Written by Randall Weaver, CPA
If you’re a real estate developer, the return of 100% bonus depreciation is a big deal, but the January 19, 2025 effective date can create real friction for projects already underway. The good news is that a binding contract signed before that date does not automatically mean you’re stuck with reduced bonus depreciation for everything that gets built later.
This article explains what changed, why it matters for phased and multi-building developments, and how the component depreciation election (paired with strong documentation and cost segregation) can help preserve accelerated depreciation where available.
Quick answer
Developers with binding contracts executed before January 19, 2025 may still qualify for 100% bonus depreciation on portions of a project completed after that date by using a component depreciation election to establish separate placed-in-service dates supported by clear construction milestones, invoices, and cost segregation documentation.
The One Big Beautiful Bill Act (OBBBA) reintroduced 100% bonus depreciation, effective January 19, 2025. For real estate developers whose projects span that effective date, the practical issue isn’t just what was placed in service; it’s which costs are tied to which “component” and when those components are treated as placed in service.
In simplified terms, developers are now operating in a bifurcated (split) framework:
Read about other ways the 2025 tax reform impacts real estate developers
Real estate development doesn’t behave like a clean, single-date event. Projects often include:
If you treat the entire project as one asset placed in service at the end, you may inadvertently push otherwise eligible costs into a less favorable bonus depreciation bucket.
The component depreciation election is a planning mechanism that allows you to treat distinct pieces of a broader project as separate depreciable components, each with its own placed-in-service date.
Instead of waiting until the entire project is complete, a developer may be able to begin depreciation for:
When a statutory effective date cuts through the middle of construction (like January 19, 2025), the component election can help align the tax outcome with what actually happened operationally, i.e., what was ready for use, when, and what costs attach to that readiness.
Important: The election is only as strong as the records supporting it. If your files can’t substantiate the component’s placed-in-service date and the related costs, you’re carrying audit risk.
A component approach is most relevant when your project includes at least one of these five realities:
Put differently: two projects with identical economics can generate very different tax results depending on contract timing, construction sequencing, and whether components were identified (and documented) early enough.
Let’s translate the planning concept into numbers.
A real estate developer undertakes a project to construct two apartment buildings as part of a single multifamily development.
A binding construction contract was executed before January 19, 2025
Construction is phased
Buildings are placed in service as follows:
Building 1
Building 2
Without a component election, the project risks being treated as a single asset where the relevant bonus regime is driven by the pre-Jan. 19 binding contract and “end-of-project” placed-in-service logic.
Result (as illustrated in the example): The developer is effectively limited to $400,000 of bonus depreciation (40% of $1,000,000 eligible cost).
With a component approach, the developer aligns depreciation with what was actually completed and when.
Building 1 (pre–Jan. 19 placed in service)
Building 2 (straddles the effective date)
Total bonus depreciation with component election:
$100,000 + $750,000 = $850,000
Compared to no election: $400,000
| Approach | Bonus-eligible basis | Bonus rate(s) applied | Total bonus depreciation |
|---|---|---|---|
| No component election | $1,000,000 | 40% | $400,000 |
| Component election | $1,000,000 | 40% on $250k; 100% on $750k | $850,000 |
The theme for 2025-era depreciation planning is: the date matters, but the documentation matters more.
To support a component approach, developers should proactively compile:
If you’re anticipating investor scrutiny (or an IRS audit), this is the difference between “defensible” and “hopeful.”
A pre-Jan. 19 binding contract does not automatically eliminate 100% bonus depreciation.
Straddle projects require a more granular approach to placed-in-service analysis and cost identification.
For phased or multi-building developments, the component election is no longer “nice to have.”
Failing to separate components can materially reduce deductions in 2025 and distort investor allocations.
Cost segregation still matters because it defines the bonus-eligible pool.
The component election and cost segregation work together: cost segregation identifies 5-, 7-, and 15-year property, and the component approach supports the timing and placement of those components.
Developers who understand and apply the component depreciation election can preserve meaningful tax benefits, even when a binding contract predates January 19, 2025. Developers who ignore component planning may find that two projects with the same economics generate dramatically different tax outcomes.
If you’re planning to take an aggressive depreciation position, treat documentation as part of the strategy, not an afterthought.
Not necessarily. While the contract date is a critical fact, developers may still be able to capture 100% bonus depreciation on qualifying portions of a project completed after January 19, 2025, if a component approach and placed-in-service support apply.
It’s a method of treating distinct parts of a larger project as separate depreciable components, each with its own placed-in-service date, rather than waiting for the entire project to be complete.
Cost segregation identifies bonus-eligible property (often 5-, 7-, and 15-year components). The component approach can help support when those assets are treated as placed in service for bonus depreciation timing.
Practical support includes certificates of occupancy, leasing/occupancy evidence, milestone certifications, invoices tied to components, draw schedules, fixed asset documentation, and cost segregation workpapers.
No. It can also apply where a single structure is delivered in phases (e.g., separate wings, floors, or amenity areas) with credible operational readiness and support.
Trout CPA helps real estate investors and developers evaluate post-OBBB depreciation planning, including component elections, cost segregation studies, and investor-level modeling. If you have projects that cross January 19, 2025, now is the time to review your depreciation strategy before your 2025 tax return is filed.
Talk with a real estate tax advisor about your project timeline, documentation, and cost segregation opportunities.
Randall Weaver, CPA
Randall joined Trout CPA in 2011. He graduated from Millersville University with a Bachelor of Science degree in Business Administration (magna cum laude) in 2006. Randall has over 19 years of accounting experience. He currently serves on the firm's Construction and Real Estate, Manufacturing and Estate & Trust Practice Groups. As a Partner, Randall manages all aspects of tax planning and preparation and business consulting for some of the firm's significant clients. Randall enjoys activities with his family, being involved with his church, and rooting for Philadelphia sports teams. He lives in Lancaster County with his wife and two children.