Tax Savings Strategies for the Big Beautiful Bill Act

Key Benefits for Real Estate Investors

    • 100% Bonus Depreciation Restored and Made Permanent (with some adjustments):

       

      Bonus depreciation allows businesses to immediately deduct a significant portion (now 100% again) of the cost of eligible assets in the year they are placed in service, rather than spreading out the deduction over the asset's useful life through traditional depreciation. This accelerates tax savings, dramatically improves cash flow, and can even create a net operating loss (NOL) that can be used to offset other income.

       

      What Qualifies for Bonus Depreciation?

      Generally, eligible property for bonus depreciation includes:

      • Tangible personal property with a MACRS (Modified Accelerated Cost Recovery System) depreciation period of 20 years or less. This includes:

        • Appliances (refrigerators, stoves, washing machines, dryers)

        • Furniture (beds, sofas, tables, chairs)

        • Electronics (TVs, computers)

        • Fixtures (lighting, decorative items)

        • Certain land improvements (fences, parking lots, landscaping, sidewalks, signage

       

    • The Crucial Role of Cost Segregation Studies

      While buildings themselves are generally depreciated over 27.5 years (residential) or 39 years (commercial), the magic of bonus depreciation in real estate comes alive with a cost segregation study.

      A cost segregation study is an engineering-based analysis that dissects the various components of a building and reclassifies them into shorter depreciable lives. Instead of depreciating the entire property over 27.5 or 39 years, a cost segregation study identifies and separates out components like:

      • 5-year property: Carpeting, specialized lighting, certain electrical systems, appliances, furniture, and decorative items.

      • 7-year property: Office equipment, fixtures, and certain computer systems.

      • 15-year property: Land improvements (e.g., parking lots, sidewalks, fencing, landscaping, irrigation systems).

       

      Once these components are reclassified, they become eligible for 100% bonus depreciation. This means you can deduct their full cost in the year the property is acquired or the improvements are placed in service, generating substantial upfront tax savings.

       

      Strategies for Short-Term Rentals (STRs)

       

      Short-term rentals (like Airbnbs or VRBOs) are uniquely positioned to maximize bonus depreciation benefits due to their operational nature.

      1. Material Participation is Key:

        • Unlike traditional long-term rentals, which are generally considered "passive activities," STRs can often qualify as an "active trade or business" for tax purposes. This is crucial because passive losses can generally only offset passive income. If your rental activity is classified as active, you can use losses (including those generated by bonus depreciation) to offset any income, including W-2 wages, self-employment income, or other business income.

        • To achieve "material participation," you typically need to meet one of the IRS's seven tests. The most common for STR owners are:

          • Spending more than 500 hours on the activity annually.

          • Performing substantially all the work for the activity.

          • Spending more than 100 hours on the activity, and no one else (like a property manager) spends more time than you.

        • Strategy: Maintain meticulous records of your time spent on STR activities (managing bookings, cleaning, maintenance, guest communication, marketing, etc.) to substantiate material participation.

      2. Aggressive Cost Segregation:

        • STRs often have a higher proportion of personal property and land improvements compared to unfurnished long-term rentals. Think about all the furniture, appliances, electronics, artwork, and outdoor amenities you furnish.

        • Strategy: Immediately after acquiring or making significant improvements to an STR, commission a cost segregation study. This will identify all eligible 5, 7, and 15-year property components. With 100% bonus depreciation, you can write off the entire cost of these components in the first year, creating massive upfront deductions.

        • Example: You purchase a $700,000 furnished short-term rental. A cost segregation study might identify $200,000 as 5-year and 15-year property. With 100% bonus depreciation, you can deduct the entire $200,000 in the first year, significantly reducing your taxable income for that year. If you're in the 32% tax bracket, that's $64,000 in immediate tax savings.

      3. Renovation/Improvement Timing:

        • Strategy: Plan significant renovations or improvements to your STR property strategically. If you make improvements that qualify as QIP or purchase new furniture/appliances, you can take 100% bonus depreciation on those costs in the year they are placed in service. This encourages immediate investment in property upgrades, enhancing guest experience and property value while delivering substantial tax benefits.

       

      Strategies for Long-Term Rentals

       

      While long-term rentals are typically classified as passive activities, bonus depreciation is still a powerful tool, especially when combined with careful planning.

      1. Cost Segregation for Building Components & Land Improvements:

        • Even if your long-term rental is unfurnished, a significant portion of its value can be reclassified. This includes:

          • Land Improvements: Parking lots, sidewalks, landscaping, fencing, outdoor lighting, and irrigation systems are often present in multi-unit properties or even single-family homes with significant outdoor areas. These typically fall into the 15-year MACRS category.

