The One Big Beautiful Bill Act, signed July 4, 2025, permanently restored the 100 percent bonus depreciation deduction for qualifying property acquired and placed in service after January 19, 2025. This represents a fundamental shift in tax planning for real estate investors, creating immediate deduction opportunities that were previously phasing down toward extinction.
For investors who acted quickly in 2025 and 2026, the financial impact is substantial. This article walks through a real-world scenario showing how a multifamily investor deployed a cost segregation study to generate $306,250 in federal tax savings on a $4.5 million acquisition, and what sponsors and investors need to understand about executing this strategy today.
What Is Cost Segregation?
Without a cost segregation study, the IRS assigns multifamily properties a straight-line depreciation recovery period of 27.5 years. Every year, the investor writes off the building basis gradually over nearly three decades before any meaningful cash flow benefit is realized through tax deductions.
Cost segregation reclassifies building components into shorter recovery periods, accelerating depreciation deductions and reducing current tax liability. Certified engineering specialists conduct a detailed analysis of the property, identifying components that qualify as personal property (5 or 7 year recovery) or land improvements (15 year recovery), as opposed to the standard 27.5-year real property classification.
The result is a front-loaded deduction schedule that can dramatically reduce tax liability in the year of acquisition, freeing up capital for reinvestment or debt service reserves.
The 2026 Tax Environment: 100% Bonus Depreciation Is Back
The One Big Beautiful Bill Act removed the TCJA phase-down schedule that was systematically reducing bonus depreciation each year after its initial passage. For property placed in service after January 19, 2025, investors can now claim 100 percent bonus depreciation on qualifying short-lived components identified through cost segregation studies.
This is a meaningful improvement over the 2024 and 2025 phase-down periods, where bonus depreciation had been reduced to 60 percent and 40 percent respectively. Investors who missed the window in earlier years now have a clean opportunity to maximize deductions.
Notice 2026-11, released January 14, 2026, by the Internal Revenue Service, provides administrative guidance on substantiating acquisition timing and physical work dates. Taxpayers must follow Treasury Regulation Section 1.168(k)-2 with updated dates reflecting the new legislative cutoff. The notice also clarifies that developers who began physical work on self-construction projects before January 20, 2025, may use a component election to claim the 100 percent bonus rate on specific qualified property components that were acquired or constructed after January 19, 2025.
Case Study: $4.5 Million Multifamily Acquisition in Orange County
An investor acquired a 48-unit garden-style multifamily community in Orange County for a gross purchase price of $4,500,000. The property was constructed in 2008 and had been well-maintained, with a mix of one- and two-bedroom units serving workforce housing tenants.
Acquisition Profile:
– Gross purchase price: $4,500,000
– Land value (non-depreciable): $1,000,000
– Depreciable building basis: $3,500,000
Cost Segregation Study Results:
An engineering firm conducted a comprehensive cost segregation analysis and identified components qualifying for reclassification:
– Personal property (5-year): $425,000
– Personal property (7-year): $175,000
– Land improvements (15-year): $275,000
– Total reclassified basis: $875,000 (25% of depreciable basis)
The 25% reclassification rate is consistent with historical engineering averages for suburban garden-style multifamily communities of this vintage.
Tax Calculation:
Because the property was acquired and placed in service after January 19, 2025, the investor claimed 100% bonus depreciation on the $875,000 reclassified basis.
– Immediate deduction: $875,000
– Marginal federal tax rate: 35%
– Tax savings generated: $306,250
The investor received a federal tax refund of $306,250 in the year of acquisition, effectively reducing the net purchase price from $4,500,000 to $4,193,750 from a tax perspective.
What Gets Reclassified? Detailed Component Breakdown
Understanding which building components qualify for shorter recovery periods helps investors evaluate whether cost segregation is worthwhile for a specific property.
5-Year Property — Personal Property:
These are items that can be removed without damaging the structural integrity of the building or are considered personal property by IRS definition:
– Major appliances: refrigerators, ranges, stoves, microwaves, dishwashers, garbage disposals, washers and dryers
– Floor coverings: carpet pads, floating floors, luxury vinyl plank flooring in individual units
– Window treatments: blinds, shades, curtains, drapery hardware
– Specialty lighting: decorative fixtures, under-cabinet lighting, bathroom vanity lights
– Audio/visual components: cable infrastructure, networking equipment, doorbell systems
7-Year Property — Certain Fixtures and Equipment:
– Some specialty millwork and built-in fixtures that do not qualify as permanent building components
– Certain equipment not permanently attached to the structure
15-Year Property — Land Improvements:
These are improvements to the land that have a determinable useful life but are not the building structure itself:
– Sidewalks, walkways, and concrete flatwork
– Swimming pools, spas, and pool equipment
– Storm drainage systems and retention features
– Carports, covered parking structures, and garage equipment
– Fencing, gates, and site signage
– Hardscaping: retaining walls, decorative stonework
– Landscaping: trees, shrubs, irrigation systems (in some classifications)
27.5-Year Property — Main Building Structure:
The core structural elements remain in the longest recovery period:
– Primary structural frame, foundations, and load-bearing walls
– Roof systems and roofing membranes
– Built-in plumbing and electrical infrastructure
– Central HVAC systems serving the building
– Elevator and vertical transportation equipment
How the Deduction Math Compares
Standard depreciation without cost segregation:
$3,500,000 depreciable basis / 27.5 years = $127,273 per year
With cost segregation + 100% bonus depreciation in Year 1:
– Bonus depreciation on $875,000 reclassified basis: $875,000
– Regular depreciation on remaining $2,625,000 basis: $95,455
– Total Year 1 deduction: $970,455
This represents a 663% increase in Year 1 deductions compared to standard depreciation.
