Section 179 vs. Bonus Depreciation: What Real Estate Investors Need to Know

Bonus depreciation and Sec. 179 are Congress-approved tax savings methods.

Bonus depreciation is the better-known of the two, for obvious reasons. However, investors generally hear, whether via social media or other tax content, about the utilization of 179 expensing and how it also can be a 100% ‘write-off’. This ultimately drives the question ‘which one should an investor or business owner pick?’

The answer: It depends.

The decision is really far more complex than it sounds, as it can apply differently to every situation.

Is your property eligible? Are you operating with a pass-through entity? Do you have enough income? What does next year’s income look like?

This article is intended to help you figure out the flow path that a CPA considers when making these decisions.

Quick Definitions

• Section 179 – You must ‘elect to expense qualifying assets up to the annual cap ($1,250,000 for 2025; indexed for inflation). Phase-out begins when total assets placed in service exceed the investment ceiling.
  • You elect INTO Sec. 179. It’s a choice to use it. It’s really bonus depreciation’s older cousin, as it was established in the tax code first. And since it’s been around longer, other states follow it (to an extent).
• Bonus Depreciation – Sec. 168(k) automatic 100% first-year deduction on qualifying property acquired after 1/19/2025. No dollar cap. No election required (opt out if you don’t want it).
  • Bonus depreciation was originally going to be phased down for qualifying property, and real estate investors experienced it, going from 80% to 60%, then to 40% in 2025. However, that is when the OBBBA ultimately stepped in.
  • So, what is qualifying property? It is anything that falls into the 5,7, & 15 year depreciation bucket. This can be personal property used in a trade or business.
    • Examples of this are business vehicles, personal property like equipment, computers, and qualified improvement property (QIP). QIP is any type of non-residential improvement made that would fall under the 15-year bucket for bonus depreciation. And nearly everything that qualifies for bonus depreciation also qualifies for 179. This is because Sec. 168(k), bonus depreciation, borrows from Sec. 179.
  • One important item of note is that any property placed in service before January 19th, 2025 or acquired before that date, is not eligible for 100% bonus, and is stuck under 40% bonus depreciation.

Key Differences That Matter for RE Investors

When Section 179 Wins

Below is one limitation that exists for 179: there is a ‘max’ and also a phase-out range.

Sec. 179 is the winner when you want to cherry-pick a certain number of assets to expense before applying bonus depreciation. The rules for electing out of bonus, while electing in Sec. 179, are far more targeted.

Sec. 179 is also a good move when you would prefer to leave the tax losses as carryovers IN the business. Now, why would anyone want to do that?

Say you had a capital-intensive year in your business, and you know that your current year (while filing your prior return) will produce significant gains and income. So, you plan to ‘save up’ your losses so you can ultimately maximize your tax savings to the higher tax bracket rates.

Sec. 179 also helps us deduct automobiles at a higher rate when not subjected to the bonus depreciation limitations that exist as well.

Sec. 179 is also a great option if you are making improvements on commercial properties (like STRs). If you replace an HVAC, a roof, or a security system, that entire amount is now eligible to be written off.

Bonus Depreciation can’t touch that. So this is a major spot where 179 wins.

Also, it’s worth analyzing to see if your state conforms to 179 or bonus depreciation. Quite a few states don’t conform, and this can create additional tax savings by using the 179 route instead of bonus depreciation.

Sec. 179 must also be applied at two different levels. The first is the ‘entity’ level, and the second is the owner level. If 179 brings taxable income to $0, that means losses would be trapped in the entity.

Then, after that, you apply 179 losses at the ‘owner’ level. This means that, after business income, W2 income, and other forms of business income. The key part here is 179 deductions go against your W2.

However, one other area that I see missed is not applying 179 to 1231 Gains. Tax software doesn’t always do this naturally, and this can also create significant tax savings.

When Bonus Wins

Bonus wins when a real estate investor needs flexibility. Are you operating a pass-through entity? Is the GP of a syndication wanting to take losses? Is it a multi-family property?

If any of those answers are yes, more times than not, bonus depreciation should be the answer. It generally allows more deductions of expenses.

Bonus is much easier and pairs with cost segregation studies relatively well.

Sec. 179 only allows certain kinds of property to be expensed on a cost segregation study. Bonus depreciation doesn’t have nearly the limitations that bonus depreciation has.

More often than not, bonus depreciation is the winner. But only after an analysis has been performed.

Practical Scenario

Short example: investor acquires a $2M multifamily property → cost seg study reclassifies $400K to 5/7/15-year property → bonus depreciation wipes it out in year one. Compare what 179 alone could do (capped, can’t create a loss).

Here is a short scenario:

Investor acquires, with their spouse, a $2M multifamily property in Iowa. They work to get a cost seg study performed, and it reclassifies $400K to 5/7/15-year property. This is a fantastic use case for bonus depreciation. Why?

1. Residential Property
2. Investor lives in a state that conforms with bonus depreciation
3. They invested via a pass-through entity

If they had instead lived in Virginia, purchased a hotel, and run a full-time law firm, then they might consider 179 for the self-employment tax savings, state deductions, and non-residential property.

179 Carryover vs. NOL Conversation

One area I see get missed frequently is not considering self-employment tax when it comes to loss carryovers.

Bonus depreciation can create a ‘net operating loss (NOL)’. This allows investors and others to write off more than their income in a given year. It actually helps them create a large number of losses in one year and then carry forward the losses each year to utilize.

However, NOLs do not offset SE Tax. This means, if you have $1,000,000 of NOLs, and $1.2M of income, and you run a trade or business, you will not owe tax on the $1.2M, but you will owe SE tax on the overall $1.2M of net business income.

Sec. 179 does not have this issue. 179 can and will offset SE income, regardless of how long it has been carried forward. Real estate investors who are also business owners should keep this in mind when planning and modeling.

A pound of prevention is worth four pounds of cure.

Talk to your CPA before year-end. The rules are favorable right now. The question is how to stack them.