What this article explains:
- •Topic: Cost Segregation & Bonus Depreciation Tax Strategies
- Who this is for: Family offices, HNWIs, and investors acquiring assisted living facilities seeking significant tax savings
- Problems addressed: High tax liability on property acquisitions, missed depreciation opportunities, suboptimal after-tax returns
- Systems involved: Cost segregation studies, bonus depreciation, 1031 exchanges, passive loss planning
- Why this matters now: 100% bonus depreciation permanently restored under One Big Beautiful Bill Act (July 2025)
Key Insight
Under the One Big Beautiful Bill Act (July 2025), cost segregation studies combined with 100% bonus depreciation (now permanent) can accelerate $3M+ in depreciation deductions into year one for a typical $10M assisted living facility acquisition, reducing federal tax liability by $1.2M–$1.4M+ (assuming 37% marginal rate + state taxes). This extraordinary cash flow benefit can be reinvested into operations, acquisitions, or debt reduction—and unlike the prior phase-down schedule, this tax advantage is now available indefinitely.
Assisted living facilities represent one of the most tax-advantaged asset classes in commercial real estate due to their capital-intensive nature, specialized improvements, and favorable depreciation treatment. For sophisticated investors—family offices, high-net-worth individuals, and institutional capital allocators—mastering cost segregation and bonus depreciation is not optional; it's a fundamental component of investment returns.
This guide provides a comprehensive framework for leveraging advanced tax strategies to maximize after-tax cash flow from assisted living facility investments. We examine cost segregation mechanics, bonus depreciation rules, passive activity loss limitations, and strategic structuring considerations that can materially enhance IRRs by 200–400 basis points.
What Is Cost Segregation?
Cost segregation is an IRS-approved tax planning strategy that reclassifies components of real property from 27.5- or 39-year straight-line depreciation into shorter recovery periods (5, 7, or 15 years). This acceleration of depreciation deductions generates significant tax savings by allowing investors to recover their capital investment faster.
Standard Depreciation vs. Cost Segregation
Standard Approach (Without Cost Segregation)
Under standard depreciation, the entire building and all improvements are depreciated over 27.5 years (residential rental) or 39 years (nonresidential). For a $10M assisted living facility with $8M in depreciable basis (excluding land):
- •Annual depreciation: $290,909 ($8M ÷ 27.5 years)
- •Year 1 tax savings (37% bracket): $107,636
With Cost Segregation
A cost segregation study identifies components that qualify for shorter lives. Typical reclassification for an assisted living facility:
- •5-year property: $1.2M (carpeting, specialized medical equipment, furniture, removable partitions)
- •7-year property: $400K (furniture, fixtures, security systems)
- •15-year property: $1.6M (site improvements: parking lots, sidewalks, landscaping, signage)
- •27.5-year property: $4.8M (remaining building structure)
Result: Instead of $290,909 in year one depreciation, cost segregation accelerates $3.2M of assets into shorter lives, generating significantly higher early-year deductions—especially when combined with bonus depreciation.
Bonus Depreciation: Immediate Expensing
Bonus depreciation allows taxpayers to deduct 100% of the cost of qualifying property in the year it is placed in service. Under the original Tax Cuts and Jobs Act (TCJA), bonus depreciation was phasing down from 100% through 2022, declining to 80% in 2023, 60% in 2024, and scheduled to reach 40% in 2025 before eventually expiring.
However, in July 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law, permanently restoring 100% bonus depreciation for qualifying property. This landmark change removes the phase-down schedule and makes full expensing a permanent feature of the tax code.
2025 Tax Law Update: 100% Bonus Depreciation Restored
The One Big Beautiful Bill Act (July 2025) permanently reinstated 100% bonus depreciation, eliminating the scheduled phase-down. Real estate investors can now deduct 100% of qualifying property costs in year one indefinitely—a massive win for cash flow optimization.
Current Bonus Depreciation:
100% (Permanent)
Qualifying Property: Bonus depreciation applies to property with a recovery period of 20 years or less. In the context of cost segregation, this includes:
- 5-year property (carpeting, medical equipment, removable partitions)
- 7-year property (furniture, fixtures, security systems)
- 15-year property (site improvements, parking lots, landscaping)
Game-Changing Tax Law Update
With 100% bonus depreciation now permanent under the One Big Beautiful Bill Act, timing pressure has been eliminated. Investors no longer need to rush acquisitions to capture higher rates—full expensing is available indefinitely. This allows investment decisions to be driven by fundamentals rather than tax deadlines, while still capturing extraordinary first-year depreciation benefits.
