I recently spent 90 minutes with James C. Peacock, a former IRS General Engineer who spent nearly 39 years at the agency before retiring in September 2025.
James was among the first IRS engineers to examine cost segregation studies. He contributed to the original Cost Segregation Audit Techniques Guide, the document IRS auditors use when reviewing your study, from its development in 2000-2002 through every major update, including February 2025. He served as the IRS's primary technical expert on Section 179D from 2014 through his retirement.
When I asked him about the One Big Beautiful Bill and what it means for real estate investors, he gave me something most advisors can't: perspective from inside the IRS across the full arc of how bonus depreciation was born, grew, shrank, and is now permanently restored.
Here is what every investor needs to know.
Quick Answer: OBBB made 100% bonus depreciation permanent for qualified property acquired after January 19, 2025. The old phase-down was 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, then zero in 2027. Cost segregation ROI models should now use 100%.
Where Bonus Depreciation Came From
Most tax advisors talk about bonus depreciation as if it has always existed. It has not.
James walked me through the origin. "It started at 30% after September 11, 2001," he said. "It was an economic stimulus measure. The government wanted to encourage capital investment." Congress expanded it to 50% during the 2008 financial crisis. It hit 100% briefly, then phased out, then came back at 50% and 100% again under the Tax Cuts and Jobs Act of 2017. After TCJA, it began phasing down: 80% in 2023, 60% in 2024, 40% in 2025.
That phase-down created enormous pressure on investors. If bonus was going to 20% and eventually zero, the math on waiting to do a cost segregation study got worse every year. Deals that worked at 80% barely penciled at 40%.
The OBBB changed that equation completely by making 100% permanent.
"The IRS has seen bonus depreciation go through many cycles," James told me. "Now that it's permanent, investors aren't racing against a deadline anymore. The analysis becomes purely about the property and the tax situation, not the calendar."
That shift in framing matters more than most investors realize.
What "Permanent" Actually Changes for Your ROI Calculation
If you modeled a cost segregation study's return on investment at 40% or 60% bonus depreciation, your spreadsheet is wrong. Not by a small margin. By a large one.
Here is the core math. Cost segregation reclassifies building components from 27.5-year residential or 39-year non-residential property into 5-year, 7-year, and 15-year personal property and land improvements. Those reclassified assets qualify for bonus depreciation, meaning instead of depreciating them over their assigned life, you take 100% of the deduction in year one.
At 40% bonus, you accelerated 40 cents of every reclassified dollar into year one. At 100% bonus, you accelerate the full dollar. The present value of that difference is significant, especially at current interest rates.
A simple example. Say a cost segregation study on a $2 million commercial property identifies $400,000 in 5-year and 15-year assets. At a 37% marginal tax rate:
- At 40% bonus depreciation: $400,000 x 40% = $160,000 accelerated. Tax benefit year one = $59,200.
- At 100% bonus depreciation: $400,000 x 100% = $400,000 accelerated. Tax benefit year one = $148,000.
Same property. Same study. A $88,800 difference in year-one cash tax benefit, simply because the bonus depreciation rate changed.
Now apply that across a portfolio. Investors who modeled their 2025 or 2026 acquisitions under the phase-down schedule need to re-run every one of those projections with 100% bonus.
The "No More Rush" Effect
Beyond the raw numbers, permanent 100% bonus depreciation changes the strategic posture around when to do a study.
Under the phase-down, advisors routinely told clients to rush: "Get the study done this year while bonus is at 60%, because next year it drops to 40%." That urgency sometimes pushed investors into studies before they were ready, before the purchase was complete, before they had enough tax liability to absorb the deduction, before they had confirmed their real estate professional status.
That urgency also created opportunities for low-quality providers to sell rushed studies. If the investor believed they were on a deadline, they were easier to pressure into cutting corners on engineering rigor. The quality markers that distinguish a defensible study require time and property-level analysis, not a sprint to beat the calendar.
With permanent 100% bonus, that pressure disappears. You now make the decision based on:
- Does the property have enough reclassifiable assets to justify the study cost?
