Tax laws are changing for Texas real estate investors, and your depreciation benefits hang in the balance.
If you’re still claiming bonus depreciation at 100%, brace yourself—it’s dropping to 20% in 2025, which means your write-offs are about to take a serious hit.
But here’s the thing: most investors don’t even realize these changes are coming until they’re sitting across from their CPA with a much bigger tax bill than expected.
Whether you own a single rental in Austin or a portfolio of commercial properties in Houston, these tax law updates will impact your cash flow and investment strategy in ways you can’t afford to ignore.
How Depreciation Works in Real Estate
Depreciation is a key tax advantage for real estate investors, allowing you to deduct a portion of your property’s value each year on your tax return. This reduces your taxable income without affecting your actual cash flow. Only income-producing properties qualify—your personal residence doesn’t count. And remember, you can’t depreciate land, only the building and improvements.
Depreciation Period
The IRS sets specific timelines: residential rental properties depreciate over 27.5 years, while commercial properties take 39 years. This determines your annual deduction amount. The IRS applies the “mid-month convention,” meaning depreciation starts mid-month when the property is placed in service. Major improvements like new roofs or HVAC systems are depreciated separately over their own lifespans (often 5, 7, or 15 years).
Depreciation Methods
- Straight-Line Depreciation – The most common method where you divide the property value evenly across its useful life.
- Modified Accelerated Cost Recovery System (MACRS) – This method front-loads your deductions so you get more tax benefits sooner and claim larger amounts in the early years.
- Bonus Depreciation – A temporary tax incentive that lets you deduct a large percentage of improvement costs immediately. When available, it’s basically instant gratification for your tax deductions.
- Section 179 Deduction – Allows you to expense certain property improvements immediately rather than depreciate them over the years.
2025 Tax Law Updates on Depreciation
The depreciation game changes dramatically for Texas real estate investors in 2025, with several key tax benefits shrinking or disappearing entirely. Whether you’re flipping houses in San Antonio or managing long-term rentals in Dallas, these changes will impact your bottom line—and possibly your investment strategy.
- Bonus depreciation plummets: The generous 100% write-off for qualified improvements drops to just 20% in 2025 and disappears completely by 2027. That $50,000 kitchen renovation that was fully deductible? You’ll only get a $10,000 deduction for the same work.
- Section 179 becomes more valuable: While bonus depreciation fades, Section 179 deductions remain crucial for immediate write-offs on improvements like HVAC systems, roofing, and security systems that would otherwise be stuck on a 39-year schedule.
- Cost segregation benefits shrink: Which cost segregation studies helped you accelerate depreciation? They’ll still work, but without 100% bonus depreciation backing them up, the tax benefits won’t be nearly as powerful.
- Residential and commercial timelines stay put: The standard 27.5-year period for residential properties and 39 years for commercial properties remain unchanged, but new proposals could extend these periods and further reduce your annual deductions.
What Should You Do?
Let’s cut to the chase—these tax changes are coming whether you like it or not, but you’re not powerless. The strategies below won’t completely eliminate the tax hit, but they’ll help you navigate the transition with less pain and more control over your investment outcomes. The key is acting now, not after these changes kick in.
1. Accelerate Improvements While You Still Can
Bonus depreciation sits at just 20% in 2025, down from 80% last year. Claim it while you can before it vanishes completely in 2027. Double-check your late 2024 purchases to ensure they’re properly classified under the higher rate. Adjust your cash flow expectations now—those big first-year write-offs are mostly gone.
2. Reassess Cost Segregation Studies
Cost segregation still works—it’s just less powerful than before. If you bought property recently but skipped the cost seg study, get one now before potential rule changes. Focus on correctly classifying short-lived components like cabinets and flooring—these smaller deductions matter more than ever.
3. Utilize Section 179 Deductions Where Possible
Section 179 now outshines bonus depreciation for immediate write-offs on improvements like roofing and security systems. Unlike bonus depreciation, it can’t create a loss, so time these deductions during high-income years. For mixed-use properties, only the commercial portion might qualify—consult a tax pro to navigate these distinctions.
4. Prepare for Higher Taxable Income
Your tax bill will likely jump this year if you’ve relied on bonus depreciation. Start building cash reserves now. Review past returns to see what they would’ve been with just 20% bonus depreciation. Consider restructuring debt or finding other deductions to offset the coming hit.
5. Explore Alternative Tax Strategies
Look into 1031 exchanges to defer gains and avoid depreciation recapture taxes. Consider Opportunity Zone investments as their tax benefits become comparatively more valuable. If retirement is approaching, this might be the time to sell and leverage stepped-up basis strategies before further tax changes.
Get Expert Guidance for the 2025 Tax Law Changes
These depreciation changes can feel overwhelming, especially when they directly impact your investment returns and tax planning. Many real estate investors are scrambling to understand how these new rules affect their specific situation and portfolio structure.
At Virjee Consulting, we help Texas real estate investors navigate these complex tax shifts with personalized strategies that protect your bottom line.
Our team of CPAs specializes in real estate taxation and can identify opportunities you might miss on your own.
Schedule a discovery call today, and let’s develop a plan that keeps more money in your pocket despite these challenging tax law changes.
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