Evaluating Bonus Depreciation in Real Estate Portfolios

Permanent 100% bonus depreciation has handed real estate investors one of the most powerful tax tools in years, and with it, a temptation to chase deductions instead of returns. Kevin Van Hoesen, managing partner of Ibis Capital, argues the order matters. His firm, which buys income-producing healthcare, industrial and storage properties alongside experienced operators through Ibis Capital Fund I, completes a cost segregation study on every acquisition to accelerate deductions that flow through to investors on a single K-1.

Its modeling of a hypothetical diversified portfolio at about 60% leverage produced roughly 80 cents of deductions for every dollar invested over a five-year hold, most of it in year one. But Van Hoesen insists a deal that works only because of the tax break doesn’t work at all.

Van Hoesen explains how the One Big Beautiful Bill Act changed the math, which property types benefit most and how family offices can put the deductions to work across a portfolio.

CM: You write that Ibis buys “income-producing real estate at a basis we can defend,” not tax deductions. What does a defensible basis look like in today’s market, with the 10-year Treasury yield near 5%?

KVH: When I worked on a life insurer’s investment portfolio at an institutional asset manager, investments were measured against the 10-year Treasury, whether fixed income, equities or real assets. The Treasury is the risk-free rate for long-term investments, so anything else had to earn a spread over it to justify the added risk, wherever rates happened to be.

With the 10-year currently near 5%, that spread starts from a higher base, so income has to lead. If an asset’s in-place NOI can support a 7% to 9% cash-on-cash yield, it has a solid foundation. Typically, we look for about 300 basis points over the 10-year. After that we look at long-term appreciation, NOI growth and how much illiquidity we’re taking on.

When we can buy stabilized rents or strong operating income at a price that holds up in our diligence without relying on incentives or non-contractual rent growth, I’d see that a defensible basis.

CM: Can you share an example of a deal you passed on because it only worked with the tax benefit?

KVH: In mid-2025, I reviewed a newer-vintage multifamily property where the sponsor led with after-tax returns instead of a standard net IRR. That was the first thing I noticed, because an after-tax return rests on assumptions about each investor’s tax situation, and those vary from one investor to the next.

Two tax benefits were behind that figure: tax increment financing (TIF) from the city, which offset part of the property taxes for a set number of years, and the sponsor’s cost segregation study, which showed a significant first-year deduction.

What those benefits masked was the leverage. It was close to 75%, and the lender was comfortable there because the TIF made the NOI and the debt service coverage more appealing. The higher leverage also made the deduction look bigger relative to the equity, since depreciation is based on the cost of the building and improvements, including the portion paid for with debt. Take the TIF away and the property was overleveraged. A dip in occupancy, or the TIF ending, and debt coverage would get tight quickly. We passed.

CM: The One Big Beautiful Bill Act made 100% bonus depreciation permanent for property acquired after Jan. 19, 2025. How has that changed the way you and your investors underwrite deals compared with the phase-down years?

KVH: It came up less than you’d think. In late 2024 and into 2025, with bonus depreciation stepping down to 60% and then 40%, operators rarely led with it. Cost segregation studies were still being done, but the first-year benefit was smaller, and a deduction wasn’t going to make a deal pencil if it didn’t stand on its own. And for the first half of 2025, it wasn’t clear whether 100% would come back at all, which made it hard for sponsors and investors to count on.

This year, operators I talk to treat a cost segregation study as table stakes, and some walk their investors through K-1s side by side with cash distributions.

I still underwrite the same way. The deal has to work before the tax benefits. Now that bonus depreciation is permanent, though, we plan for and model it so investors know what to expect and can build it into their long-term planning.

CM: Which tax policy risks still concern you, whether future legislation, state conformity or IRS guidance?

KVH: How any of these risks play out depends on the investor, which is why I’d bring a tax adviser in early. The best results I’ve seen come from specialists who build tax strategies alongside the investments instead of looking for loopholes after the fact.

On legislation, “permanent” only means the expiration date has been removed from the law. It can still be changed or repealed. It’s something to keep an eye on, but because our deals have to stand on their own, a change would impact investors’ after-tax returns, not the deals themselves.

