Real Estate Professionals + Cost Segregation + OBBBA: How They Work Together
Why this matters
When used together, three ideas can materially reduce current‑year taxes for active real estate owners: (1) qualifying as a Real Estate Professional (so rental losses are generally non‑passive), (2) using an engineering‑based cost segregation study to front‑load depreciation, and (3) leveraging the One Big Beautiful Bill Act (OBBBA), which restores 100% bonus depreciation for most assets placed in service after January 19, 2025.
A note on Real Estate Professional (REP) status
To capture the full benefit of this strategy, the taxpayer (or spouse, if filing jointly) generally needs to be a Real Estate Professional for tax purposes. For the official IRS discussion of REP rules, see Publication 925: IRS Publication 925 (Passive Activity and At‑Risk Rules)
Cost Segregation = Bigger Early Deductions
An engineering study breaks a building into components. Many items move from 27.5/39‑year lives into 5/7/15‑year buckets (for example, certain flooring, electrical, and site improvements). Those short‑life assets are generally eligible for bonus depreciation, magnifying first‑year deductions when you qualify as a Real Estate Professional and materially participate.
OBBBA Restores 100% Bonus Depreciation
Under OBBBA, most tangible property with a recovery period of 20 years or less is eligible for 100% bonus depreciation if it is acquired and placed in service after January 19, 2025. This restoration increases the value of cost segregation studies and applies broadly, including many improvements to real property such as qualified improvement property (interior, non‑structural improvements to nonresidential buildings). Timing (acquisition and placed‑in‑service) still matters.
Putting It Together: The Interplay
• REP status (see IRS link above) makes rental losses generally non‑passive, allowing them to offset other sources of income.
• Cost segregation shifts basis into short‑life, bonus‑eligible buckets, increasing deductions up front.
• OBBBA’s restored 100% bonus accelerates those deductions into the current year when timing rules are met.
What to Do Next
• Confirm whether REP status is appropriate for your situation by reviewing the IRS guidance and your facts; keep meticulous time/activity records.
• Order a feasibility memo, then a full engineering cost segregation study post‑closing.
• Use 100% bonus depreciation on eligible assets identified in the cost segregation study to accelerate depreciation and potential real estate losses.