- Do you have sufficient tax liability this year to absorb the deductions?
- Can you demonstrate active participation or real estate professional status if needed?
The IRS doesn't care when you do the study. They care whether the study is right. That has always been true. Now the incentive structure for investors aligns with it.
Stacking Cost Segregation, 179D, and Bonus Depreciation
For investors and developers working on commercial buildings, the most powerful combination is cost segregation plus Section 179D plus bonus depreciation. Understanding how they interact requires knowing what each does independently.
Cost segregation reclassifies building components and land improvements into shorter depreciable lives. Bonus depreciation then allows 100% first-year expensing of those reclassified assets. These two tools work in sequence: cost seg creates the eligible property categories, bonus depreciation accelerates the deduction timing.
Section 179D is a separate deduction, up to $5.94 per square foot in 2026 with prevailing wage and apprenticeship compliance, for energy-efficient commercial building construction or renovation. It applies to the building's lighting, HVAC, and building envelope when they meet performance thresholds. It is a direct dollar deduction against taxable income, not a depreciation acceleration.
The key planning insight James shared: 179D and cost segregation apply to different asset pools and do not cancel each other out. A qualifying commercial project can claim 179D on the energy systems that meet the threshold, while simultaneously using cost segregation to accelerate depreciation on other personal property and land improvements that do not qualify for 179D.
The timing constraint James flagged was specific to 179D, not cost segregation. Congress let 179D expire as part of the OBBB negotiations. Construction that commences before June 30, 2026 still qualifies under the prior law, even if the project is not placed in service until 2027 or 2028. After June 30, 2026, new projects cannot access 179D under current law. "Usually the popular deductions come back," James told me. "Congress has a pattern of letting them lapse and then reinstating them." But for now, the window is closing.
For details on the 179D commencement-date rule and which projects still qualify, see this breakdown of 179D 2026 eligibility for projects started before June 30.
Cost segregation plus 100% bonus depreciation has no such expiration. You can commission a study on a property you bought in 2028 and still get full first-year expensing on the reclassified assets.
What Passive Investors vs. Real Estate Professionals Need to Know
The recalculation is not the same for every investor. How you use the accelerated deductions depends entirely on your tax classification.
Real Estate Professionals (REPS) can use cost segregation deductions against ordinary income, W-2, business income, capital gains. This is the most powerful version. If you qualify as a real estate professional under IRC Section 469(c)(7), which requires more than 750 hours annually in real property trades and more than half your working time in real estate, cost segregation deductions can eliminate tax across your entire income picture. At 100% bonus, the year-one deduction on a large property can create a loss that offsets significant ordinary income.
Passive investors (most individual real estate investors) can only use cost segregation losses against passive income from other activities or carried forward until the property is sold. The deduction is real and valuable, but it does not offset a W-2 salary without REPS status or the short-term rental exception.
Short-term rental (STR) investors occupy a specific middle ground. Properties with average stays under 30 days are classified as 39-year non-residential property, not 27.5-year residential. That is important because interior improvements to STR properties are Qualified Improvement Property (QIP), which carries a 15-year life and qualifies for 100% bonus depreciation. Land improvements, pools, landscaping, parking, are also 15-year property regardless of rental type. So an STR investor doing cost segregation should expect significant 15-year QIP and land improvement reclassification that qualifies for immediate expensing.
The STR passive activity exception also matters. If your average stay is seven days or fewer, IRS guidance historically allows material participation rules to apply, potentially letting the losses offset ordinary income without REPS status. Talk to a CPA who specializes in this before assuming the deductions are usable.
For a complete analysis of whether cost seg makes sense for your situation, this decision framework covers the main variables.
The Recalculation Checklist
If you modeled a property under the phase-down schedule, here is what to revisit:
Step 1: Re-run the bonus depreciation rate. Any model built on 40%, 60%, or 80% bonus is understating your year-one cash benefit. Replace the phase-down rate with 100%.
