100% Bonus Depreciation Explained: Real Estate Tax Strategies That Actually Work

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In this conversation, tax strategist Thomas Castelli shares insights on tax strategies for real estate investors, focusing on bonus depreciation, cost segregation, and various asset classes. He explains how these strategies can help investors retain more of their income and maximize deductions. The discussion also covers common mistakes in bookkeeping and the importance of maintaining accurate records for tax purposes.

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Thomas Castelli (00:00)
So let’s say you have that $900,000 property, right?

you’re going to have to figure out the land value. for the sake of this example here, we’re going to assume that 80 % of that purchase price is the building and its land improvements. So we’re go get to $720,000. Now with the cost segregation study somewhere between 20 and 30 % of that

will be reallocated to components that are eligible for bonus depreciation. So we’ll split the difference. We’ll go right down to 25 % and we’re gonna get $180,000.

So that entire amount would be deductible in the year that that property is placed in service.

Dylan Silver (02:07)
Hey folks, welcome back to the show. Today’s guest, Tom Castelli is a tax strategist, real estate investor, podcast host. He’s dedicated to helping real estate investors reduce their tax burden and build lasting wealth. Tom has helped countless high income earners, individual investors, syndicators, fund managers, large scale operators, keep more of their hard earned money. You can find him on LinkedIn, on Instagram at.

Thomas Castelli, CPA or on YouTube, youtube.com/@ThomasCastelli. Tom, thanks for taking the time today.

Thomas Castelli (02:42)
Thanks for having me. It’s thanks for having me. It’s an honor to be here today.

Dylan Silver (02:46)
Are you in South Florida? Are you in Miami?

Thomas Castelli (02:49)
Yep, I’m living in Miami. I look out the window right there in sunny Miami. It’s beautiful.

Dylan Silver (02:55)
I should have started with that. How long have you been in South Florida?

Thomas Castelli (02:57)
I moved to South Florida in October 2024.

Dylan Silver (03:01)
Okay, so about coming up on two years now, how has South Florida been treating you?

Thomas Castelli (03:06)
It’s better. So I grew up in New York and I love New York to death. Don’t get me wrong ⁓ But the weather down here in South Florida, especially during this time of the year. It’s January ⁓ is Certainly better. I was just in in New York for Christmas and it was 18 degrees today It’s 77 degrees right now. So, you know, I can’t complain

Dylan Silver (03:24)
Which part of New York? I grew up in Northern New Jersey in town called Caldwell, West Caldwell.

Thomas Castelli (03:29)
Yeah, so I was born and raised on Long Island. lived in Suffolk for most of my life. And then I lived in Nassau County for a bit and the story of Queens. So kind of, kind of all across Long Island, but Long Island was like my primary place in New York.

Dylan Silver (03:42)
Okay, we can probably relate being part of the tri-state area. I was in Northern New Jersey visiting my folks for Thanksgiving and I was like, I don’t miss the cold. I actually live in Santo Domingo, the Dominican Republic. So like you, I enjoy the warm weather. I do wanna dive in and talk about tax strategy, tax savings, and some of the niche areas where people can really…

hold more of their money, retain more of their money when it comes to real estate investing. One of the things that’s interesting right now, and I was watching one of the videos that you had on your channel, is cost seg, right? And with the big, beautiful bill, 100 % bonus depreciation, who can take advantage of that?

Thomas Castelli (04:28)
All so pretty much all real estate investors who are buying rental properties, so buy and hold properties, you’re holding them for rent for the long term, can take advantage of bonus depreciation. The question is how impactful will it be? For some investors, it will be more impactful than others. So I’m happy to go through what it looks like, give the whole rundown. Just let me know if you want me to do that.

Dylan Silver (04:50)
Let’s start here. mean, when we talk about 100 % bonus appreciation, some misnomers, right? You’ve got to build the property yourself, right? It’s got to be built in the last couple of years, right? Or hey, if it’s at the end of its depreciable life, is ⁓ there a situation where if you’re buying a property you wouldn’t want to take advantage of?

Thomas Castelli (06:00)
Yeah. So I mean, in situations you probably would not want to take advantage of a hundred percent bonus depreciation would be a property you intend to ⁓ flip. If you intend to flip a property, it’s usually considered inventory and not an asset for tax purposes. So you wouldn’t be able to actually depreciate the asset at all. So you probably wouldn’t do a cost segregation study on it and you wouldn’t be eligible for a hundred percent bonus depreciation. The only other time that I really sticks out as like a probably not is if you only intend to hold the property, even though you might be renting it out, flipping it.

for a very short period of time. Because oftentimes you might take the bonus depreciation and then if you sell it, you could be subject to depreciation recapture. And there are ways to mitigate that via 1031 exchanges or other exit strategies. But that’s kind of the only times that I’m really kind of, it’s coming to top of my head right now that you would wanna not do it.