Over a 5-year holding period, the accelerated deductions continue through the remaining book depreciation on reclassified components.
California Complications: State Tax Conformity
California investors must account for the state’s deliberate decoupling from federal bonus depreciation. Senate Bill 711, enacted October 1, 2025, advanced California’s conformity date to the Internal Revenue Code to January 1, 2025, but explicitly maintained decoupling from Section 168(k) bonus depreciation.
This means any federal deductions claimed for bonus depreciation must be added back to California taxable income. The $875,000 federal deduction in our case study would be added back to the investor’s California return.
Practical impact:
– Federal tax savings: $306,250
– California added-back income: $875,000
– California tax cost (at 9.3% marginal rate): $81,375
– Net federal-state tax benefit: $224,875
California investors should work with tax advisors to model the net benefit after state add-back. In high-tax states like California, the net advantage of cost segregation is reduced but still meaningful, particularly for investors in the highest federal brackets.
Risks and Caveats Every Investor Must Understand
Depreciation Recapture:
If the property is sold after a short holding period, accelerated deductions may be subject to ordinary income recapture taxes assessed against the gain at a rate up to 25 percent. Investors who sell shortly after acquisition may face a recapture tax bill that partially offsets the original deduction benefit.
Passive Activity Rules:
Individual passive investors cannot use cost segregation losses to offset active, non-real-estate income unless they qualify as Real Estate Professionals under IRS rules (requiring minimum 750 hours annually in real estate activities and material participation) or have offsetting passive capital gains from other investments.
Component Election for Self-Construction:
Notice 2026-11 allows developers who began physical work before January 20, 2025, to claim 100% bonus depreciation on specific components acquired or constructed after January 19, 2025, using the component election. This is particularly relevant for investors completing value-add renovations where construction was ongoing at the legislative cutoff date.
Future IRS Regulations:
The IRS has stated its intention to release formal regulations corresponding to Notice 2026-11. Taxpayers should maintain thorough documentation of acquisition dates, component costs, and engineering study findings in case of future audit scrutiny.
Engineering Study Costs:
Professional cost segregation studies typically cost $5,000 to $15,000 for medium-sized multifamily properties. This cost is immediately deductible as a consulting fee, but investors should confirm with their tax advisors that the study cost itself generates a net benefit after considering the fees.
Who Should Use Cost Segregation in 2026?
Cost segregation is most valuable for:
– Investors acquiring multifamily or commercial properties above $1 million
– Investors in high marginal federal tax brackets (32 percent or higher)
– Investors planning to hold property for five or more years
– Properties with significant personal property components (newer renovations, premium finishes, extensive landscaping)
– Investors who can utilize passive losses through Real Estate Professional Status or passive income from other sources
– Properties acquired after January 19, 2025 (100% bonus depreciation window)
For more analysis, see Primior’s commercial real estate reports.
Conclusion
The permanent restoration of 100 percent bonus depreciation creates a compelling tax planning opportunity for multifamily investors in 2026. The case study investor saved $306,250 in federal taxes on a $4.5 million acquisition through a cost segregation study, demonstrating the tangible financial impact of accelerated depreciation.
California investors must account for state decoupling but still benefit meaningfully. All investors should work with qualified tax advisors and certified engineering firms to conduct cost segregation studies on qualifying acquisitions.
For more tax strategies for real estate investors, explore Primior’s investor resources. Calculate potential returns on your next investment using Primior’s investment calculator. Review current syndication offerings for investment opportunities that include tax planning as part of the sponsor strategy.
Investors evaluating cost segregation as part of their acquisition due diligence should request preliminary engineering assessments before closing, when possible, to understand the potential reclassification magnitude and ensure the study cost generates a net benefit after fees. The combination of 100% bonus depreciation and cost segregation represents one of the most powerful tax reduction tools available to real estate investors in 2026.
