A Look Back at Game-Changing Tax Legislation
Those of us who were in the commercial real estate business in the Reagan era remember landmark legislation that allowed 15-year straight-line depreciation with a 175% declining-bonus component. This game-changing modification to the tax code was passed to jump-start an economy mired in high unemployment, high inflation, and stratospheric interest rates.
Thankfully, it worked like a charm, and the economy, along with the commercial real estate business, began a sustained recovery.
Introducing the OBBBA: A New Opportunity for 2026
Well, we are pleased to bring to your attention another such game-changing update to the tax code that we believe will, once again, jump-start the owner/user and investor commercial property market, which has been hampered by flagging demand driven by economic uncertainty and higher interest rates. It’s called the OBBBA (The One Big Beautiful Bill Act), and we believe it will be the catalyst for a turnaround year in 2026. Surprisingly, it has not gotten the attention it deserves to date, but it soon will.
Understanding Bonus Depreciation & Cost Segregation
How the Tax Strategy Works
While there are several components of the law that benefit the commercial property sector, we focus here on bonus depreciation combined with cost segregation, which, even when fully understood, seems too good to be true. Simply put, the law allows a property owner to break out numerous physical components of real property that the IRS has designated as having a useful life of 5, 7, or 15 years and fully deduct them in year 1. The remaining depreciable basis is then depreciated on a straight-line basis over 39 years.
Case Study: 701 E. Ball Road Property Overview
Property Details
By way of demonstration, let’s take a closer look at our current offering at 701 E. Ball Road in Anaheim. This is a state-of-the-art 139,500-square-foot new facility on 7 prime acres, offered for sale at $65 million. Click here for the project brochure.
Step 1: Determining Depreciable Basis
The first step in the process is to determine the depreciable basis by subtracting land value from the purchase price. This determination is very subjective depending on location, zoning, and other factors. For purposes of our demonstration, we are using a land value of $22 million, but a more aggressive approach would call for an even lower value for the land, which would enhance the tax benefits dramatically. Our intent here is to present the concept, erring on the side of caution, and leave exact numbers to legal and financial experts for final determination.
Standard Depreciation vs. Bonus Depreciation
So, with a $65,000,000 price tag and $22,000,000 land value, that leaves us with a depreciable basis of $43 million. Using standard 39-year depreciation, that would yield a depreciation deduction of just $1,102,654 per year. But here’s where the new law kicks in.
Step 2: Cost Segregation Analysis Benefits
After running a detailed cost segregation analysis that breaks out the 5,7 and 15 year components within the structure, that total is depreciated in year 1. In the preliminary estimate provided to us by Engineered Tax Services, a nationally recognized specialist in cost segregation (click here to review) their preliminary report), we can bonus depreciate $8,857,265 in the first year and then take annual straight-line depreciation of $882,051 for the following 38 years. Based on the current maximum federal income tax bracket of 37%, this massive increase in 1st year write-off would save the buyer $3,277,188 in federal income tax in the year of purchase! That represents a substantial recovery of the cash required to acquire the property. And, if those tax savings are not all needed in year 1, they can be carried over into subsequent tax years until fully utilized.
Is It Too Good to Be True?
Yes, we know, that does sound a bit too good to be true, but this is a conservative estimate of the components the IRS designates as having a 5,7 and 15-year useful life. It also contemplates a very generous estimate of land value. Thus, after the full cost segregation study is completed, it would likely stand up to even the most rigorous IRS review.
Additional First-Year Tax Savings Opportunities
To top things off, the buyer of this property may also be able to bonus-depreciate capital expenditures that support thevoperation of his business such as tenant improvements, equipment purchases, power installations and other capital items placed in service in year 1. When considered together, the first-year savings could be astronomical.
Financing Options That Enhance ROI
We will continue our discussion on this topic in our next post, but before we go, we have another bit of good news to share regarding the potential financing for this premier property. First Citizens Bank, a lender we do a lot of work with, offered two financing options that require a down payment of just 15% at rates in the low-to-mid 5% range, depending on loan maturity. So, after factoring in the $3,277,188 tax savings in year, a buyer could effectively buy this state-of-the-art facility with a down payment of just 9.99%. To take a closer look at both scenarios (Click Here).
What’s Next
Stand by for our next post as we take a deeper drive into this opportunity, including how this all looks to California’s Franchise Tax Board.
Disclaimer
This report is a preliminary estimate prepared by Engineered Tax Services with numbers provided by the Zehner/Hill team. It has been prepared for example purposes only and is based on a proprietary model that analyzes data from thousands of detailed cost segregation studies prepared by Engineered Tax Services around the country. A more precise benefits analysis can only be determined after a full cost segregation study is completed.