The big depreciation write-off that can save you nothing this year
You bought into a 2025 multifamily deal. The sponsor mentioned a cost segregation study and a six-figure first-year write-off, and you did the quick math: big deduction, high bracket, big refund. Then you find out the deduction is worth nothing this year. Not less than you hoped. Zero off your current tax bill.
If you bought property in 2025 and you are on extension, there is a decision in front of you that locks on October 15, 2026, and most people make it without understanding what they are choosing.
Two rules colliding
100% bonus depreciation is back, for good. The One Big Beautiful Bill Act permanently restored 100% bonus depreciation under IRC §168(k) for qualified property acquired and placed in service after January 19, 2025. A building itself (27.5-year life) does not qualify, but many of its components do. That is what a cost segregation study does: an engineering analysis that reclassifies a portion of a building's cost, the components rather than the 27.5-year shell, into 5-, 7-, and 15-year buckets that can be written off immediately.
Rental real estate is "passive," no matter how hard you work. Under IRC §469(c)(2), rental activity is passive by default, and passive losses can only offset passive income. So if your cost-seg study throws off a $200,000 loss but you have a W-2 job and no other passive income, that loss cannot touch your salary. It is trapped.
The softer part: suspended passive losses carry forward indefinitely (IRC §469(b)), and they release in full when you completely dispose of the property in a fully taxable sale to an unrelated party (IRC §469(g)). A sale to a related party does not trigger the release. You do not lose them. They wait.
The part people miss
Section 179, the other "expense it now" provision, is capped by taxable income; it cannot create a loss. Bonus depreciation has no such limit. So bonus will happily manufacture a $200,000 loss you have no income to use. The biggest write-off in the building is, for the wrong investor, the most useless one.
What it looks like in numbers
| Take 100% now: | |
| year-one tax benefit | $0(loss suspended; she's passive) |
| released at sale (~year 5): $200,000 x 37% = $74,000 | |
| present value at 7% | ~$52,700 |
| Elect down to 40% (§168(k)(10)): | |
| $80,000 now (also suspended) + the rest spread over later years, | |
| all released at the same sale anyway -> present value | ~$48,000-50,000 |
For a trapped passive investor headed toward a single sale, taking 100% wins. The suspended loss comes back in full at disposition regardless, so front-loading it maximizes present value. Electing down only helps in specific cases: you expect future passive income to absorb deductions, your state does not conform to federal bonus, or you are protecting another tax attribute.
The deadline you are choosing against
The 100%-versus-40% choice is the §168(k)(10) transition election, available only for your first tax year that ends after January 19, 2025 (for most individuals, 2025). It is made on a timely filed return, extensions included, so a calendar-year investor who extended has until October 15, 2026. Once the deadline passes, the choice is effectively set, and you cannot count on fixing a wrong call by amending later.
The three doors out of the passive box
If the trapped loss is the problem, the real question is whether any of these applies to you. If a door is open, you take 100% and use the deduction now.
Had Dr. Lee qualified as a real estate professional or run this as a materially-participated short-term rental, the $200,000 would be non-passive and deductible in year one, about $74,000 saved immediately, and electing down would be plainly wrong. One honest note: REPS is heavily audited, and contemporaneous time logs (date, hours, task, property) are what hold up. Reconstructed-after-the-fact logs are what get rejected.
Getting it right
We handle the tax side: running the §168(k)(10) election on the 2025 Form 4562, and modeling the present value of 100% versus electing down against your rate, your hold-or-sell horizon, and your state (many states do not conform to federal bonus). Your cost-segregation engineer produces the study and confirms your acquisition and placed-in-service dates fall after January 19, 2025. And if you are chasing real-estate-professional or short-term-rental treatment, you keep the time logs, because no one else can.
One caveat to stay honest: this currently rests on IRS interim guidance (Notice 2026-11), with proposed regulations expected. You can rely on the Notice for now, but the fine print could shift.
Bonus depreciation is only as valuable as the income it can offset, and for a trapped passive investor the election is a timing lever, not a tax cut. Which investor you are, your hours, your AGI, your passive income, your sell date, your state, decides the call. A Diagnostic is where we surface which one you are and whether the election is even in play. Making the election, running the study, and modeling it out is the work we do for our clients, and the 2025 window closes October 15, 2026. Start your Diagnostic.
This article is general tax information, not specific tax advice. Your situation has details we cannot see from a blog post. Talk with us or your tax professional before acting on it.