year life; partial bonus eligible | Full 100% bonus depreciation restored for qualifying interior non-residential improvements | Larger upfront deductions; immediate expense recovery | Commercial landlords, office / retail remodels |
| State Tax Treatment (NY) | May decouple from federal rules | Requires local coordination — some NY filings exclude bonus depreciation | State compliance essential to avoid mismatched reporting | NY, CT, NJ multi-property investors |
| Audit Documentation | Basic fixed-asset schedules | Engineering-based study required + audit-ready asset classification | Prevents IRS disputes; supports 100% bonus claims | All investors using accelerated methods |
| Cash-Flow Impact | Gradual deduction = slow ROI | Immediate 100% deduction = strong cash-flow boost | Frees liquidity for reinvestment or debt reduction | Growth-minded landlords and developers |
| Financing / Refinance Advantage | Limited effect on debt ratios | Higher after-tax income = better DSCR for lenders | Improves borrowing capacity and refinance terms | Investors expanding or refinancing in 2025 |
| Documentation Standard | Simplified depreciation schedule | Detailed cost-segregation study + property-level classification | Required for audit defense & maximum deduction | CPA-guided investors using engineering partners |
| OBBB New Provision — Production Property | Not applicable | 100% expensing for certain domestic nonresidential real property used in manufacturing (temporary) | Encourages U.S. production facility investment | Manufacturing & industrial real estate owners |
| Overall Compliance Cost | Low administrative / low benefit | Moderate (+$3k-$7k per study) with high return | ROI typically > 10× in first year via tax savings | Properties >$500k basis or recent renovations |
| Best Timing for 2025 | None (phase-out ended) | Acquire / place in service after Jan 19 2025 to qualify for full 100% bonus | Ensures permanent eligibility & front-loaded benefit | Any investor closing new property in 2025 or beyond |
Bottom Line:
After the OBBB Act, cost segregation has transformed from a tactical tax move into a permanent cash-flow advantage.
Real estate investors in Long Island, Queens, and the tri-state region who act now can claim 100% bonus depreciation, expanded Section 179 expensing, and strategic CAPEX planning — locking in benefits that once had expiration dates.
Regional Considerations for Tri-State Investors
State and local variations still apply:
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New York State generally conforms to federal depreciation but may limit timing differences.
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Connecticut and New Jersey require adjustments to federal bonus depreciation calculations.
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NYC and Long Island landlords must also account for local property-tax assessments and commercial-rent taxes when projecting cash flow.
Coordinating these layers avoids duplicate reporting and preserves every deduction you are entitled to claim.
Sample Impact Table — Cost Segregation vs. Standard Depreciation
| Scenario | Standard Depreciation | Cost Segregation with 100% Bonus |
|---|---|---|
| Property Basis | $1,000,000 | $1,000,000 |
| Short-Life Assets Identified | — | $400,000 |
| Year-1 Deduction | ≈ $25,000 | $400,000 |
| Tax Savings (35% rate) | $8,750 | $140,000 |
| Cash Flow Increase | Minimal | Significant liquidity for reinvestment |
Sundack CPA — Your Partner in Smarter Real Estate Tax Strategy
At Sundack CPA, we deliver engineering-supported cost segregation studies and end-to-end tax planning for investors across Long Island, Queens, NYC, and the tri-state area.
Our Services Include:
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Comprehensive cost segregation analysis and audit-ready reports
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Depreciation recapture and 1031 exchange coordination
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Section 179 and bonus depreciation optimization under OBBB
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CAPEX vs. repairs classification guidance
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Multi-state filing support and property tax compliance
When you partner with a Long Island CPA who understands the new law, you don’t just claim deductions —you build sustainable wealth.
The Bottom Line
The One Big Beautiful Bill Act permanently restored 100 percent bonus depreciation, making 2025 one of the most favorable years for real-estate investors in recent memory.
A properly executed cost segregation study can transform a property’s tax profile from gradual to immediate savings. When combined with enhanced Section 179 limits and sound recapture planning, it delivers a clear advantage in a tight market.
Frequently Asked Questions
What changed under the OBBB?
Bonus depreciation returned to a permanent 100 percent for qualifying property acquired and placed in service after Jan 19 2025. Section 179 expensing limits also rose substantially.
Does this apply to used property?
Yes. Used assets qualify if the taxpayer had no prior ownership interest and the purchase meets arm’s-length standards.
Can I combine cost segregation and Section 179?
Absolutely. Section 179 handles smaller purchases and software; bonus depreciation covers larger building components identified in the study.
How do I handle recapture on sale?
Plan ahead with a CPA to time sales or use 1031 exchanges to defer recapture.
Do states follow the federal rule?
Most do, but some require adjustments or add-backs. New York generally conforms but still demands accurate reporting of basis allocations.