Raising Capital
Bonus Depreciation: How Sponsors Use It to Attract Investors
Bonus depreciation lets a real estate owner deduct a large portion of certain assets in the very first year, instead of spreading the deduction over years or decades. Paired with a cost segregation study, it can turn a freshly acquired property into a source of substantial first-year paper losses — the kind of tax benefit that makes a deal genuinely attractive to high-income investors. For sponsors, understanding bonus depreciation (and being honest about its limits and its phase-down) is part of telling a credible investor story.
By One Million Media4 min read
This guide explains bonus depreciation for sponsors: what it is, how it works with cost segregation, how the rules have changed over time, and how to present the benefit to investors without overpromising. It's educational, not tax advice — confirm current rules and individual outcomes with a CPA.
What is bonus depreciation?
Bonus depreciation is a tax provision that allows an immediate first-year deduction of a large percentage of the cost of qualifying assets, rather than depreciating them over their normal recovery period. It applies to assets with a recovery period of 20 years or less — which, in real estate, means the short-life components (5-, 7-, and 15-year property) that a cost segregation study identifies, not the building itself (27.5 or 39 years).
That's the key link: the building doesn't qualify, but the appliances, fixtures, finishes, and land improvements pulled out by cost segregation do. So bonus depreciation supercharges cost segregation — the study reclassifies the short-life assets, and bonus depreciation lets you deduct a big chunk of them in year one.
How bonus depreciation and cost segregation work together
The two tools are a sequence, and they're far more powerful together than apart:
- Acquire the property and commission a cost segregation study.
- The study reclassifies eligible components into 5-, 7-, and 15-year lives.
- Bonus depreciation lets you deduct the applicable percentage of those reclassified assets in year one.
- The resulting first-year depreciation can be large enough to create a paper loss that flows to investors on their K-1.
On a sizable value-add deal, this can produce first-year depreciation equal to a meaningful share of an investor's contributed capital — which is precisely why tax-sensitive investors gravitate toward sponsors who use these tools well. But the benefit is a deferral, not free money: it lowers basis and increases depreciation recapture at sale.
The phase-down: why the percentage matters
Bonus depreciation has not been a fixed number. It was 100% for several years, then began phasing down (80%, then 60%, and so on) under prior law, and the applicable percentage has been the subject of ongoing legislative change. Because Congress periodically adjusts or restores it, the exact percentage available in any given year — and for property placed in service in a particular period — can shift.
Always confirm the current rate
The bonus depreciation percentage changes with legislation and the year an asset is placed in service. Never quote a specific rate in investor materials without confirming the current rule with a CPA — the number that was right last year may not be right this year.
For a sponsor, the practical takeaway is to verify the applicable percentage for your acquisition's timing before you model or market the benefit, and to frame the projection around current law rather than a remembered rate.
Presenting the benefit responsibly
Bonus depreciation is a strong selling point and a compliance risk if handled loosely. Operator discipline:
- Project the deal-level first-year depreciation, not each investor's tax savings — you don't know their individual situation.
- State the assumptions: that you'll run a cost segregation study, and the bonus depreciation percentage you're modeling under current law.
- Explain it's a deferral — pair it with depreciation recapture so investors understand the tax comes back partly at sale.
- Flag the passive activity loss rules — not every investor can use the losses; route them to their CPA.
- Never guarantee a tax outcome, and don't quote an outdated bonus percentage. Accuracy here protects both the investor and you.
Frequently asked questions
What is bonus depreciation in real estate?
Bonus depreciation is a tax provision that lets an owner deduct a large percentage of qualifying assets in the first year instead of depreciating them over time. It applies to assets with a recovery period of 20 years or less — the short-life components (5-, 7-, and 15-year property) a cost segregation study identifies — not the building itself, which depreciates over 27.5 or 39 years.
How does bonus depreciation work with cost segregation?
Cost segregation reclassifies parts of a building into shorter recovery periods, and bonus depreciation then lets the owner deduct a large share of those reclassified assets in year one. Together they can generate substantial first-year depreciation — potentially a paper loss that flows to investors on their K-1 — which is why sponsors use them in combination on larger deals.
Is bonus depreciation still 100%?
It has changed over time. Bonus depreciation was 100% for several years, then began phasing down under prior law, and the applicable percentage has been subject to ongoing legislative changes. Because the rate depends on current law and the year an asset is placed in service, you should always confirm the applicable percentage with a CPA rather than relying on a remembered number.
Does bonus depreciation create a tax bill later?
Yes, partly. Like all depreciation, it lowers the property's tax basis, so a portion is recaptured — taxed — when the property is sold, and short-life components can face recapture at ordinary income rates. Bonus depreciation accelerates the timing of deductions (a big benefit now) rather than eliminating tax, so it should be presented alongside depreciation recapture.
How should sponsors present bonus depreciation to investors?
Project the deal-level first-year depreciation rather than individual tax savings, state your assumptions (that you'll run a cost segregation study and the percentage you're modeling under current law), explain that the benefit is a deferral subject to recapture, and flag that passive activity loss rules limit who can use the losses. Always route specifics to each investor's CPA and never guarantee a tax outcome.
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This article is for educational purposes only and is not legal, investment, tax, or securities advice. Securities offerings are regulated; always work with your securities attorney to structure and run your offering. One Million Media is a marketing and lead-generation provider — not a broker-dealer, investment adviser, or law firm.
