100% Bonus Depreciation Raises Future Recapture Taxes

The One Big Beautiful Bill restored 100% bonus depreciation for qualifying property acquired after Jan. 19, 2025, allowing owners to expense eligible assets in the first year. The change increases immediate tax deductions for owners of rental housing, commercial buildings, industrial sites and self-storage facilities while preserving existing depreciation recapture rules.

The Tax Foundation projects an average after-tax income increase of 5.4% for 2026. Many owners are using cost segregation studies to reclassify building components into shorter-life categories that qualify for the full first-year expensing. A $300,000 reclassification that would have yielded a $60,000 deduction under the previous phase-down can now be expensed entirely in year one.

Depreciation recapture rules remain unchanged. Standard real estate depreciation recapture is capped at 25%. Components reclassified into personal property through cost segregation face recapture at ordinary income rates, which can reach 37%. Owners also remain subject to long-term capital gains rates of 0%, 15% or 20%, the 3.8% net investment income tax in many cases, and applicable state taxes. Those layers can push the combined tax burden toward or above 30% to 40% of a sale’s total gain.

An example illustrates the mechanics: an owner who bought an apartment building for $1.2 million and sells it 15 years later for $2.5 million records a nominal gain of $1.3 million. If the owner claimed $400,000 in depreciation over the holding period, the adjusted basis falls to $800,000 and the taxable gain rises to $1.7 million. The $400,000 in depreciation would generate $100,000 in recapture tax at 25% before capital gains rates and other taxes are applied. After a 20% capital gains rate on the remaining $1.3 million, the 3.8% net investment income tax and state levies, a preliminary $260,000 estimate can increase to roughly $550,000.

Industry analysis from April 2026 shows rising demand for accelerated depreciation strategies and an increase in service providers offering cost segregation and related work. Apartment transaction volume fell to $119 billion in 2023, a 61% decline from a 2021–22 average of $332 billion, following Federal Reserve rate increases totaling 525 basis points from March 2022 to July 2023. Many pandemic-era loans with five- to seven-year balloon payments are maturing into a higher-rate environment, increasing monthly costs and prompting some owners to consider sales.

Managing principal Carl E. Sera urged advisors to address both immediate tax savings and future sale implications: “If the first question from the client is, ‘How much tax can I save today?’ the advisor should answer it — but quickly follow up with, ‘Let’s talk about the tax consequences when you eventually sell.'” Exit strategy choices determine when and how recapture taxes are paid. Possible approaches include using a traditional 1031 exchange to defer tax by rolling proceeds into like-kind property, a Delaware statutory trust to preserve deferral with passive ownership, a 721 UPREIT exchange to convert interests into operating partnership units in a REIT, or a Section 453 installment sale to spread gain and recapture over multiple years.

Which option is appropriate depends on the size of accumulated depreciation, the owner’s desired level of involvement in real estate and timing constraints such as loan maturities. Advisors are discussing both the short-term deduction benefits and the later tax implications with clients preparing for potential sales.