The Big Beautiful Bill, Bonus Depreciation, and DSTs

I keep seeing bonus depreciation discussed as if it were a stock tip — something to grab before it disappears. That framing is now out of date. First-order thinking says a big first-year deduction is good. Second-order thinking asks what a permanent deduction changes about how you sequence a sale, an exchange, and the passive real estate that comes after.

This is a guide to what the One Big Beautiful Bill Act actually did to depreciation, and where it does — and does not — change the math for DST investors.

Key Takeaways

• The One Big Beautiful Bill Act (enacted July 2025) restored 100% bonus depreciation and made it permanent, ending the phase-down that had dropped the rate year by year.
• The full 100% rate applies to qualifying property acquired and placed in service after January 19, 2025; property acquired earlier falls under the old phase-down.
• Bonus depreciation applies to property with a MACRS class life of 20 years or less — which is why cost segregation matters: it identifies the 5-, 7-, and 15-year components inside a building.
• DSTs pass depreciation through to fractional owners, and a cost-segregation study — the sponsor's or your own — determines how much arrives in year one.
• In a 1031 exchange, carryover basis limits the benefit; the largest first-year deductions generally attach to new basis. This is CPA territory before it is a selling point.

What the law changed

Bonus depreciation lets a taxpayer deduct the full cost of qualifying property in the year it goes into service instead of spreading it over the asset's recovery period. The 2017 tax law set the rate at 100% temporarily, then began stepping it down — 80%, 60%, 40% — on a schedule that had investors racing placements against a calendar.

The One Big Beautiful Bill Act ended the race. For qualifying property acquired and placed in service after January 19, 2025, the default rate is 100% again, permanently. Property acquired before that date but placed in service later remains on the old phase-down, so the acquisition date — not just the in-service date — decides which regime applies.

Permanence matters more than the percentage. Under a sunsetting benefit, deals got structured around deadlines. Under a permanent one, depreciation goes back to being what it should be: one input in the underwriting, not the reason for the deal.

Why buildings need cost segregation to benefit

Bonus depreciation does not apply to a building as a whole. Residential rental property depreciates over 27.5 years and commercial property over 39 — both far past the 20-year class-life ceiling that bonus depreciation requires.

What does qualify are the shorter-life components inside and around the building: personal property such as appliances, carpeting, and specialty equipment (typically 5- or 7-year property) and land improvements such as parking, landscaping, and site utilities (typically 15-year property). A cost-segregation study is the engineering analysis that carves those components out of the purchase price. Depending on the property type, a study commonly reclassifies a meaningful slice of the basis into categories that can now be deducted 100% in year one.

What this means inside a DST

A DST is a pass-through for tax purposes: each investor reports their fractional share of the trust's income and deductions, including depreciation. Three practical points follow.

First, the sponsor's cost-segregation decision flows to you. Some sponsors commission a study and bake accelerated depreciation into the offering's projected tax treatment; many do not. The PPM and the sponsor's tax discussion are where to look.

Second, you can commission your own study. A cost-segregation study can be performed on a fractional DST interest and applied to your share. Whether it pencils depends on the size of your investment — the study has a cost, and at smaller fractional amounts the benefit may not justify it. It also front-loads deductions you would otherwise take over decades, which means heavier recapture exposure when the program goes full cycle.

Third, your basis controls the ceiling. How much depreciation you can take depends on the basis you carry into the investment, which is where the 1031 rules enter.

The 1031 interaction: carryover basis is the governor

A successful exchange defers your gain by carrying your old, low basis into the replacement property. That is the feature — and it is also why exchangers should keep their expectations about bonus depreciation modest. Broadly, the basis you carry over keeps depreciating on its old schedule; the fresh deductions attach mainly to new basis — the amount by which you trade up with additional cash or debt, and the qualifying short-life components your study finds within it.

An investor buying a DST interest with cash (no exchange) starts with full cost basis, so a cost-segregation study has the most to work with. An exchanger who traded up substantially sits in the middle. An exchanger who carried nearly all old basis should expect the smallest first-year effect. The interaction of exchanged basis, excess basis, and the used-property acquisition rules is genuinely intricate — model it with your CPA before you count on a number.

The "lazy 1031," honestly assessed

Permanence revived interest in an alternative some call the lazy 1031: skip the exchange, recognize the gain, and invest in passive real estate whose first-year bonus depreciation offsets much of the taxable income in the same year. No 45-day clock, no qualified intermediary, no debt-matching.

It can work — and it is easy to oversell. The offsets depend on the character of your income and the passive-activity rules; a large first-year deduction is a timing benefit that builds recapture into the eventual exit; and giving up the exchange means giving up the option to keep deferring, including the estate outcome when deferred gain meets a basis step-up. For some sellers the simplicity is worth it. For others the traditional exchange still wins by a wide margin. The point of the comparison is to run it, with your figures, before the sale closes — not after.

Frequently Asked Questions

Does 100% bonus depreciation expire now?

No. The One Big Beautiful Bill Act made the 100% rate permanent for qualifying property acquired and placed in service after January 19, 2025. Congress can always change the law again, but there is no scheduled phase-down.

Does my DST automatically come with big first-year deductions?

No. It depends on whether a cost-segregation study has been applied, what the study found, and your own basis in the interest. Review the offering's tax section and ask.

Can bonus depreciation eliminate the tax on my property sale without a 1031?

Sometimes it can offset a meaningful part of it, but the outcome depends on your income character, the passive-activity rules, and how much qualifying short-life property the replacement investment contains. It is a strategy to model precisely, not a rule of thumb.

Does depreciation I take now come back later?

Generally yes — accelerated deductions reduce basis, and the reduction is exposed to recapture when the investment sells. Bonus depreciation changes the timing of tax, powerfully, but timing is what it changes.

Glossary

• Bonus depreciation: First-year expensing of qualifying property instead of multi-year depreciation; now 100% by default and permanent.
• Cost segregation: An engineering-based study that reclassifies building components into 5-, 7-, and 15-year MACRS categories eligible for bonus depreciation.
• Carryover (exchanged) basis: The basis that transfers from your relinquished property into the replacement in a 1031 exchange.
• Excess basis: New basis added when you acquire replacement property worth more than what carried over — the primary fuel for fresh depreciation.
• Recapture: Tax on prior depreciation deductions when the property is sold, generally at rates up to 25% for real property depreciation.
• Lazy 1031: Shorthand for recognizing a gain and offsetting it with first-year depreciation from a new passive investment instead of exchanging.

Source Attribution

Filed under: Delaware Statutory Trusts. Written by Baker 1031 Research.

Disclosures

This memo is published by Baker 1031 for general informational and educational purposes only. It is not investment, legal, or tax advice, and is not an offer to sell or a solicitation to buy any security. Depreciation outcomes depend entirely on facts specific to each taxpayer and each offering; model your situation with your CPA before acting, and review the PPM of any investment you consider. References to the One Big Beautiful Bill Act and related rules reflect general understanding as of September 2026 and are subject to change and to interpretation by Treasury and the IRS. Securities offered through Aurora Securities, Inc. (ASI), CRD #46147, SEC #8-51322, member FINRA/SIPC. Gerald F. "Jerry" Baker, III is a registered representative of ASI (FINRA CRD #7537416). Baker 1031 Investments, LLC is independent of ASI.