The Most Powerful (and Often Overlooked) Tax Advantage for Rental Property Investors
If you’re adding a rental property to your portfolio in 2025—whether it’s a long-term single-family home, a duplex, or a short-term Airbnb—the biggest tax win usually isn’t mortgage interest or property taxes. It’s depreciation. Done right, this one strategy can hand you significant deductions in year one, completely legally and with rules that just got even friendlier this year.
Disclaimer: We work with investors and their CPAs every day on these exact strategies, but we’re real estate brokers—not tax advisors. This guide is meant to give you a solid foundation so you can have a smarter conversation with your own tax professional. Rules are individual and can change, so always verify with an expert.
Why Depreciation Is Different in 2025
For decades, residential rental property has been depreciated straight-line over 27.5 years. That’s still the baseline—but it only applies to the building structure itself.
The game-changer is that 100% bonus depreciation is now permanent for shorter-life components (5-, 7-, and 15-year property) placed in service after January 19, 2025. Combine that with a cost-segregation study, and 30–45% of your purchase price can often be written off immediately instead of dribbling out over decades.
The Simple Breakdown
(Average Asheville-area purchase price: $500,000)
| Approach | Year 1 Deduction on ~$400k Building Value | Timeframe |
| Standard straight-line (no planning) | ~$14,500 | Spread over 27.5 years |
| Cost segregation + 100% bonus | $120,000 – $200,000+ | Mostly in the first year |
How It Actually Works
- You buy a rental property and place it in service (ready and available for rent) in 2025 (or the applicable tax year).
- You hire an engineering firm to perform a cost-segregation study (cost: usually $4k–$10k for a $500k property).
- The study reclassifies personal property and land improvements—things like carpet, appliances, cabinetry, lighting, landscaping, driveway, and fencing—into 5-, 7-, or 15-year categories.
- Because bonus depreciation is 100% and permanent, everything in those shorter buckets is deductible in full on your 2025 return.
Quick real-world example (numbers we see all the time in our market)
Purchase price: $500,000
Land value (estimated 20% in our area, this can vary): $100,000
Depreciable basis: $400,000
After cost segregation:
→ Roughly $150,000–$180,000 reclassified to bonus-eligible assets
→ $150,000–$180,000 immediate deduction
At the top federal bracket (37%), that single deduction can put $55,000–$66,000+ back in your pocket the following April—on top of whatever cash flow the property generates.
Who Benefits the Most
- Long-term rental investors
- Short-term rental (Airbnb/VRBO) owners—especially powerful because of the “short-term rental loophole” that often lets you offset W-2 or business income
- Anyone qualifying as a real estate professional (no passive-loss limits)
- Investors doing renovations or furnishing packages in 2025 (or the applicable tax year)—those costs almost always qualify for 100% bonus too
Designated Real Estate Professional vs. Non Real Estate Professional
- For Non-Real Estate Professionals: The depreciation losses generated from a cost segregation study are considered passive losses. These losses can only be used to offset other passive income (such as income from other rental properties or gains from the sale of a property). If you have no passive income, the losses are carried forward to future years until you do, or until the property is sold.
- For Designated Real Estate Professionals: If you meet the IRS criteria to be classified as a real estate professional, the losses can be treated as non-passive. This means you can use the losses to offset active income, such as W-2 wages or active business income.
Deprecation Recapture
If you choose to sell a property, or when you need to recapture bonus depreciation from a cost segregation study, this means a portion of the gain from the sale of your property will be subject to tax at ordinary income tax rates (up to 37%) rather than the lower long-term capital gains rates (maximum 20%). This “recapture” is the IRS’s mechanism for collecting taxes on the accelerated tax benefits you received during the years you owned the property.
A cost segregation study reclassifies certain building components from long-life real property (Section 1250 property) to shorter-life personal property (Section 1245 property). The bonus depreciation is applied to this Section 1245 property.
When you sell the property for a gain:
- Section 1245 property depreciation (the bulk of your bonus depreciation) is fully recaptured and taxed at your personal ordinary income tax rate, up to the amount of gain.
- Section 1250 property depreciation (the building structure, which uses straight-line depreciation) is subject to a different recapture rule, known as “unrecaptured Section 1250 gain,” which is taxed at a maximum preferential rate of 25%.
The total gain on the sale is calculated by subtracting your adjusted basis (original cost minus total depreciation claimed) from the sale price. The portion of that gain attributable to claimed depreciation is the recapture amount.
Key Implications
- Higher Tax Rate: The primary consequence is paying a potentially much higher tax rate on the recaptured portion of your gain than you would on a standard long-term capital gain.
- Timing: Recapture occurs in the year the asset is sold or disposed of.
- Still Beneficial: Even with recapture, the strategy is often considered beneficial due to the “time value of money” – you received significant tax savings (which you could invest) in the early years of ownership. The savings often outweigh the later tax cost, especially if you hold the asset for several years.
Timing Tip for 2025
Close anytime this year, get the property listed and available for rent before December 31, and the full deduction hits your 2025 return. We’ve helped dozens of clients pull this off in the fourth quarter—it’s very doable.
Final Thoughts
Depreciation done aggressively is one of the last great wealth-building tools left in real estate. With bonus depreciation now permanent and rates having eased off their peaks, 2025 is shaping up to be an ideal window for investors who want to put more money to work—and keep more of what they make.
There’s always opportunity in real estate, especially when you understand the tax side. Want to run numbers on a specific deal or get introduced to the cost-seg and CPA pros we trust most? We’re here to help you make connections and to find the right property for you to invest in. Reach out anytime
Collin O’Berry
Managing Broker
Altamont Property Group
altamontpropertygroup@gmail.com
828-782-5582
