100% bonus depreciation is back. For most of the limited partners in your fund, that changes nothing this year.
That sounds wrong. It should feel wrong. After years of phased-down rates, 80%, then 60%, then 40%, the full first-year deduction on qualifying personal property and land improvements is restored. A cost segregation study on a property placed in service this year can now generate a 100% write-off on all eligible components identified in the study. The year-one math on a new acquisition has genuinely shifted. That is real money.
On a multifamily deal with $10 million in depreciable basis, a cost segregation study might identify $2 to $3 million in components eligible for accelerated treatment: personal property like appliances and fixtures, land improvements like parking lots and landscaping. Under prior law, a 60% bonus rate meant a first-year deduction somewhere around $1.4 to $1.8 million. At 100%, you're now looking at the full $2 to $3 million in year one. The difference matters. It changes cash-on-cash projections, tax efficiency modeling, and the value proposition you're presenting to investors.
But the rate returning is not the same thing as the deduction being useful.
The mistake most GPs make is treating bonus depreciation as a deal-level story. They run the cost segregation study, model the accelerated deduction, and stop there. The deduction exists. The math checks out.
What they're not modeling is whether any of their LPs can actually use it.
Bonus depreciation in a real estate partnership generates large passive losses in year one. Whether those losses actually reduce a partner's tax bill this year comes down to three things: their passive income position, their professional status under the tax code, and their outside basis in the partnership at the time of the allocation.
None of those things live in the deal model. They live on each investor's individual return.
The Passive Income Problem
Passive losses from a real estate partnership can only offset passive income. That's the rule under Section 469 of the Internal Revenue Code. If a limited partner doesn't have other passive income flowing in from investments, rental activities, or other partnerships, the loss doesn't disappear. It suspends. It sits on their books and carries forward to future years when they either generate passive income or sell the investment.
Translation: a $200,000 allocated loss to a partner with no passive income offsets exactly zero dollars of tax this year. The deduction is real. The current-year benefit is not.
This is true regardless of the bonus depreciation rate. It was true at 60%. It's true at 100%. The rate is not the variable that determines whether the deduction actually works for a given investor. The investor's own income picture is.
Most limited partners in a real estate fund are passive investors by definition. They're doctors, executives, business owners with income tied to their profession or company. Passive real estate losses don't offset any of that unless they have passive income somewhere else in their portfolio. Many don't.
The Real Estate Professional Exception
There is one significant way out of the passive loss limitation. Section 469(c)(7) provides that a taxpayer who qualifies as a real estate professional can treat rental real estate losses as non-passive. Those losses can then offset wages, business income, or any other ordinary income, not just passive income.
To qualify, a taxpayer has to meet two tests. They have to spend more than 750 hours per year in real property trades or businesses in which they materially participate, and that time has to constitute more than half of their total working hours for the year.
For most wage-earning limited partners, that threshold isn't realistic. A physician or an attorney with a full-time professional practice can't credibly hit both prongs. For a full-time syndicator, a developer, or an operator who is actively managing multiple properties, qualifying is entirely possible. Some LPs in your fund may qualify in some years and not others, depending on how their time is allocated.
The distinction matters enormously. An LP who qualifies as a real estate professional in the year your deal places in service can potentially run a $500,000 allocated bonus depreciation loss directly against ordinary income. An LP who doesn't qualify carries that same loss forward indefinitely.
You can't know which category your LPs fall into without asking them. That conversation belongs before the deal closes, not after the K-1s go out.
The Outside Basis Constraint
The third filter is outside basis. A partner can only deduct losses up to the amount of their outside basis in the partnership. Outside basis is roughly the amount a partner has at risk in the investment: their capital contribution, plus their allocable share of partnership liabilities, adjusted upward and downward for prior allocations.
If a partner's outside basis is less than their allocated loss for the year, the excess suspends at the partner level. It doesn't disappear. It waits until the partner has enough basis to absorb it, either through additional contributions, future income allocations, or sale of the interest.
For most LP-heavy deals with standard capital structures, this is less of a binding constraint in year one than the passive income problem. But it becomes relevant in deals where prior losses have already eroded basis, in structures with thin LP equity, or in funds where complex multi-year allocations have been at work. Knowing where each LP's basis stands before you make the allocation is part of doing the analysis correctly.
What the GP Actually Needs to Do
The investor-level picture on bonus depreciation has to be assembled before the deal closes, not after. Once the property is placed in service and the allocation is made, the year is locked. You can't retroactively redirect a deduction to the partners who can use it once you've learned the others can't.
What a GP actually needs before closing is a clear picture of which LPs have passive income to absorb losses, which LPs qualify as real estate professionals, and whether any LP's outside basis creates a constraint. That analysis requires getting information from the investors and, in most cases, coordinating with their individual advisors. It doesn't have to be elaborate. But it has to happen before the deal closes.
The alternative is allocating a meaningful deduction to partners who get no current-year benefit from it and learning about that in April, after the K-1 calls start coming in.
What the Rate Restoration Actually Means
The restoration of 100% bonus depreciation is worth modeling. The delta between 60% and 100% on a cost segregation study is real, and the year-one economic story on a new acquisition is genuinely stronger than it was under the phased-down regime.
But the rate coming back didn't change the limitation. It made the limitation more expensive to ignore.
A fully accelerated deduction allocated to the wrong partners still suspends. The carry-forward still has no current-year tax value. The investor calling to ask why they owe more than they expected is still your problem to explain.
The deduction only works when the right investor gets it in the right year under the right circumstances. The analysis that determines all three of those things has never been optional. With 100% bonus on the table, skipping it just costs more.