Dylan Silver (06:52)
Very basic question, and forgive me for not knowing the answer to this, when we talk about 100 % bonus depreciation, it’s 100 % of the purchase price, what is the 100 % referring?

Thomas Castelli (07:02)
Yeah,

yeah, great, great question. So let me break this down high level, right? So when you buy a property, you’re usually gonna have the building and the land improvements. So the building itself is the actual structure of the house, whatever have you. And then like land improvements are things like landscaping, pools, decks, sheds, things of that nature. Those items are depreciable. The land itself is not depreciable. So there’s always a part of the purchase price that’s dedicated to land, even if in condos, believe it or not. We don’t have to go down that rabbit hole. ⁓ But the…

The components that are eligible for 100 % bonus depreciation are the components that have a five, seven and 15 year class life. bonus depreciation applies to assets that have a class life of less than 20 years. So when you buy a single family residence, for example, a single family home, that is depreciated over 27 and a half years. That’s kind of the default treatment. So you’re gonna take that in just a little bit over 27 and a half years, you can get a little depreciation expense every year.

However, what happens is when you have a cost segregation study performing your property, an engineer is gonna break down the components and say, okay, here’s the components of your property that are truly 27 and a half year class life, which is probably somewhere around 70, it could be anywhere between, let’s call it 60 to 70 % of the property, right? Whereas here’s the components that are five, seven and 15 year property, which usually makes up somewhere between 20 and 30%.

of the assets of the building’s value. So maybe I got the other percentage wrong, but it’s 20, 30 % are usually reallocated to the components that are eligible for bonus depreciation. ⁓ And five-year properties considered tangible personal property within that. think of things like appliances, fixtures, ⁓ carpeting, things of that nature as a whole bunch more, but things of that nature. then the land improvements, that’s the 15-year property. That is the pools, deck sheds, things like

Dylan Silver (08:57)
Now I know this is going to be a tough question. this is, there’s of course no one size fits all, but if you’re looking at, know, where I’m from in Northern New Jersey and you’re looking at, you know, very middle-class home that might be $900,000 and let’s say the home is, I don’t know, 10 years old, what’s the range of deductions that someone might be able to take through a 100 % bonus appreciation?

Thomas Castelli (09:23)
Yeah, so in certain states, certain areas, land value can be higher than other states. in Northern New Jersey, for example, I’m sure land value is a significant component of it. So I’ll just use a national example just to keep things a little bit more straightforward.

So let’s say you have that $900,000 property, right?

you’re going to have to figure out the land value. Now the land value you can figure out through the property tax card or through an independent third party appraisal on what the land value is. But for the sake of this example here, we’re going to assume that 80 % of that purchase price is the building and its land improvements. In other words, the parts that can be depreciated. So we’re go ahead and take 80 % at 900,000 or get to $720,000. So that’s the part that’s depreciable. Now with the cost segregation study somewhere between 20 and 30 % of that 720,

will be reallocated to components that are eligible for bonus depreciation. So we’ll split the difference. I know we should never do that, but we’re gonna do it anyway. We’ll go right down to 25 % and we’re gonna get $180,000. So that would be $180,000 would be the amount that’s eligible for bonus depreciation. And right now, bonus depreciation is at 100 % that is made permanent under the recent One Big Beautiful bill that was signed in July 2025.

So that entire amount in this example, $180,000 would be deductible in the year that that property is placed in service.

Dylan Silver (11:25)
Now, cost segregation studies are going to vary, right? So you’re going to have size, you’re going to have complexity. Is there a national average for what cost seg is on a single family home?

Thomas Castelli (11:35)
So yeah, it definitely varies depending on the study. Probably for single family home somewhere between two to $3,000. Typically, it could be more depending on the cost segregation firm, the location of the property, so on and so forth. Let’s say somewhere between two to $3,000 is an appropriate estimate.

Dylan Silver (11:55)
So before the big beautiful bill, were people doing cost seg for like single family homes or is this something that’s new to the single family space?

Thomas Castelli (12:04)
Yeah, so it’s definitely not new. I’d say so back in 2017, the Tax Cuts and Jobs Act introduced 100 % bonus depreciation initially, and it made 100 % put 100 % bonus depreciation in play from 2017 all the way through 2022, when it began to phase out in 2023, before it was brought back in 2025. So we’ve seen a lot of people pick up ever since 2017, that bill was passed. That’s when you see cost segregation start to make sense on single family homes.

