Year-End Real Estate Tax Planning: Cost Segregation, Bonus Depreciation, and 1245X^®

Year-end real estate tax planning connects bonus depreciation, cost segregation, improvements, and sale decisions before filing season begins. A coordinated review helps owners and advisors evaluate deductions, preserve records, and prepare for future tax consequences.

The One Big Beautiful Bill Act changed several depreciation rules. However, the available benefit still depends on property use, acquisition dates, placed-in-service dates, and the taxpayer’s circumstances.

Therefore, year-end planning should begin with the facts. Review what the client purchased, completed, replaced, or sold during the year.

Start Year-End Real Estate Tax Planning With Property Records

A useful review brings together property activity and the client’s wider tax position.

Begin with:

• Purchase agreements and closing documents.
• Current depreciation schedules.
• Construction and improvement records.
• Dates when assets became ready and available for use.
• Details of components removed during renovations.
• Records of completed or planned sales.

For example, a closing date does not necessarily establish a property’s placed-in-service date. Supporting records should explain when the asset became ready and available for its intended use.

In addition, discuss expected taxable income and deduction limits. A large projected deduction may provide little immediate benefit if the taxpayer cannot currently use it.

Review Bonus Depreciation Eligibility

Bonus depreciation can allow an additional first-year deduction for qualifying assets.

Certain qualified property acquired and placed in service after January 19, 2025, may qualify for a 100% allowance. However, eligibility involves more than checking a single date.

Your advisor should review acquisition requirements, binding contracts, asset characteristics, and applicable elections.

For current rules, consult IRS Publication 946: How To Depreciate Property.

Separate Asset Eligibility From Deduction Availability

An eligible asset does not guarantee an immediately usable deduction.

Basis, at-risk, passive activity, and other rules may limit the taxpayer’s benefit. State treatment may also differ from federal treatment.

Consequently, model the federal and state results separately. Then, compare available elections with the client’s income and long-term plans.

Review Qualified Improvement Property

Certain taxpayer-made interior improvements to nonresidential buildings may qualify as Qualified Improvement Property, or QIP.

Generally, the improvements must occur after the building first entered service. Exclusions include building enlargements, elevators, escalators, and the internal structural framework.

Therefore, do not assume every renovation qualifies as QIP. Review the actual work, dates, costs, and applicable depreciation requirements.

Include Cost Segregation in Year-End Real Estate Tax Planning

An engineering-based property study identifies eligible components that may follow shorter recovery periods than the building.

Depending on the assets, classifications may include 5-, 7-, or 15-year property. Eligible components may also qualify for bonus depreciation.

However, classification requires property-specific analysis. HVAC, lighting, signage, and other components do not automatically receive the same recovery period.

Review New and Previously Acquired Properties

Cost segregation can support reviews of acquisitions, completed construction, and qualifying improvement costs.

Previously acquired properties may also warrant analysis. In some circumstances, an accounting method change and a Section 481(a) adjustment can address differences in prior depreciation.

However, the filing approach depends on the taxpayer’s previous treatment and applicable procedures.

As a result, the study team and CPA should coordinate before changing depreciation records. A study does not always need completion by December 31, although underlying property activity may have year-specific consequences.

Evaluate Qualified Production Property Separately

Year-end real estate tax planning should include a separate review of Qualified Production Property, or QPP, for potentially eligible manufacturing clients. QPP concerns qualifying nonresidential real property used in production activities.

It is distinct from shorter-life machinery and equipment. Therefore, an industrial address or manufacturing tenant does not automatically establish eligibility.

Section 168(n) includes specific requirements involving construction timing, placed-in-service dates, production use, and an election.

For the general construction window, work must begin after January 19, 2025, and before January 1, 2029. The property must enter service after July 4, 2025, and before January 1, 2031.

Additional requirements and special rules apply. Review IRS Notice 2026-16 when evaluating an opportunity.

Connect the Deduction With Future Operations

QPP planning should address eligible areas, excluded functions, ownership arrangements, and documentation.

In addition, certain changes in use can trigger recapture during the applicable monitoring period.

For a more detailed discussion, read our QPP guide for CPAs.

Address Replaced Components Before Filing

Renovations are another part of year-end real estate tax planning. Review both the treatment of new expenditures and the remaining adjusted basis of components removed during the work.

Some work may qualify as a current repair expense. Other costs require capitalization and depreciation.

Separately, a qualifying partial asset disposition may allow recognition of a loss on a retired component’s remaining adjusted basis.

However, eligibility, supporting records, and election timing matter. Therefore, identify removed components while project details remain available.

Our guide to classifying repairs and improvements explains these separate reviews.

Add Sale Reviews to Year-End Real Estate Tax Planning

A property sale brings earlier depreciation decisions into focus.

The assets sold, their adjusted basis, and supported sale allocations affect the tax analysis. Section 1245 and Section 1250 property follow different rules.

Consequently, avoid applying a single recapture rate to every asset or assuming all prior depreciation becomes ordinary income.

For background, review IRS Publication 544: Sales and Other Dispositions of Assets.

How 1245X^® Supports the Review

CSA Partners’ 1245X^® disposition analysis evaluates asset values at the time of sale.

The analysis can support your advisor’s review of the assets included in the transaction and the allocation of sale proceeds.

However, it does not guarantee lower taxes or automatically change an asset’s tax classification. The transaction’s facts and applicable rules determine the result.

Therefore, discuss sale planning before closing whenever practical. Preserve prior studies, depreciation schedules, improvement records, and transaction documents.

A Year-End Real Estate Tax Planning Checklist

Use these steps to organize client discussions:

1. Reconcile acquisitions, improvements, retirements, and sales.
2. Confirm relevant acquisition and placed-in-service dates.
3. Evaluate bonus depreciation eligibility and elections.
4. Identify properties that warrant a cost segregation review.
5. Assess QIP or QPP requirements where relevant.
6. Review removed components and potential partial dispositions.
7. Model deduction limits and state differences.
8. Evaluate sale allocations and potential recapture.
9. Assign responsibility for records, studies, and filing requirements.

In addition, distinguish actions needed before year-end from work due with the tax return. Not every study, election, or reporting step follows the same deadline.

Connect Year-End Decisions With Long-Term Goals

Year-end real estate tax planning works best as part of an ongoing property strategy.

At acquisition, establish accurate basis and preserve records. During ownership, review improvements and retired components. Before a sale, assess asset values and potential tax consequences.

Bonus depreciation can provide a valuable timing benefit when the requirements are met. However, the largest immediate deduction is not always the best overall outcome.

By connecting current deductions with future plans, owners and advisors can make better-informed decisions throughout the property lifecycle.