Understanding Bonus Depreciation in Commercial Real Estate: A Powerful Tax Strategy for Investors
Smart commercial real estate investors don’t just focus on cash flow and appreciation—they also leverage every tax advantage available to them. One of the most powerful tools in that arsenal is bonus depreciation. Whether you're purchasing a NNN retail property, upgrading a grocery store, or improving a hangar facility, bonus depreciation can significantly reduce your tax liability and boost your after-tax returns. And although we are not CPAs, and this shouldn’t be construed as tax advice, we would strongly advise that you speak to your tax advisor about bonus depreciation for the following reasons.
What is Bonus Depreciation?
Bonus depreciation allows investors to immediately deduct a large portion of the cost of qualifying property in the year it is placed in service, rather than spreading the deduction out over many years through standard depreciation. This applies to tangible assets with a useful life of 20 years or less—such as building improvements, equipment, and certain interior renovations.
Why It Matters Now
Under the Tax Cuts and Jobs Act of 2017, bonus depreciation was temporarily increased to 100% for qualifying assets placed in service between 2017 and 2022. This meant you could potentially write off the entire value of certain improvements or equipment in the year you purchased the property or made capital investments.
While bonus depreciation had started to phase down (80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026), the recently passed One Big Beautiful Bill act restores bonus depreciation at 100%, effective January 20, 2025, and makes the benefit permanent.
How It Works for Commercial Real Estate
Let’s say you purchase a retail strip center or NNN investment and conduct a cost segregation study—a process that breaks out components of the property (like lighting, HVAC, and non-structural interior improvements) into shorter depreciation categories. You may be able to apply bonus depreciation to these components and claim significant upfront deductions.
This can translate into:
Lower taxable income
Improved cash flow
Accelerated ROI
Who Should Consider It?
Bonus depreciation is especially useful for:
High-income investors looking to offset passive or active income
Business owners buying their own real estate and making tenant improvements
NNN buyers acquiring properties with recent or planned renovations
1031 exchange investors seeking ways to improve basis and reduce taxable gain exposure
Strategic Considerations
It’s essential to work closely with your CPA, in conjunction with other advisors such as an engineer, in conducting a cost segregation study to make sure of the following:
The improvements or property components qualify
You have enough passive income to offset with the losses (or strategies to group income)
You understand potential recapture implications if you sell early
Bottom Line: Bonus Depreciation Can Supercharge Your Returns
In a tight market with rising interest rates, every edge counts. Bonus depreciation can turn a good deal into a great one—especially when paired with smart asset selection, tenant credit analysis, and long-term investment planning.
At Chandler James Retail Team, we help investors uncover real estate opportunities that make sense both financially and strategically. Whether you're eyeing your first NNN investment or expanding your portfolio, let us, along with your tax advising team, discuss benefits with you such as bonus depreciation and how they can fit into your big-picture goals.
Reach out today to explore properties and strategies tailored to your investment profile.
