February 18, 2025

Bonus Depreciation in 2025: Still Available? Plus, How It Compares to Cost Segregation

1 hour 13 minutes

We have now hit 237 episodes of Tax Tuesday! Today, Anderson Advisors attorneys Toby Mathis, Esq., and Eliot Thomas, Esq., discuss topics including depreciation strategies, with detailed explanations of how bonus depreciation differs from cost segregation analysis. The conversation also covers real estate professional status requirements, home office deductions, and the strategic use of management C-corporations to maximize tax benefits. Other key topics included the limitations of 1031 exchanges for partnership interests, tax strategies for international property purchases, meal expense deductions under current tax law, and the benefits of a stepped-up basis for inherited properties. You’ll hear practical strategies for leveraging existing properties rather than selling them and included insights on how to minimize tax exposure through various investment structures and borrowing strategies.

Send your tax questions to [email protected].

Highlights/Topics:

In 2024, I spent most of my time managing rental properties under our LLC (not in a C or S management corp). I will claim real estate professional status for 2024 tax returns. What home office expenses can I deduct from rental income? Should we consider creating a management C corporation to maximize deductions? - You can deduct a portion of home expenses (mortgage interest, property taxes, utilities, etc.) based on either square footage or number of rooms method.

Is 100% bonus depreciation available in 2025? Is this the same as cost seg? - Cost segregation breaks down property components into different depreciation schedules (5, 10, 15 years) while bonus depreciation allows immediate write-offs of qualifying components.

If you meet 750 hours as a real estate investor and own both commercial/non-residential real estate property and residential rental property, could you use Schedule C or Schedule E on your tax return? - Generally, long-term rentals go on Schedule E regardless of real estate professional status. Schedule C might be used for short-term rentals (average stay less than 7 days) with significant personal services provided.

Does selling a partnership interest in a hotel business qualify for a 1031 exchange? How can you save on taxes on capital gain when you sell your partnership interest? - A partnership interest generally doesn't qualify for 1031 exchange (though the partnership itself could exchange the building).

If I inherit a property and now use the property as Airbnb, do I need to depreciate the value of the property? - You should depreciate the property because the IRS will assume you took depreciation when you sell and tax you accordingly (recapture). You'll get a stepped-up basis at inheritance value to depreciate from.

Can you comment on food and meals? When can those be expensed and how much? - Business meals are generally 50% deductible. Company-wide events like holiday parties or open houses with unrestricted attendance can be 100% deductible. Entertainment expenses are no longer deductible.

I'm a full-time employee receiving W2 income and own two rental properties which I manage myself. Can I use the qualified business deduction (QBI)? - Yes, you can potentially qualify for the QBI deduction. The safe harbor rule requires 250 hours of rental services, but you may still qualify even without meeting this specific threshold if you can prove it's a trade or business.

How can I avoid capital gains if I sell my rental home in the U.S. to purchase a multi-family home in Costa Rica? - Options include: living in the property for 2 of the last 5 years to qualify for primary residence exclusion, leveraging the U.S. property instead of selling, harvesting capital losses to offset gains, or investing in tax-advantaged opportunities to create offsetting losses.

I have two rental properties in SoCal owned since 2009 using straight-line depreciation. If I 1031 exchange these properties into replacement properties of slightly higher value, can I start depreciation over and do it correctly? If I 1031 these properties into replacement properties of slightly higher value, does that mean I can start depreciation all over and do it correctly? Getting more tax benefit. How does this affect my basis? What about any recapture when I then sell later? - In a 1031 exchange, you'll have carryover basis from the relinquished property. The basis in the new property will be its purchase price minus deferred gain. Instead of selling, consider leveraging existing properties to buy additional real estate for more depreciation opportunities.

What are the benefits of the step-up basis evaluation for a person's residence and investment property? - When inherited, properties receive a stepped-up basis to fair market value at death, allowing heirs to depreciate from the higher amount and potentially eliminate capital gains tax on appreciation that occurred during the deceased's lifetime.

Resources:

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