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Using Section 179 Deductions For Commercial Rental Properties

Because bonus depreciation is reduced to 40 per cent for 2025, the Section 179 expense appears more favourable.

It is possible that an upcoming tax bill in Congress will restore 100% bonus depreciation. However, until that restoration comes to light, the Section 179 strategy remains a viable option when it works for you.

Section 179 Deduction Overview

IRC Section 179 allows you to deduct any amount up to the full cost of qualifying property in the year it is placed in service rather than depreciating it over multiple years. However, the tax code imposes restrictions on the types of property that qualify for this deduction.

To qualify for Section 179, the property must be

  • Eligible Section 179 property
  • Acquired by purchase, and
  • Used in a trade or business

Okay – so far, so good. But when a property meets the eligibility requirements for Section 179, you have several limitations to consider:

  • Section 179 annual cap
  • Dollar-for-dollar phaseout for major projects
  • Overall business income limit

Section 179 Property

Eligible Section 179 property includes tangible personal property and off-the-shelf software. It also includes the following commercial real property improvements that are made after the property is first placed in service:

  • Qualified improvement property (QIP) – interior upgrades to commercial buildings (excluding structural work, elevators, and building entanglements)
  • Roofs
  • Heating, ventilation and air conditioning (HVAC)
  • Fire alarm systems
  • Security systems

Important note: Land improvements – such as parking lots, sidewalks and landscaping – do not qualify for Section 179 deductions.

However, such land improvements are eligible for 15-year MACRS depreciation and bonus depreciation.

Acquired-by-Purchase Rules

To qualify for a Section 179 deduction, you must acquire the property by purchase, meaning that you must buy it from an unrelated party in a taxable transaction. The following rules apply:

  • No gifts or inheritance: Property received as a gift or through inheritance does not qualify for Section 179 deductions.
  • Related-party transactions: Purchases from closely related individuals or entities (such as family members or controlled corporations) are generally disqualified under IRS rules.

Definitions of a trade or business

For property to qualify for Section 179, it must be used in a trade or business rather than a passive investment activity. The IRS generally defines “trade or business” as an activity conducted regularly and continuously with the primary purpose of generating a profit. Mere property ownership or collecting rental income does not automatically constitute a trade or business.

Issues with Triple Net Leases

A significant issue for commercial landlords is that properties leased under a triple-net-lease arrangement may not qualify for Section 179 deductions.

Under a triple net lease, the tenant is responsible for paying property taxes, insurance, and maintenance costs, leaving the landlord with minimal active involvement.

The IRS may classify triple-net lease arrangements as passive investment activities rather than active trade or business activities.

Without active management or material participation, landlords may be unable to claim Section 179 deductions. According to the IRS, a mere passive investor who doesn’t meaningfully participate in the management or operations of the business will not qualify to claim Section 179.

Engaging in property management activities – such as handing repairs, marketing vacancies, or directly overseeing tenant relations – may help establish trade or business status for tax purposes.

Annual deduction limits and phaseouts

For 2025, the maximum Section 179 deduction is $1.25 million, with a phaseout beginning at $3.13 million. This means that if total qualifying property purchases exceed $3.13 million, the deduction is reduced dollar for dollar and is fully phased out at $4.38 million.

Additionally, Section 179 deductions cannot exceed your business’s taxable income or, in the case of an individual, your defined business income, which includes wages and salary. Essentially, you cannot use Section 179 to generate losses to offset other non-business income. Any amount exceeding the taxable income limit must be carried forward to future tax years.

Section 179 Vs. Bonus Depreciation

Bonus depreciation is another method of accelerating deductions – one that offers 100% write-offs through 2022. However, starting in 2023, bonus depreciation phases down 20 percent per year until it is completely phased out in 2027.

Unlike Section 179, bonus depreciation is not subject to an income limitation, making it useful if your business is generating losses.

Fortunately, you do not have to decide between Section 179 and bonus depreciation. You can first apply the Section 179 rules and then claim bonus depreciation to maximize your first-year depreciation.

BergerCPAFirst, with over 30+ years of experience, offers comprehensive tax preparation services for individuals and businesses nationwide. Our commitment is to provide personalized attention while ensuring compliance and maximizing tax benefits. If you have any questions or would like to schedule a consultation, please call (201) 587-9200 or send us an inquiry.

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