Real estate has always offered paper losses. But until a few things line up at once, those losses sit trapped in the passive bucket under IRC §469, doing nothing for your tax bill. The One Big Beautiful Bill Act changed the math in a big way. Permanent 100% bonus depreciation is now on the table for any qualifying property acquired and placed in service after January 19, 2025. Pair that with Real Estate Professional Status (REPS) and a cost segregation study, and you have a combination that can produce a six-figure ordinary-income deduction in the year you buy.
TL;DR: The One Big Beautiful Bill Act permanently restored 100% first-year bonus depreciation under IRC §168(k) for qualified property placed in service after January 19, 2025. When you qualify as a real estate professional under IRC §469(c)(7) and layer in a cost segregation study, those accelerated losses escape the passive bucket and offset your W-2 or business income dollar for dollar in year one.
Written by the REPS Time team, real estate investors who track Real Estate Professional Status and short-term rental material-participation hours, grounded in IRC §469(c)(7) and current Treasury guidance.
How REPS and Bonus Depreciation Work Together
These are two separate tools. Understanding each one on its own first is the fastest path to understanding why they're so effective together.
Real Estate Professional Status is an exception carved out in IRC §469(c)(7). It says that if you spend more than 750 hours per year in real property trades or businesses in which you materially participate, AND more than half of all your personal services during the year are in those real property trades or businesses, your rental losses are reclassified as non-passive. That one shift means they can offset W-2 income, business income, or anything else that would otherwise face full ordinary-income tax rates. Without REPS, rental losses from long-term rentals are passive and can only absorb other passive income.
Bonus depreciation under IRC §168(k) lets you deduct the cost of qualifying personal property in year one rather than spreading it over 5, 7, or 15 years. The One Big Beautiful Bill Act, signed in July 2025, made that 100% deduction permanent for property acquired and placed in service after January 19, 2025. It applies to MACRS property with a recovery period of 20 years or less.
Here is where it clicks: a typical residential rental purchase is mostly a 27.5-year asset, which does not qualify for bonus depreciation. But a cost segregation study reclassifies a meaningful portion of that same building into 5-, 7-, and 15-year components: appliances, flooring, cabinetry, site improvements, landscaping, parking surfaces. Those reclassified components do qualify. Pull them into year one at 100%, and you can generate a large paper loss on a property that may actually be producing positive cash flow.
Without REPS, that paper loss sits in the passive bucket. With REPS, it flows directly to the front page of your Form 1040.
The REPS Qualification: What You Actually Need
This is worth being precise about, because the two-part test is frequently misunderstood.
To qualify under IRC §469(c)(7), ONE spouse must independently meet both of these:
- More than 750 hours in real property trades or businesses in which that taxpayer materially participates.
- More than half of all personal services during the year must be in real property trades or businesses.
Both tests must be met by the same person. Spouses cannot combine their hours to hit the 750-hour threshold, though they can combine hours to meet material participation on a specific property under IRC §469(h)(5).
The 750 hours must be in activities in which you materially participate. Material participation is defined separately under Treas. Reg. §1.469-5T, and the most common tests for long-term rental owners with REPS status are the 500-hour test (Test 1) or the test that you participate more than anyone else in the activity (Test 5). If you have grouped all your rentals into one activity under the election available through IRC §469(c)(7)(A), your total hours across all properties count together toward material participation. You can read more about the passive activity loss rules and how the grouping election works.
One important clarification: investor-type activities do not count. Reviewing financial statements, reading market reports, and arranging financing are excluded under Treas. Reg. §1.469-5T(f)(2)(ii). Hours that count include direct management, maintenance, leasing, showing units, coordinating repairs, and similar hands-on work.
A Fully Worked Example: The Year-One Impact
Say you are a physician with $350,000 in W-2 income. You purchase a $1,200,000 long-term rental in March 2025 and have a cost segregation study performed.
The study identifies $240,000 of the depreciable basis (about 20% in this example) as 5- and 7-year personal property, and another $90,000 as 15-year land improvements. The remaining depreciable basis stays on the 27.5-year residential schedule.
Because all of this property was acquired and placed in service after January 19, 2025, the 5-, 7-, and 15-year components qualify for 100% bonus depreciation under the One Big Beautiful Bill Act's permanent restoration of IRC §168(k).
Year-one bonus depreciation: $240,000 + $90,000 = $330,000.
You also take standard 27.5-year depreciation on the remaining basis. Say that adds roughly $18,000. Total paper loss for the year, after netting against rental income: approximately $290,000 (assuming modest rental income of $58,000).
Now, the fork in the road:
| Scenario | Treatment of the $290,000 loss | Tax savings (37% rate) |
|---|---|---|
| No REPS | Passive. Suspended. Carries forward. | $0 this year |
| REPS qualified | Non-passive. Deducts against W-2. | $107,300 |
That is not a rounding error. That is over $100,000 in actual tax reduction in a single year, on a property that is generating real rental income and building equity at the same time. Worth noting: these numbers will vary based on your specific cost segregation results, tax situation, and deductible expenses, but the structure of the math is accurate.
If you are thinking about front-loading capital expenditures in a high-income year to maximize this effect, this walkthrough of front-loading capex strategy is worth reading before you finalize the timing of your purchase.
Cost Segregation: The Engine Under the Hood
Bonus depreciation is only as powerful as the amount of your basis it can touch. That is why cost segregation is not optional if you want to maximize the combination. Without it, you are mostly looking at a 27.5-year straight-line schedule with a small amount of personal property treated separately. With it, you can often shift 25 to 35 percent of a property's depreciable basis into qualifying short-life categories.
The study itself is performed by an engineer who physically or virtually inspects the property and identifies assets by their function and useful life. The result is a detailed report that supports the reclassified categories on your tax return.