Step 2: Check your placed-in-service date. The 100% rate applies to property placed in service after January 19, 2025 (the OBBB effective date). If you closed and placed property in service before that date under the phase-down rules, those properties received whichever rate applied at the time. You cannot retroactively apply 100% to prior-year placements without an amended return, and that analysis should involve a CPA.
Step 3: Assess 179D eligibility separately. If you built or substantially renovated a commercial building and construction commenced before June 30, 2026, get the 179D analysis done now. The certification process takes time. Do not let that window close while you are recalculating the cost segregation ROI.
Step 4: Recalculate your cost segregation study ROI. If you had previously decided a study was marginal at 60% bonus, run it again at 100%. Many properties that did not justify study costs at lower bonus rates now clearly do.
Step 5: Confirm your tax classification. The accelerated deductions are only as useful as your ability to absorb them. If you are not a real estate professional and do not have other passive income, the deductions accumulate as passive losses until you sell or gain passive income. That is still valuable, it is a deferred tax benefit, but it changes the cash-flow timing analysis.
The Study Quality Rule Has Not Changed
Permanent 100% bonus depreciation is a tax policy change. It does not change what makes a cost segregation study defensible under IRS scrutiny.
James was direct about this: the quality of the underlying engineering work is what determines whether the deduction survives an audit. The IRS has not softened its review of studies because bonus depreciation became permanent. If anything, larger deductions attract more attention.
James puts the IRS audit rate on businesses with a cost segregation study around 0.078%, versus roughly 0.07% for those without one. "Two out of a thousand instead of one," James said. "It doubled. But it's still very, very, very low." The risk is not in having a study. The risk is in having a study that does not hold up.
The markers that determine whether a study holds up have not changed: property-specific RS Means codes, documented land allocation, correct land improvement categorizations, evidence that personal property was actually removable and moved (not just theoretically movable). For a full breakdown of what IRS examiners actually look for, see does cost segregation trigger an IRS audit and the FreeCostSeg audit risk guide.
When selecting a provider, the test is whether they produce engineering-level documentation, not a software model built on square footage averages. James noted that studies built on averages "tell the IRS they used averages and didn't look at the property." That generates Information Document Requests and complicates the audit unnecessarily. Use this provider selection framework before commissioning a study, or compare top providers side by side.
Why the History James Described Matters to Your Decision Today
Bonus depreciation has been modified by Congress more than a dozen times since 2001. It has been at 30%, 50%, 100%, and every rate in between. Each change created winners and losers based on when investors placed property in service.
The OBBB is the first time Congress has made the 100% rate permanent rather than temporary. That is a different kind of legislative commitment. It eliminates the scenario-planning question that made cost segregation ROI models so complicated, "what if bonus drops to 20% before we close?"
James's perspective from inside the IRS through all those cycles: the mechanics of how you claim the deduction have always mattered more than the rate. "It's the support, not the report," he told me, quoting a mantra he heard repeatedly from IRS colleagues throughout his career. A study that says the right things but cannot be supported with engineering documentation is not a study, it is a liability.
Permanent 100% bonus depreciation makes cost segregation more valuable than it has ever been. It also makes the integrity of the underlying work more visible. Large first-year deductions attract scrutiny. The investor who responds to that scrutiny with a properly documented, engineer-verified study is in a strong position. The investor who responds with a PDF generated by software is not.
The recalculation most investors need to run right now is not complicated. Replace the phase-down rate with 100%. Compare the updated year-one deduction against study costs and your tax liability. If you have a qualifying commercial property or STR portfolio, get a free estimate at FreeCostSeg to understand what reclassification might look like for your specific buildings.
The deadline pressure is gone. The opportunity is not.
About the Expert
James C. Peacock spent nearly 39 years at the IRS as a General Engineer and Subject Matter Expert in the LB&I Division. He was among the first IRS engineers to examine cost segregation, contributed to the Cost Segregation Audit Techniques Guide from 2004 through the 2025 update, and served as the IRS's primary technical expert on Section 179D from 2014 through his retirement in September 2025.
