Permanent 100 Percent Bonus Depreciation: What It Means for Real Estate Funds in 2025
Bonus depreciation has always been one of the most powerful tax tools available to real estate funds, syndicators, and private equity sponsors. But the One Big Beautiful Bill (OBBA) changed the landscape permanently. What was once scheduled to phase down every year is now fully restored to 100 percent for assets placed in service on or after January 19, 2025.
For fund managers, this is not simply a tax update. It is a strategic opportunity that materially impacts acquisitions, cost segregation studies, cash flow planning, promote structures, and investor outcomes. Understanding how to use permanent 100 percent bonus depreciation is essential for fund performance in 2025 and beyond.
This blog breaks down what changed, why it matters, and how fund managers can leverage this provision to reduce taxable income, increase distributable cash, and build a more attractive investor pitch.
What Bonus Depreciation Is and Why It Matters
Bonus depreciation allows taxpayers to deduct 100 percent of the cost of eligible property the year it is placed in service. Instead of depreciating certain components of a property over five, seven, or fifteen years, bonus depreciation accelerates the full deduction into year one.
For real estate funds, this is significant. Buildings are normally depreciated over 27.5 or 39 years. But through a cost segregation study, portions of the building can be reclassified as shorter-life property, making them eligible for immediate expensing.
The result is substantial first-year losses, which can be used to offset income depending on the investor’s tax status.
The Phase-Down That Was Avoided
Under previous law, bonus depreciation was scheduled to decrease:
80 percent in 2023
60 percent in 2024
40 percent in 2025
20 percent in 2026
0 percent in 2027
The OBBA reversed this decline entirely. Bonus depreciation is now permanently restored to the full 100 percent for qualifying property placed in service beginning January 19, 2025.
This provides clarity, certainty, and long-term planning stability.
Why Fund Managers Should Pay Attention
For real estate funds and private equity sponsors, 100 percent bonus depreciation directly impacts:
Acquisition strategy
Tax-adjusted cash flow
Promote structures
LP expectations
Year-one returns
Investor capital raises
Bonus depreciation is not just a tax benefit. It is an economic tool that reshapes the way deals are underwritten and structured.
Cost Segregation: The Engine Behind Bonus Depreciation
To access bonus depreciation, fund managers must complete a cost segregation study. These studies break down a building into its components, identifying which parts qualify for shorter depreciation lives.
Examples include:
Specialized cabinetry
Electrical systems
Plumbing components
Flooring
Fencing
Landscape improvements
Machinery and equipment
Medical or industrial infrastructure
By segregating these components, investors can shift millions of dollars from long-life property to bonus-eligible categories.
The permanent 100 percent rule significantly enhances the ROI from these studies.
How Passive Investors Benefit
Passive investors sitting on passive gains from prior investments can use bonus depreciation to offset these gains. A new investment with substantial first-year losses can reduce or eliminate taxable income generated from other passive assets.
This creates what many investors refer to as a “lazy 1031” effect. Instead of exchanging properties to defer tax, investors use depreciation from a new asset to offset gains from an older one.
The result is increased flexibility, reduced friction, and more control over timing.
How Active Real Estate Professionals Benefit
For real estate professionals who meet the 750-hour rule and materially participate in their activities, bonus depreciation becomes even more powerful.
Real estate professional status converts depreciation into a tool that can offset W2 income, business income, and other ordinary income. For fund managers who qualify as real estate professionals, bonus depreciation may be the single most valuable tax provision available.
This creates opportunities for:
Tax-free cash flow
Strategic acquisition timing
Higher returns
Faster capital recycling
Improved capital raises
The OBBA ensures these opportunities remain accessible for years to come.
Fund-Level Planning for Bonus Depreciation
Fund managers must incorporate bonus depreciation into their broader strategy. Key considerations include:
Acquisition Timing
Assets must be placed in service after January 19, 2025, to qualify.Fund Documentation
Operating agreements should reflect how depreciation will be allocated among LPs and GPs.GP Allocation Strategy
Aligning depreciation with promote structures can create significant GP-level tax savings.Investor Communication
Educating LPs on how depreciation affects their tax positions strengthens trust and reduces confusion.Cash Flow Modeling
Bonus depreciation affects not just taxes, but year-one cash-on-cash returns and after-tax yield.
Opportunity Zones and Bonus Depreciation
Opportunity Zones remain one of the few areas in the tax code where long-term gains can be completely eliminated. When combined with bonus depreciation, these zones create an even stronger economic profile.
A fund that acquires property in an Opportunity Zone, completes a cost segregation study, and holds the asset for ten years can offer investors:
Immediate tax benefits
Enhanced cash flow
Long-term tax-free gains
With Opportunity Zone 2.0 launching in 2027, this remains an important area for fund managers to watch.
Energy Policy and Bonus Depreciation
The OBBA reduced incentives for renewable energy but reinforced oil and gas development. For funds operating in those sectors, bonus depreciation strengthens investment opportunities.
From pipelines to drilling equipment, much of the infrastructure required for expanded production qualifies for bonus depreciation. For energy-specific funds or diversified alt funds, this provides both tax and economic advantages.
What Fund Managers Should Do Now
Fund managers should begin planning for 100 percent bonus depreciation immediately. Key steps include:
Reviewing acquisition pipelines for eligible assets
Scheduling cost segregation studies in advance
Updating operating agreements to reflect allocation strategies
Coordinating with tax counsel on entity structure
Communicating with investors about projected tax outcomes
Year-end planning is essential. Bonus depreciation involves timing, structure, and execution.
Final Takeaway
Permanent 100 percent bonus depreciation is one of the most important components of the OBBA. It does not just reduce taxes. It shapes acquisition strategy, investor relations, cash flow timing, and fund performance.
Understanding how to integrate this provision into fund strategy is essential for 2025.
Book Your Tax Strategy Call with James
If you want to understand how permanent bonus depreciation applies to your acquisitions, fund structure, or investor tax outcomes, now is the time to take action. There is still time to review your cost segregation strategy, refine your allocation model under Section 704(b), and position your fund for stronger tax advantages in 2025. Once the year closes, these planning opportunities are gone.
Schedule Your Tax Strategy Session Now
