2025 Bonus Depreciation Is Fading Fast (but might be expanded as part of ongoing updated legislation) — Here’s What Real Estate Investors Need to Know for the time being.
Bonus Depreciation and Real Estate: What Newport Beach, Costa Mesa, and Orange County Property Owners Need to Know (2025 Edition)
Bonus Depreciation and Real Estate: What Newport Beach, Costa Mesa, and Orange County Property Owners Need to Know (2025 Edition)
Bonus depreciation has been one of the most powerful tax-saving strategies available to real estate investors and property owners over the last several years. But as of 2025, this benefit is phasing out—and fast. That makes it more important than ever for property owners in Newport Beach, Costa Mesa, and across Orange County to understand how to strategically use bonus depreciation before it potentially disappears.
At Lucas Real Estate Group, we specialize in helping clients navigate the legal and tax complexities of real estate transactions, including maximizing tax strategies like bonus depreciation. Whether you’re renovating a short-term rental, investing in improvements, or planning a cost segregation study, timing and structure are critical.
Bonus Depreciation 2025 At a Glance
- Deduct 40% of eligible property costs placed in service in 2025
- Applies to qualified improvements and short-life real estate components (20 years or less)
- Commonly used with cost segregation studies to maximize deductions
- Still available for used property (if criteria are met)
- Scheduled to phase out entirely by 2027 (barring Congressional action)
- Pending legislation may extend or restore higher percentages—but nothing is certain
What Is Bonus Depreciation?
Bonus depreciation—also called the additional first-year depreciation deduction—allows businesses and real estate investors to deduct a large portion of a qualifying asset’s cost in the year it is placed in service, instead of depreciating it slowly over its useful life.
This is a form of accelerated depreciation and can significantly reduce taxable income in the year the investment is made.
| Year Placed in Service | Bonus Depreciation Rate |
|---|---|
| 2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 | 0% (unless extended) |
How Bonus Depreciation Applies to Real Estate
In real estate, bonus depreciation is typically not applied to the building itself, but rather to components of the property that have a MACRS recovery period of 20 years or less, such as:
- Appliances
- HVAC units
- Flooring
- Roofing and insulation (in some contexts)
- Landscaping and fencing
- Interior improvements and finishes
Real estate investors often utilize cost segregation studies to break down a property into its depreciable components, many of which qualify for bonus depreciation.
Timing Matters: Placed-in-Service Rule
Bonus depreciation can only be claimed in the year the asset is placed in service.
- If you purchased and placed a rental property into service in 2023, you had to claim bonus depreciation on your 2023 return (at the 80% rate).
- You cannot go back and claim bonus depreciation for prior years unless you amend the original tax return or file a change in accounting method (Form 3115).
Example: If you bought a property in 2023 but didn’t take bonus depreciation then, you generally cannot take it now in 2025 unless you amend your 2023 return.
Recent Improvements? You’re in Luck
If you already own a rental or investment property and you’re making major upgrades in 2025—new HVAC, appliances, flooring, or a remodel—those improvements may qualify for bonus depreciation this year, even if the building itself was purchased years ago.
Bonus Depreciation vs. Section 179
| Feature | Section 179 | Bonus Depreciation |
|---|---|---|
| Limit | $1,220,000 (2024 indexed) | No dollar limit |
| Income Cap | Yes – limited to taxable business income | No – can create a net loss |
| Flexibility | Choose how much to deduct | Deduction is fixed by percentage |
| Order | Claimed before bonus depreciation | Claimed after Section 179 |
Caution: State Tax Rules May Differ
California does not conform to federal bonus depreciation rules. That means you may benefit on your federal return but not on your California return.
Keep separate depreciation schedules for state and federal tax planning. This is crucial for real estate investors operating in Newport Beach, Costa Mesa, or anywhere in California.
Possible Legislative Extension
As of 2025, Congress has introduced proposals to restore or extend bonus depreciation to 100%. While nothing has passed yet, real estate investors should:
- Stay in close contact with their CPA or tax attorney
- Place qualifying assets in service now, while the benefit still exists
- Be prepared to act quickly if extension legislation is passed mid-year
Citations
- IRS Bonus Depreciation FAQ
- Internal Revenue Code § 168(k)
- IRS Form 4562: Depreciation and Amortization
- Proposed Treasury Reg. § 1.168(k)-2
- Tax Cuts and Jobs Act of 2017 (Pub. L. No. 115-97)
- H.R.7024 (Build It in America Act of 2024 – pending legislation)
Questions or Need Help?
Thinking of buying, improving, or managing California real estate? We’d love to help. Lucas Real Estate Group provides full-service sales, legal, and property management services in Newport Beach, Costa Mesa, and the surrounding Orange County coastal communities.
Call (949) 478-1623 or email info@lucas-real-estate.com for a complimentary consultation.
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Devin R. Lucas is a Real Estate Broker, REALTOR® and Real Estate Attorney specializing in Newport Beach, Costa Mesa, and Orange County coastal communities. Courtney Lucas, a licensed CPA, Real Estate Salesperson, and REALTOR®, provides expert financial insight alongside real estate services. Together, they lead Lucas Real Estate, operating in conjunction with Coldwell Banker, the region’s premier luxury brokerage.
Lucas Real Estate offers unmatched expertise in California real estate sales, property management, and tax strategies, including capital gains planning, Proposition 19 guidance, trust and estate transfers, and LLC formation.
Want to discuss real estate laws, tax planning, tax considerations, private sales, intra family sales, or real estate legal matters? We conduct paid one-hour confidential consultations via Zoom, walking families through Prop 19 impacts, potential tax exposure, capital gains considerations, and the pros and cons of gifting, sales, LLCs, or hybrid solutions. For discussions requiring real estate legal advice, private family sales, family transfers, or tax-related matters, please schedule a paid one-hour consultation via Zoom, phone, or in person using this calendar (Book a consultation here.) Upon booking, you’ll receive instant confirmation and a Zoom link if applicable.
Thinking of selling California real estate or seeking a new property management company? We would love the opportunity to assist – we provide full service sales and property management in Newport Beach, Costa Mesa and surrounding areas. If you are seeking to sell or professionally manage your home in Newport Beach, Costa Mesa or the surrounding areas, call or email anytime for a free brief consultation – info@lucas-real-estate.com or 949-478-1623.