State conformity is the bigger issue for funds and their investors. Idaho, where our RIA is registered, decoupled from federal bonus depreciation, and California has long declined to follow it. More than half the states don’t fully follow the federal rule. An investor in a state that doesn’t conform gets the federal deduction but a smaller state one, and a fund that owns assets in several states adds operational and reporting complexity.

CM: You list self-storage and car washes near the high end for accelerated depreciation and industrial near the low end. How much does depreciation potential factor into your sector allocation versus income and fundamentals?

KVH: Very little. Accelerated depreciation is a characteristic of many of the asset classes we look at, but we choose investments for income and fundamentals first, and the depreciation comes along with that.

There’s also a practical reason not to chase it. The deduction is largest where more of the cost sits in equipment, specialized systems and site work, which is common in healthcare, special-purpose industrial and some of our opportunistic investments. Those are also the components that wear out and need replacing, so a bigger deduction usually comes with a bigger capital budget. Our operating partners run the properties day to day, and we work through the capital plan with them before we invest. If the replacement costs aren’t funded, the deal isn’t ready.

CM: Industrial outdoor storage is mostly land, which can’t be depreciated. Why include it, and how do you weigh lower tax benefits against its income?

KVH: There’s a lot to like about IOS, starting with basis and supply. Owner-operators still hold most of it, and many sites haven’t traded in years. Institutional capital is moving in, but because each site is a smaller equity check, it tends to buy portfolios, leaving smaller single sites available at a better basis. In the right markets, supply is also constrained. Zoning for outdoor storage is restrictive, and new builds are limited, which supports rents and helps protect the downside.

The depreciation is smaller, but it’s there. Land doesn’t depreciate. Paving, fencing, site lighting and drainage are generally 15-year land improvements, which qualify for bonus depreciation. More developed sites add covered parking for machinery, storage buildings and maintenance shops, and the equipment and systems in those can often be broken out too. There’s less to deduct than on a building-heavy asset, and for the same reason there’s less to maintain.

CM: You suggest family offices can keep adding investments to generate new deductions. Isn’t that a treadmill? Where does the strategy end?

KVH: I agree it becomes a treadmill if the goal is to avoid paying tax on the income the investments generate. When the strategy starts with income, though, a family office that builds a diversified real estate portfolio over time keeps generating new depreciation as a byproduct. That works best with enough volume to stagger investments, which is why it fits family offices and fund strategies better than one or two direct deals. The investor also needs passive income to offset; otherwise the losses carry forward.

I want to be clear that this is a tax deferral, not avoidance. The income the depreciation shelters is ordinary income, and when the asset sells, the depreciation is recaptured, much of it at ordinary rates. This gets back to the concept of the time value of money. If you can defer your tax bill for 10 years and invest that capital at 7%, it roughly doubles before the bill comes due.

Where it ends is really an allocation question. As long as you keep adding real estate, new depreciation can offset the recapture when older properties sell. It should stop when the portfolio is adequately allocated to real estate. Without new depreciation coming in, any remaining losses get used up over time, and the rental income and future gains become taxable. Direct owners can use the exchange strategies Chris Milner described in your conversation with him. For families holding across generations, the step-up in basis at death can make the deferral permanent, but that’s a conversation for their estate counsel.

CM: What’s the most common misconception advisers have about bonus depreciation in fund structures?

KVH: I think it’s twofold. One is that it isn’t always clear bonus depreciation flows through in a fund. In a private real estate fund taxed as a partnership, the depreciation passes through to investors on their K-1s, much as if they owned the building directly. I make that point with advisers and investors often.

The other is where it fits. For a typical investor in a real estate fund, the losses are passive, so they offset passive income, such as income from other rental real estate or a business in which the client doesn’t materially participate. They generally can’t offset salary or gains in a stock portfolio. The best advisers I work with run a tax strategy alongside the investment strategy. Not every adviser lives in the tax code, though, and it’s easy to treat these benefits as if they’re interchangeable. That’s where I see the misconception.