Combined Strategy: Cost Segregation + Bonus Depreciation
When cost segregation is combined with bonus depreciation, the tax benefits are extraordinary. Let's model a $10M assisted living facility acquisition in 2025:
Transaction Assumptions
Purchase Price: $10,000,000
Land Value: $2,000,000 (20%)
Depreciable Basis: $8,000,000
Acquisition Year: 2025 (post-OBBBA)
Bonus Depreciation Rate: 100% (permanent)
Investor Tax Bracket: 37% (federal)
State Tax Rate: 5%
Combined Rate: 42%
Cost Segregation Reclassification
| Asset Category | Allocated Value | % of Total |
|---|---|---|
| 5-year property | $1,200,000 | 15% |
| 7-year property | $400,000 | 5% |
| 15-year property | $1,600,000 | 20% |
| 27.5-year property (building) | $4,800,000 | 60% |
Year 1 Depreciation Calculation
Step 1: Apply 100% Bonus Depreciation to Qualifying Assets
Under the One Big Beautiful Bill Act (2025), assets with recovery periods ≤20 years qualify for 100% bonus depreciation:
- 5-year property: $1,200,000 × 100% = $1,200,000
- 7-year property: $400,000 × 100% = $400,000
- 15-year property: $1,600,000 × 100% = $1,600,000
Total Bonus Depreciation: $3,200,000
Step 2: Regular Depreciation on 27.5-Year Property
With 100% bonus depreciation, ALL 5-, 7-, and 15-year property is fully expensed in year one. Only the building structure remains for standard depreciation:
- 5-year property: $0 remaining basis (100% expensed)
- 7-year property: $0 remaining basis (100% expensed)
- 15-year property: $0 remaining basis (100% expensed)
- 27.5-year property: $4,800,000 ÷ 27.5 years × 11.5 months (mid-month) = $163,636
Total Regular Depreciation: $163,636
Total Year 1 Depreciation (Under OBBBA)
100% Bonus Depreciation: $3,200,000
Regular Depreciation (building only): $163,636
Total Year 1 Depreciation: $3,363,636
Tax Savings Analysis (Under OBBBA)
Comparison to Standard Depreciation: Without cost segregation, year 1 depreciation would be only $290,909, generating $122,182 in tax savings.
The cost segregation + 100% bonus depreciation strategy produces an additional $1,290,545 in year 1 tax savings—a staggering amount of immediate cash that can be reinvested into acquisitions, used to pay down debt, fund capital improvements, or distributed to investors. This represents a 1,057% increase in first-year tax benefits compared to standard depreciation.
Passive Activity Loss Limitations: Critical Considerations
While cost segregation and bonus depreciation create substantial paper losses, passive activity loss (PAL) rules limit when and how these deductions can be used. Understanding these rules is critical to realizing the tax benefits.
Who Can Use Passive Real Estate Losses?
1. Real Estate Professionals (Full Deductibility)
If you qualify as a real estate professional under IRC §469(c)(7), rental real estate losses are NOT passive and can offset ordinary income without limitation.
Requirements:
- More than 50% of personal services during the year are performed in real property trades or businesses
- More than 750 hours of services performed in real property trades or businesses
- Material participation in each rental activity (or election to aggregate all rental activities)
→ Real estate professionals can use the full $1.67M depreciation deduction to offset W-2 wages, business income, or other active income.
2. Active Participants (Limited Deductibility)
Taxpayers who actively participate in rental activities (but are not real estate professionals) can deduct up to $25,000 in passive losses against active income if AGI is below $100,000. This allowance phases out completely at $150,000 AGI.
→ Most high-income investors exceed the AGI threshold and cannot use this provision.
3. Passive Investors (Suspended Losses)
If you are not a real estate professional and have AGI >$150,000, passive rental losses are suspended and carried forward indefinitely. These losses can only offset:
- Future passive income from the same activity (rental income after operating expenses)
- Gains upon disposition of the property (full release of suspended losses)
→ Suspended losses still have value—they reduce taxes on rental income and capital gains at exit.
Strategic Implication
For passive investors, cost segregation still provides value by creating losses that offset future rental income and reduce capital gains tax at exit. However, immediate cash flow impact is limited unless the investor qualifies as a real estate professional or generates passive income from other sources.
Additional ALF Tax Strategies
1. 1031 Exchange + Cost Segregation
Investors who acquire assisted living facilities through 1031 exchanges can still benefit from cost segregation. The key is to perform the study immediately after acquisition to identify previously-unrecognized shorter-life assets.
Strategy: Complete a cost segregation study in the year of acquisition to identify and depreciate new 5-, 7-, and 15-year property that was not separately identified in the relinquished property. This "resets" depreciation on those components.