Before that, it was mainly commercial properties just because the expense relative, because there was no 100 % bonus depreciation. So you were getting enhanced depreciation benefits because you were able to depreciate the five-year property over five years instead of 27 and a half years and the 15-year property over 15 years instead of 27 and a half. So it was still accelerating the depreciation. So giving you increased deductions, but the cost benefit wasn’t there on your typical single family property, maybe on a large commercial property.

where the numbers are much larger, there was a cost benefit. But really since 2017, I’d say that’s when I started seeing it ⁓ make sense on single family and a lot of people started taking action.

Dylan Silver (13:15)
Another kind of granular question here. I speak with a lot of mobile home park investors. I know that’s not considered real property. Could you do some type of cost seg on a mobile home?

Thomas Castelli (13:27)
Yeah, absolutely. So mobile homes, there’s a few different kind. I can get into some of the nuances here, but long story short, a large component, a large part of what you’re purchasing with mobile home is land improvements. So land improvements is that 15 year property. So it’s not uncommon to see somewhere around 70 % or perhaps even more in some cases of that purchase price being eligible for a bonus depreciation when it comes to mobile home parks. Go a step further, depending on whether you have park owned homes and depending on what type of park owned homes those are.

you might even be eligible for even more depreciation. Specifically, if you have like mobile homes that are movable, that are not permanently affixed to the ground, ⁓ those are considered five-year property, which also eligible for bonus depreciation. So depending on the type of homes you have in the mobile home park, if you own them as the owner, you might be for enhanced benefits. But typically, if you’re just looking at your renting pads, that’s just what you’re doing.

At a mobile home park, you’re at probably around 70 % or more ⁓ in bonus depreciation ⁓ on the purchase price.

Dylan Silver (14:30)
What’s interesting about mobile homes is they’re not making any more mobile home parks from what I understand. I’ve spoken with a number of investors who invest in this space and very, very rarely have I heard the conversation, yeah, we’re building a mobile home park. And I think there’s a lot of reasons for that. One of the main ones is I don’t know necessarily that they’re a huge driver of tax revenue for the areas that they’re being placed in. And so people are looking at other asset classes versus mobile homes. For investors who are

looking at outside of single family investing or small multifamily investing and they may be looking at storage facilities, mobile home parks, RV parks, or like ADUs, right? Are there any specific tax strategies or benefits that would go along with any of those different segments of the real estate space?

Thomas Castelli (16:03)
Yeah, so yeah, that’s a pretty it’s pretty, ⁓ wide. ⁓ I would say that as tough. Yeah, I would say if you want to look at strategies in that space, you want to look at the real estate professional status. ⁓ If you’re going to be investing in long term rentals, mobile home parks, things like that. If you’re investing in, ⁓ could also look at short term rentals, there’s some unique benefits that come tax benefits that come with investing in short term rentals. And most short term rentals are typically single family homes or condos or

or what have you, but not always. those two strategies, and I’m happy to unpack some of those, unlock significant tax benefits really across those asset classes.

Dylan Silver (16:42)
What’s the, I was unaware that there’s tax benefits for short-term rentals, for STRs. What type of things can people take advantage of with STRs?

Thomas Castelli (16:50)
Yeah, yeah. So this definitely ties in with bonus depreciation. So ⁓ under the task code, all rental activities or rental properties are passive by default. So what does that mean? That means that the losses that are passed through to you typically through bonus ⁓ depreciation deductions. ⁓

cannot offset your active income, active income being like W-2 income or income from a business that you’re running. There’s an exception for that called the real estate professional status, which allows you to take those losses ⁓ against your W-2, your active business income. However, to qualify as real estate professional, you need to spend more than 750 hours and more than 50 % of your total working time in real estate.

So in other words, you need to be working full-time in real estate. It’s gonna be very challenging for people who have a full-time job or ⁓ running a full-time business to do. With short-term rentals, if you have an average period of customer use, that’s the official language, or just an average guest stay, you could look at it as, of seven days or less, then it’s not considered a rental activity, it’s considered a business. And with a business, you do not need to spend more than…

50 % of your total working time. You just need to meet one of seven material participation tests, which can allow you to spend as little as just over 100 hours on your short-term rental property and take the losses as non-passive against your W-2 or active business income. And for lot of high-income earners, lot of couples who are working full-time, that is a very lucrative strategy.

Dylan Silver (18:26)
For folks who have a W-2 and they may be looking at getting into real estate, and I would put myself into this category before I went full time with it, right? You’re not aware that there may be some tax savings that you could recoup against your W-2 income. I wanna use the example of someone who may be starting out in wholesale or as a realtor, but they aren’t.

necessarily making lots of money in wholesale or as a realtor, would they be able potentially to do things like deduct mileage if they’re tracking mileage for driving between appointments and that type of thing against W-2 income?