If you already own properties and did not do a cost segregation study in prior years, you may have options to catch up. Catch-up cost segregation and how it intersects with spousal REPS strategies walks through how that works, including the mechanics of a §481(a) adjustment.
The Hours Requirement Is Not a Formality
Getting REPS right on the numbers is one thing. Proving it is another. The IRS scrutinizes REPS claims, and courts have consistently rejected logs that were reconstructed after the fact or that lacked the specificity needed to verify each entry.
The documentation standard that survives review is a contemporaneous log: one maintained during the year, with each entry showing the date, the property or activity, the specific task performed, and a start and end time. Almquist v. Commissioner established that after-the-fact "ballpark guesstimates" are rejected outright and can trigger a 20% accuracy penalty. Penley v. Commissioner showed that rounded hours with no times noted were insufficient. Moss v. Commissioner confirmed that "on-call" time does not count.
If you are managing multiple properties, the grouping election under IRC §469(c)(7)(A) is almost always the right move. It lets you treat all your rental activities as a single activity for material participation purposes, so your hours across every property count together. Miss the election, and you may need to demonstrate material participation on each property individually.
A tool like REPS Time keeps a contemporaneous, audit-ready log of your hours across all properties throughout the year, whether you are building toward the 750-hour threshold or tracking material participation. You can also read about how to get started tracking your REPS hours the right way if you are new to the process.
What If You Do Not Qualify for REPS?
REPS is not the only path to making rental losses non-passive. Short-term rental owners, meaning those whose average guest stay is 7 days or less under Treas. Reg. §1.469-1T(e)(3)(ii)(A), operate outside the rental activity rules entirely. They need only material participation, which typically means 500+ hours (Test 1) or 100+ hours and more than any other person in the activity (Test 3). That path does not require 750 hours or the more-than-half personal-services test.
Both paths can benefit from 100% bonus depreciation paired with cost segregation. The key difference is which hour tests apply and how the losses are characterized. For a side-by-side comparison of the two paths, REPS vs. the STR loophole lays it out clearly.
Key Takeaways
- The One Big Beautiful Bill Act permanently restored 100% bonus depreciation under IRC §168(k) for property acquired and placed in service after January 19, 2025. No phase-out. No sunset.
- REPS under IRC §469(c)(7) reclassifies rental losses as non-passive, letting them offset W-2 and ordinary income.
- A cost segregation study unlocks the 5-, 7-, and 15-year components that qualify for 100% bonus depreciation, turning a large portion of a purchase into a year-one deduction.
- The combination can produce six-figure ordinary-income deductions in the year of purchase for a qualifying taxpayer.
- Contemporaneous hour logs are not optional. They are your proof.
FAQ
Does the One Big Beautiful Bill permanently eliminate the bonus depreciation phase-out? Yes. For property acquired and placed in service after January 19, 2025, 100% bonus depreciation is now permanent under the restored IRC §168(k). The old TCJA phase-down schedule (60%, 40%, 20%, 0%) was repealed for current purchases. If you acquired property between January 1 and January 19, 2025, a 40% rate applies to that window.
Can I use bonus depreciation losses against my salary if I qualify for REPS? Yes. Once you qualify under IRC §469(c)(7), your rental losses from materially participated activities are non-passive. Non-passive losses offset any type of ordinary income, including W-2 wages. The combination with 100% bonus depreciation is what makes the year-one deduction so large.
Do I need a cost segregation study every time I buy a property? Not legally required, but practically speaking, you are leaving money on the table without one. Bonus depreciation applies only to the 5-, 7-, and 15-year components. A cost segregation study is the method that identifies and documents those components. On a property worth $800,000 or more, the tax savings almost always exceed the cost of the study.
What happens if only one spouse qualifies for REPS but both own the properties? Only one spouse needs to qualify under IRC §469(c)(7), and that qualification applies to the couple's jointly owned rental activities. The qualifying spouse must independently meet both the 750-hour and more-than-half-of-services tests. The non-qualifying spouse's hours can still count toward material participation on specific properties under IRC §469(h)(5), but cannot contribute to meeting the REPS threshold itself.
What records does the IRS expect to see if it questions my REPS claim? A contemporaneous log documenting each date, the specific property or activity worked on, the task performed, and a start and end time. Tax Court cases including Almquist v. Commissioner and Penley v. Commissioner have rejected reconstructed or vague logs. Keep your log current throughout the year, not assembled at tax time.
The Bottom Line
The One Big Beautiful Bill Act made 100% bonus depreciation permanent. REPS has always been the key that unlocks those losses against ordinary income. A cost segregation study is what makes the numbers large enough to matter. All three together, with the hours documented properly, is one of the most effective tax strategies available to a high-income investor who is willing to put in the real property work to qualify.
The move is not complicated. Buy a qualifying property, commission a cost segregation study, log your hours carefully throughout the year, and work with a CPA who understands all three pieces. The math does the rest.
Sources
- IRC §469(c)(7), Real Estate Professional Exception
- IRC §168(k), Bonus Depreciation
- Treas. Reg. §1.469-5T, Material Participation Tests
- Treas. Reg. §1.469-1T(e)(3), Rental Activity Definition
- IRS Publication 925, Passive Activity and At-Risk Rules
- IRS Publication 527, Residential Rental Property
- Rev. Proc. 2011-34 (late grouping election relief)
- Almquist v. Commissioner, T.C. Memo. 2014-215
- Penley v. Commissioner, T.C. Memo. 2008-260
- Moss v. Commissioner, T.C. Memo. 2011-130
This article is for educational purposes only and is not tax or legal advice. Consult a qualified CPA familiar with real estate. Agents Invest LLC is not a CPA firm, law firm, or registered tax preparer.
