Under the Tax Cuts And Jobs Act (TCJA), you could claim 100% bonus depreciation on qualifying property placed in service after September 27, 2017. This allowed you to immediately deduct the entire cost of certain assets in the first year. To qualify, the depreciable property had to meet four criteria: (1) it must be of a specified type; (2) the original use must commence with you, or used depreciable property must meet the requirements of IRC §168(k)(2)(E)(ii); (3) it must be placed in service within the qualifying period; and (4) it must be acquired after the applicable date.
The TCJA then scheduled bonus depreciation to phase down — 80% in 2023, 60% in 2024, and 40% for property placed in service in early 2025 — on its way to zero by 2027. OBBBA reversed that phase-down: it permanently restored 100% bonus depreciation for qualifying property acquired after January 19, 2025. Once again, the full cost of eligible assets can be deducted in the first year.
Combining cost segregation with bonus depreciation could significantly increase your first-year depreciation deduction. For example, if a cost segregation study identified $100,000 of assets eligible for bonus depreciation, you could deduct the entire amount in the first year.
Consider purchasing a short-term rental property for $1 million. A cost segregation study might reveal that $200,000 of the property’s value is attributable to assets with a 5-year life. With bonus depreciation, you could deduct the full $200,000 in the first year. If your rental income was $150,000 and other expenses were $50,000, your taxable income would be zero due to the $200,000 depreciation deduction.
Federal law allows these deductions, but state law may differ. California, for instance, does not conform to federal bonus depreciation, so you will not get the same benefit on your state return.
Cost segregation paired with 100% bonus depreciation can legally show zero profit on a short-term rental in its first year — but the strategy still demands careful planning, clean documentation, and an honest engineering study that survives an audit.