If you invest in Texas residential real estate, depreciation can provide a tax deduction. The One Big Beautiful Bill Act made 100% bonus depreciation permanent. Residential rental buildings remain 27.5-year property, so cost segregation can identify shorter-lived components eligible for accelerated depreciation.
Why cost segregation matters for Texas investors
When you purchase a residential rental, a cost segregation study examines the underlying assets and separates qualifying components into appropriate tax categories. A properly supported study can identify five-year personal property and 15-year land improvements, which creates a larger pool of basis eligible for 100% bonus depreciation. If you are considering a Texas cost segregation firm, look for detailed analysis that connects classifications to the property and supports the resulting depreciation schedule. That documentation can give you a clearer basis for evaluating the strategy.
What the current bonus depreciation rules change
The OBBBA changed the planning framework for investors purchasing qualifying shorter-lived assets, so the distinction between those assets and the 27.5-year residential building matters. Under IRC Sec. 168(k), qualifying property with recovery periods of 20 years or less can receive the 100% first-year deduction, which makes the classifications identified through cost segregation significant for investors evaluating a new acquisition.
The One Big Beautiful Bill Act (P.L. 119-21), signed July 4, 2025, made the 100% first-year bonus depreciation rate under IRC Sec. 168(k) permanent for qualifying property acquired and placed in service on or after January 20, 2025. Before that change, the rate was phasing down on a fixed schedule of 80%, 60%, 40%, 20% and then 0%. Property acquired before January 20, 2025 remains subject to the phase-down percentage in effect at the time of acquisition.
A worked residential rental example
Consider a Texas investor who acquires a residential rental property for $3,150,000, of which $450,000 is allocated to land, leaving a depreciable building basis of $2,700,000. The investor separately purchases $65,000 of furniture, fixtures and equipment. The property is placed in service in January. Without a cost segregation study, the building is depreciated over 27.5 years and the first-year deduction under the mid-month convention is $94,095; the separately purchased FF&E receives 100% bonus depreciation of $65,000 whether or not a study is performed, for a total of $159,095. With a study, $378,000 is reclassified to five-year personal property and $243,000 to 15-year land improvements, giving $621,000 of accelerated basis eligible for 100% bonus depreciation. The remaining $2,079,000 stays on the 27.5-year schedule and produces $72,453 in year one. Adding the $65,000 of FF&E, the first-year deduction is $758,453. The study's incremental contribution is $599,358, which, at a 37% marginal federal rate, defers roughly $221,762 of tax.
Passive activity limits still matter
These deductions are not automatically usable. Under IRC Sec. 469, rental real estate is generally a passive activity and passive losses offset only passive income; unused losses are suspended and carried forward until the taxpayer has passive income or disposes of the activity in a fully taxable transaction. A taxpayer who qualifies as a real estate professional under Sec. 469(c)(7) and materially participates may treat the losses as non-passive. Separately, a rental with an average guest stay of seven days or less is not a rental activity under Reg. Sec. 1.469-1T(e)(3)(ii)(A), so material participation alone can make the losses non-passive without real estate professional status.
Texas has no personal income tax, so the individual investor's depreciation benefit discussed here is entirely federal. Your passive activity status and existing passive income therefore matter when you assess how much of an accelerated deduction you can use currently.
Recapture affects the long-term calculation
Accelerated depreciation is a deferral, not forgiveness. On a taxable sale, depreciation claimed on the five- and 15-year property a study reclassifies is recaptured under IRC Sec. 1245 as ordinary income to the extent of depreciation taken, potentially at rates up to 37%, rather than the 25% maximum applying to unrecaptured Sec. 1250 gain on the building itself. A study therefore shifts part of future gain from Sec. 1250 to Sec. 1245 treatment. The net benefit depends on the time value of the deferral and the expected holding period and is generally weaker for property expected to be sold within a few years.
A planning decision for investors
As an investor, you should consider the first-year deduction alongside your expected holding period and broader federal tax position. Cost segregation can accelerate deductions on qualifying components, so permanent 100% bonus depreciation increases the importance of identifying those assets correctly. The deduction is subject to passive activity limitations and depreciation recapture can affect the eventual sale. Consequently, cost segregation is a planning decision based on your property, tax position and investment horizon.