Thomas Castelli (19:02)
Yeah.

Yeah. Yeah. Absolutely. Absolutely. So especially as a guy, if you’re real, if you’re real, so if you’re a real estate agent or you’re running another real estate business, you are off, are, that’s not a rental activity. So as long you’re actively involved, which most of the time you are as a real estate agent, in fact, almost all the time you are, um, uh, yes, you can do, you can deduct things like mileage, home, excuse me, home offices, things like that against your W-2 or your active business income.

Dylan Silver (19:30)
Yeah, I think there’s a ton of people and I was just having this conversation yesterday with an enrolled agent. There’s a ton of people who don’t think about tax strategy until they’ve got a tax bill to pay. But you know, I look back at all of the W-2 taxes that I paid while I was also running, you know, an unincorporated business, you know, a side hustle, just trying to make some extra money, realizing I was putting in miles. I was buying office supplies. I would have put money into advertising, right? You know, put extra miles on my car.

Thomas Castelli (19:39)
Right.

Dylan Silver (19:59)
And we don’t think about, this is a way for me to actually recoup some of the taxes that I have already paid in through my W-2.

Thomas Castelli (20:08)
Right, right. Yeah, there’s a lot. If you have a side hustle, that is all active income or losses for the most part. So if you have a loss from your side hustle, you can often take it against your other forms of income, like your W-2 income. You just have to be careful for the hobby loss rules. The hobby loss rules, long story short, says that if you’re operating a business at a loss for three years in a row, the IRS could come back and say, hey, are you really operating this for profit or is this just like a shell?

company or something like that and they could turn into a hobby and if it becomes a hobby, you can’t deduct the losses. but long story short, in most side hustles, if you have a loss, you’re be able to offset it against your W-2 income.

Dylan Silver (20:45)
Are there any common mistakes that you see newer investors making ⁓ that ⁓ you think could be relatively simply remedied when it comes to either tax strategy or setting up their businesses or so on?

Thomas Castelli (21:00)
Yeah, so mistakes, yeah, mistakes. There’s an incredible amount of mistakes that I could go on for forever on this. the one biggest mistake and this is going to be it’s going to sound maybe boring is not keeping good books and records. I mean, bookkeeping at the end of the day.

⁓ because a lot of your business is whether you want to make better financial decisions to grow your business or are you overspending in areas or hey, what is your tax liability currently? Can we estimate that for you and how can we actually make moves to lower it in a strategic way and more targeted way? It all starts with the foundation of the bookkeeping. So a lot of investors overlook that or neglect it.

And I think that’s just the biggest mistake. I know it’s not the most sexy mistake to talk about, but it is certainly a foundational mistake that a lot of investors make.

Dylan Silver (21:48)
Hey, I would throw myself in that category. I hired someone to help with tax strategy myself at the tail end of last year. And I was thinking, yeah, I can keep my books. It’s not that complicated. I know I’m a one man show. so when I’m diving into it with with my enrolled agent, I’m realizing, my gosh, this is so complicated. I’m I’m glad I’m starting this now and not, you know, years down the line.

For folks who are coming to you and they’re doing their own books, of course that can be chaotic. Is there some of it, like you have to go and forensically identify what’s happened in the previous years or can you start now if you potentially were doing your books improperly over the years?

Thomas Castelli (22:31)
Yeah, so that’s a great question. And it definitely depends if it depends like it unless you need it for the lenders or something historical records for lenders or you haven’t filed your tax returns. Most of the time. It’s like for prior years. You have five Jackson’s in priors. You just probably start fresh this year. We’re recording this in January, for example, like, depending on what you need the financials for sometimes is good just to start over and just start clean.

⁓ So to answer your question, it depends, but in most cases, ⁓ unless you need it for those purposes, you’re probably good just to get started ⁓ from scratch, from where you are today.

Dylan Silver (23:09)
Tom, we are coming up on time here. Any new projects that you’re working on or where can folks go to reach out to you or your team?

Thomas Castelli (23:16)
Yeah, I think you know the best way to reach out on we do have a podcast Tax Smart REI podcast out on Apple Spotify wherever else you find podcasts it’s we do talks on on tax strategies all the time we have a great backlog of content there you could check out otherwise you can get in touch with me the best way to get in touch with me just go to my personal website or finding me on LinkedIn it’s thomascastelli.com I just have all my links and stuff there’s basically just like a it’s basically just like a resume type of website but that’s just the best way you can get in contact with me is that

Dylan Silver (23:46)
Tom, thank you so much for your time today. Thanks for coming on the show.

Thomas Castelli (23:49)
Thanks for having me, Dylan.

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100% Bonus Depreciation Explained: Real Estate Tax Strategies That Actually Work

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