The downside of 100% bonus depreciation: What advisors need to know

The One Big Beautiful Bill Act is delivering one of the largest tax cuts in a generation, with the nonprofit Tax Foundation projecting an average after-tax income rise of 5.4% for 2026 — the biggest single-year boost since the 2017 Tax Cuts and Jobs Act. 

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For clients who own rental housing, commercial buildings, industrial properties or self-storage facilities, the headline is the return of 100% bonus depreciation on qualifying property acquired after Jan. 19, 2025. That means a $300,000 cost segregation reclassification — a detailed analysis that breaks a property into shorter-life components eligible for faster depreciation — that would have generated a $60,000 deduction under the old phase-down is now fully deductible in year one.

Advisors have been right to communicate these wins to clients. But most of the time the conversation stops there. 

A prudent financial planner should also discuss how today’s tax deduction may affect tomorrow’s exit strategy. The OBBBA restored 100% bonus depreciation, but it did nothing to change depreciation recapture rules. In fact, larger first-year deductions can create larger future recapture liabilities.

If the first question from the client is, “How much tax can I save today?” the advisor should answer it — but quickly follow up with, “Let’s talk about the tax consequences when you eventually sell.”

READ MORE: Steps to take as bonus depreciation phases down

Layered taxes add up

When a client claims a depreciation deduction, the IRS treats that benefit as temporary. Upon sale, those deductions are recaptured and taxed. For standard real estate depreciation, the recapture rate is capped at 25%. But when cost segregation studies reclassify building components into personal property categories, those components face recapture at ordinary income rates, which can reach 37%. 

Clients do not face one tax, but layers of them: federal long-term capital gains at 0%, 15% or 20%; depreciation recapture at 25%; cost segregation recapture at up to 37%; the 3.8% net investment income tax; and state taxes on top. The true burden often approaches or exceeds 30% to 40% of the total gain.

Take a small apartment building purchased 15 years ago for $1.2 million and sold today for $2.5 million. The gain looks like $1.3 million. But $400,000 in depreciation deductions dropped the adjusted basis to $800,000, pushing the taxable gain to $1.7 million. That $400,000 gets recaptured at 25%, generating $100,000 in tax before capital gains even apply. Add 20% on the remaining $1.3 million, the 3.8% net investment income tax and state taxes, and a $260,000 tax bill quickly becomes $550,000.

READ MORE: Guiding clients through the high costs and risks of rental real estate

Depreciation in high demand

As more advisors and buyers get comfortable with the new law, I’ve seen more depreciation taken immediately. An April 2026 industry analysis found the new law, combined with the growth of providers, driving “record demand.”

After the Federal Reserve raised rates a total of 525 basis points between March 2022 and July 2023, apartment transaction volume collapsed 61% to $119 billion in 2023, down from a record-setting average of $332 billion across 2021 and 2022. Sellers were anchored to 2021 prices, buyers refused to pay them at 2023 financing costs and the market froze, with 2024 seeing only a modest bump.

Many of those sidelined owners wanting or needing to exit are now out of time after holding out for lower rates that have not materialized. Pandemic-era loans that were structured with five- to seven-year balloon payments and interest-only periods are now maturing into a much higher rate environment. The new monthly payments wreck the properties’ economics. Selling is no longer a choice.

READ MORE: 10 best and worst real estate funds of the past three years

Tax-friendly exit strategies

The advisor occupies a singular position in a real estate sale. Every other party in the transaction — including the qualified intermediary, the sponsor and the CPA — is paid to execute the deal. The advisor is the only participant whose job is to ask whether the transaction should happen at all, and if so, in what form. 

Today, with years of accumulated depreciation liability sitting silently on client balance sheets, the exit strategy a client chooses determines when and how that recapture liability is ultimately paid. Potential strategies include:

A traditional 1031 exchange. Defers the tax by rolling sale proceeds into a like-kind property, but the client remains an active landlord. A Delaware statutory trust. Offers a passive ownership structure that still qualifies for 1031 treatment, preserving the deferral without the headaches of direct ownership. A 721 UPREIT. Takes that further, exchanging the DST interest into operating partnership units in a real estate investment trust, gaining diversification and eventual liquidity. A Section 453 installment sale. Goes a different route entirely, spreading the gain and recapture across multiple tax years rather than absorbing it all at once.

These are not product decisions but tax timing decisions. The right choice depends entirely on the magnitude of the accumulated depreciation liability the client is carrying into the sale.