Supercharge Your Deductions: How the 2017 Tax Cuts Amplified Cost Segregation Benefits
For real estate investors, maximizing deductions is key to boosting returns. One of the most powerful tools in this pursuit is a Cost Segregation study, which accelerates depreciation on property components. However, the impact of this strategy was significantly amplified by the Tax Cuts and Jobs Act (TCJA) signed into law in late 2017.
Understanding how these two elements work together reveals a potential windfall for property owners, especially those who have recently acquired or constructed buildings.
Quick Recap: What is Cost Segregation?
Normally, a commercial property is depreciated over 39 years, and residential rentals over 27.5 years. A Cost Segregation study is an engineering-based analysis that identifies specific components of your building—like carpeting, fixtures, landscaping, and specialized plumbing—that qualify for shorter depreciation periods (typically 5, 7, or 15 years). This allows you to take larger depreciation deductions much sooner.
Enter the Tax Cuts and Jobs Act (TCJA) and Bonus Depreciation
The TCJA made many changes, but one of the most significant for real estate investors was the expansion of 100% Bonus Depreciation.
Before the TCJA, bonus depreciation rules were more limited. The new law allowed businesses to immediately deduct 100% of the cost of eligible property acquired and placed in service after September 27, 2017, and before January 1, 2023. Critically, this included property with a depreciation life of 20 years or less.
The Powerful Synergy: Cost Segregation Unlocks 100% Bonus Depreciation
This is where the magic happens. A Cost Segregation study identifies exactly those assets with shorter depreciable lives (5, 7, and 15 years). Under the expanded TCJA rules, these reclassified components became eligible for immediate 100% bonus depreciation in the year the property was placed in service.
Consider the impact: Instead of depreciating the cost of new carpeting over 5 years, an investor could potentially deduct the entire cost in Year 1. The same applied to landscaping (15-year property), qualifying fixtures (5-year property), and many other components identified in the study.
This created an unprecedented opportunity to generate massive "paper losses" through depreciation in the first year of ownership, dramatically reducing taxable income and freeing up significant cash flow.
What About Now? The Phase-Down Still Offers Value
It's important to note that the 100% bonus depreciation provision began phasing down starting in 2023 (reducing to 80% for 2023, 60% for 2024, 40% for 2025, and so on). However, even at these reduced rates, the accelerated deductions unlocked by a Cost Segregation study remain incredibly valuable.
The ability to claim 60% or 40% bonus depreciation upfront is still a massive advantage compared to the standard slow depreciation schedule. A Cost Segregation study remains the essential first step to identifying eligible assets and maximizing these accelerated benefits.
Maximize Your Investment
The combination of Cost Segregation and the bonus depreciation rules introduced by the TCJA created a golden window for real estate investors. While the 100% bonus rate has passed, significant accelerated depreciation is still available. A Cost Segregation study is the key to unlocking these powerful tax savings and boosting your property's financial performance from day one.
Want to know if your property qualifies for accelerated depreciation through Cost Segregation? Contact Apex Reserve Group for a complimentary 30-minute consultation.