          • Building Systems: Certain electrical, plumbing, and HVAC components might qualify as 5 or 7-year property if they are separate from the structural framework.

          • Qualified Improvement Property (QIP): If you perform interior improvements to a non-residential rental property (e.g., a commercial building leased out for offices), these can be 15-year property and eligible for 100% bonus depreciation.

        • Strategy: Conduct a cost segregation study on newly acquired long-term rental properties or when undertaking significant renovations. This will allow you to identify and accelerate depreciation on eligible components.

      2. Strategic Purchases and Replacements:

        • When replacing appliances, flooring, HVAC systems, water heaters, or other shorter-lived components in your long-term rental properties, these new assets generally qualify for bonus depreciation.

        • Strategy: Track these individual purchases carefully. The cost of a new refrigerator or washing machine for your rental unit can be 100% expensed in the year it's placed in service, even if the property itself is depreciated over 27.5 years.

      3. Real Estate Professional Status (REPS):

        • For long-term rental investors, achieving "Real Estate Professional Status" (REPS) is the ultimate goal to unlock the full power of depreciation. If you qualify as a RE Professional, your rental activities are not automatically considered passive, and you can offset active income with passive losses.

        • To qualify as a RE Professional, you must meet two tests:

          1. More than half of the personal services you perform in trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate.

          2. You perform more than 750 hours of services in real property trades or businesses in which you materially participate.

        • Strategy: If you or your spouse can meet these stringent hourly requirements and materially participate in your rental activities (even long-term rentals), then you can use the large "paper losses" generated by 100% bonus depreciation and cost segregation to offset all sources of income, including W-2 income. This is a game-changer for high-income earners with significant real estate portfolios.

Other Key Provisions

  • Permanent & Enhanced Qualified Business Income (QBI) Deduction (Section 199A): This is a huge win! The OBBB permanently extends the 20% QBI deduction for pass-through entities (like S-Corps, partnerships, and sole proprietorships, which includes most real estate agents and many investors). Not only is it permanent, but the bill also includes enhancements to make it clearer and more accessible, ensuring consistent tax benefits for your hard-earned business income.

     

  • 1031 Like-Kind Exchanges Protected: Good news for those looking to defer capital gains! The bill explicitly protects 1031 like-kind exchanges, allowing real estate investors to continue deferring taxes when swapping investment properties. This remains a cornerstone strategy for scaling your portfolio tax-efficiently.  

  • State and Local Tax (SALT) Deduction Cap Quadrupled (Temporarily): For the years 2025 through 2029, the controversial SALT deduction cap is dramatically increased from $10,000 to $40,000. This is a significant relief, especially for those of you in high-tax states, allowing for much larger itemized deductions and potentially reducing your overall tax burden.

     

  • Lower Individual Tax Rates Made Permanent: The individual income tax rates and thresholds established by the TCJA, which were set to expire, have been made permanent. This stability provides greater certainty for long-term financial planning and helps to improve affordability for potential homebuyers, further supporting a robust real estate market.

     

  • Increased Section 179 Expensing Limits: The maximum amount you can expense under Section 179 has been significantly increased to $2.5 million (from $1.25 million) for property placed in service after December 31, 2024. The phase-out threshold has also been raised to $4 million (from $3.13 million). This is particularly beneficial for smaller businesses and those investing in lower-cost assets.

     

  • Opportunity Zones Enhanced and Made Permanent: The Opportunity Zones (OZ) program, initially set to sunset, has been made a permanent feature of the tax code with revised criteria and expanded authority for state-level designations. For those looking to invest in underserved communities, this program now offers even more potential for long-term, tax-advantaged growth, including a focus on rural areas with increased "basis boost" incentives.

     

  • Low-Income Housing Tax Credit (LIHTC) Expansion: The OBBB significantly expands the LIHTC program, a crucial tool for incentivizing private equity investment in affordable rental housing. It permanently increases the allocation of the 9% LIHTC and reduces the bond test for 4% LIHTCs, making it easier to finance affordable housing projects.

  • Estate and Gift Tax Exemption Made Permanent and Indexed for Inflation: The federal estate and gift tax exemption is permanently set at $15 million (adjusted for inflation). This provides crucial certainty for wealth transfer planning, especially for clients with substantial real estate holdings.

     

  • Business Interest Deduction Relief: The bill increases the amount of business interest expenses that taxpayers can deduct by removing depreciation, amortization, and depletion deductions from the calculation of adjusted taxable income (ATI). This could lead to higher deductible interest expenses for many real estate businesses.