2. Look-Back Studies for Existing Properties
If you already own an assisted living facility but never performed a cost segregation study, you can file a Form 3115 (Change in Accounting Method) to "catch up" on missed depreciation deductions without amending prior returns.
Benefit: Claim all foregone depreciation as a "catch-up" adjustment in the current year. This can generate six- or seven-figure deductions for properties owned 5–10 years.
3. Qualified Improvement Property (QIP)
Under the TCJA, qualified improvement property (interior improvements to nonresidential buildings placed in service after the building was first occupied) is eligible for 15-year depreciation and bonus depreciation.
Application: Renovations, build-outs of memory care units, dining room upgrades, and interior improvements made after acquisition qualify as QIP and can be immediately expensed (subject to current bonus depreciation rates).
4. Energy-Efficient Property Deductions
The 179D Commercial Buildings Energy Efficiency Tax Deduction (enhanced by the Inflation Reduction Act) allows immediate deductions of up to $5.00 per square foot for energy-efficient HVAC, lighting, and building envelope improvements.
Opportunity: For a 50,000 sq ft assisted living facility with qualifying improvements, this can generate a $250,000 immediate deduction in addition to cost segregation benefits.
When Should You Perform a Cost Segregation Study?
Acquisition Year (Most Common)
Perform the study in the year you acquire the property to maximize immediate tax savings. This is especially important while bonus depreciation rates remain elevated (2025: 40%, 2026: 20%).
Post-Renovation
If you complete substantial renovations (e.g., adding a memory care wing, upgrading common areas), perform a cost segregation study to segregate the new improvements.
Look-Back (Retroactive) Study
For properties owned 1–10+ years without a prior study, file Form 3115 to claim missed depreciation as a current-year adjustment. This remains valuable even if bonus depreciation has expired.
Cost Segregation Study Costs & ROI
Professional cost segregation studies typically cost $10,000–$25,000 for a $10M property, depending on complexity. With 100% bonus depreciation restored, the ROI is even more extraordinary:
- Study cost: $15,000
- Additional year 1 tax savings (100% bonus vs. standard): $1,290,545
- Net benefit: $1,275,545
- ROI: 8,504%
Result: A $15,000 study generates $1.29M in immediate tax savings—a return of over 85X your investment in year one alone.
Risks and Considerations
1. Depreciation Recapture on Sale
Accelerated depreciation creates a tax liability upon sale. Depreciation claimed on personal property (5-, 7-, 15-year assets) is recaptured as ordinary income (up to 37%). Real property depreciation is recaptured at 25% (unrecaptured §1250 gain). Factor this into exit modeling.
2. Passive Loss Limitation Complexity
Most high-income investors will have suspended losses that cannot immediately offset active income. Cost segregation still provides value at exit, but year-one cash flow impact is limited unless the investor is a real estate professional.
3. IRS Audit Risk
Cost segregation studies must comply with IRS guidelines (IRS Audit Techniques Guide for Cost Segregation). Use reputable engineering firms with CPA partnerships to minimize audit risk. Avoid aggressive allocations that lack engineering support.
4. State Tax Conformity
Some states do not conform to federal bonus depreciation rules. Verify state tax treatment before assuming combined federal + state tax savings. States like California have historically decoupled from federal bonus depreciation.
Conclusion: Tax Strategy as Competitive Advantage
For sophisticated investors in assisted living facilities, cost segregation and bonus depreciation are not optional—they are foundational components of investment returns. The ability to accelerate $1M–$3M+ in depreciation into year one can generate immediate tax savings of $500K–$1.2M+, creating cash flow that can be reinvested into acquisitions, operations, or debt reduction.
However, these strategies require careful planning around passive activity loss rules, depreciation recapture at exit, and state tax conformity. Investors who qualify as real estate professionals unlock the greatest immediate benefit, while passive investors still realize substantial value through suspended losses that reduce future taxes.
With the passage of the One Big Beautiful Bill Act in July 2025, 100% bonus depreciation is now permanent, removing the urgency to rush transactions before phase-down deadlines. However, the extraordinary tax benefits remain—investors can now optimize acquisition timing based on market fundamentals and deal economics while still capturing full first-year expensing indefinitely. This legislative certainty provides unprecedented flexibility in structuring real estate portfolios for optimal tax efficiency.
Maximize Tax Efficiency on Your Next ALF Investment
SeniorCRE connects investors with tax-optimized assisted living opportunities and partners with leading cost segregation firms to maximize after-tax returns. Explore current listings and discover how strategic tax planning can enhance your portfolio returns by 200–400 basis points.