The One Big Beautiful Bill, Bonus Depreciation, and DSTs: What 1031 Investors Need to Know

On July 4, 2025, the One Big Beautiful Bill Act became Public Law 119-21, and with it the most investor-friendly depreciation rules real estate has seen in years returned — this time on a permanent footing. For the 1031 investor weighing a Delaware Statutory Trust (DST), the headline is simple: a well-structured DST can now pass through a far larger first-year depreciation deduction than it could a year ago. The mechanics, however, are anything but simple. Whether you actually receive that deduction depends on how the trust is structured, whether the sponsor commissioned a cost segregation study, how much new cash you brought to the exchange, and how your own CPA reports it. This guide walks through the new law's real-estate provisions in plain English, then turns to the questions that matter most for DST owners: how the benefits reach you, what happens when they aren't baked into the offering, whether you can claim them on your own, and which property types deliver the most.

What the One Big Beautiful Bill Changed for Real Estate

The One Big Beautiful Bill Act (OBBBA) runs to hundreds of provisions, but a cluster of them speaks directly to real estate investors. The centerpiece is the return of 100% bonus depreciation. Under the prior schedule, first-year bonus depreciation had been phasing down — 80% in 2023, 60% in 2024, and on track to disappear entirely by 2027. OBBBA reversed that glide path. For qualifying property acquired and placed in service after January 19, 2025, businesses can again deduct 100% of the cost in the first year, and the law makes that treatment permanent rather than temporary. That permanence is the part professionals have waited years for: it lets sponsors and investors underwrite acceleration into a deal without betting on whether Congress extends it.

Bonus depreciation does not stand alone. OBBBA also permanently raised the Section 179 expensing limit from $1 million to $2.5 million, with the phase-out threshold lifted to $4 million, both indexed for inflation going forward and effective for tax years beginning after December 31, 2024. It created an entirely new category of write-off — Qualified Production Property under new Section 168(n) — that allows 100% first-year depreciation on the shell of certain manufacturing and production buildings, a provision we'll return to because it rarely touches a typical DST. And it preserved the structural pillars that make tax-deferred real estate work in the first place: Section 1031 like-kind exchanges remain fully intact for real property, the 20% qualified business income (QBI) deduction under Section 199A was made permanent, and the federal estate and gift tax exemption rises from $13.99 million in 2025 to $15 million in 2026, indexed thereafter.

A few adjacent provisions round out the picture. The state and local tax (SALT) deduction cap was lifted from $10,000 to $40,000 for 2025 through 2029 (phasing down for very high earners but never below $10,000), which matters to investors in high-tax states weighing where to hold property. Opportunity Zones were made a permanent feature of the code with rolling designations, and a new rural Opportunity Zone incentive cut the "substantial improvement" threshold from 100% to 50% for property located entirely in rural zones. And the business interest limitation under Section 163(j) reverted to the more generous EBITDA-based calculation, which helps leveraged real estate deduct more of its interest expense. The table below summarizes the provisions that bear on a DST investor.

Two cautions before going further. First, several of these are permanent while others (SALT relief, the new individual deductions) carry expiration dates, so timing still matters. Second, the IRS is still issuing regulations and interim guidance on the depreciation provisions; the statutory framework is settled, but the fine print continues to develop. Nothing here is a substitute for advice from your own CPA on your specific facts.

Source: One Big Beautiful Bill Act (Public Law 119-21); IRS provisions summaries. Figures current as of 2026 and subject to forthcoming regulations.

Accelerated Depreciation and Bonus Depreciation, Explained

To see why the bill matters for DSTs, it helps to separate three ideas that often get blurred together: ordinary depreciation, accelerated depreciation, and bonus depreciation. Ordinary depreciation is the slow, straight-line write-off the tax code assigns to buildings — 27.5 years for residential rental property and 39 years for commercial. Buy a $10 million apartment building (excluding land) and straight-line depreciation hands you roughly $364,000 a year for 27.5 years. Steady, but unhurried.

Accelerated depreciation speeds that up by recognizing that a building is not one monolithic 27.5-year asset. It is a bundle of components with very different useful lives: the structure itself, but also carpeting, cabinetry, appliances, specialty electrical and plumbing, security and data systems, and exterior land improvements like parking lots, sidewalks, and landscaping. A cost segregation study — an engineering-based analysis of the property — reclassifies those shorter-lived components into 5-, 7-, and 15-year tax lives. On a typical apartment or hospitality asset, anywhere from 20% to 35% of the depreciable basis can be moved out of the 27.5- or 39-year bucket and into these faster ones.

Bonus depreciation is the multiplier. Under Section 168(k), property with a recovery period of 20 years or less — exactly the 5-, 7-, and 15-year components a cost segregation study identifies — is eligible to be written off entirely in year one. Before OBBBA, that first-year percentage was fading toward zero. Now it is back to 100% and permanent. Put the two together and the sequence is: cost segregation finds the short-life property, and bonus depreciation lets you deduct all of it immediately. The building shell still depreciates over its long life, but the reclassified 20%–35% lands as a deduction in the very first year.

The effect on a real return is significant. On that $10 million building, suppose a study reclassifies 30% — $3 million — into bonus-eligible categories. Instead of roughly $364,000 of first-year depreciation, the investor could see on the order of $3 million-plus in year one. For a passive real estate holder, that deduction can shelter the property's own income and, within the passive-activity rules, potentially other passive income as well. The crucial caveat, which we develop below, is that this is a timing benefit, not free money: accelerating depreciation today lowers your basis and sets up depreciation recapture later, unless a subsequent exchange defers it.

Qualified Production Property: The New §168(n) — and Why It Rarely Touches DSTs

Because it generates headlines, the new Qualified Production Property (QPP) deduction deserves a clear-eyed look. Section 168(n), added by OBBBA, lets a business write off 100% of the cost of nonresidential real property — the building itself — when that property is used as an integral part of manufacturing, production, or refining that significantly transforms a tangible product. This is genuinely novel: ordinarily the shell of a commercial building is a 39-year asset that never qualifies for bonus depreciation. QPP carves out an exception for factories and similar production facilities.

The eligibility fence is high and specific. The property's construction must begin between January 20, 2025, and December 31, 2028, and it must be placed in service in the United States on or before December 31, 2030. Just as important, the statute expressly excludes property used for offices, administrative services, lodging, parking, sales activities, and software development or engineering. In other words, QPP is aimed at owner-operators building real factories — not at landlords who lease space to tenants.

That last point is why QPP almost never applies to a conventional DST. The overwhelming majority of DST offerings hold leased, income-producing real estate: apartment communities, net-lease retail, industrial distribution, medical office, self-storage, senior housing. The trust is a passive owner collecting rent, not a manufacturer transforming products inside the building. A DST also operates under tight structural constraints — the so-called "seven deadly sins" of Revenue Ruling 2004-86 that bar the trustee from active business operation — which makes owner-operated production activity incompatible with the form. So while QPP is a meaningful win for industrial America, a DST investor should mentally file it under "interesting but not mine," and focus instead on the bonus depreciation and cost segregation levers that genuinely do flow through.

How DSTs Are Taxed — and Why That Determines Your Depreciation

Everything about how OBBBA reaches a DST investor runs through one structural fact: for federal income tax purposes, a properly formed DST is largely invisible. Under Revenue Ruling 2004-86, the beneficial interests in a qualifying DST are treated as direct ownership of an undivided fractional interest in the underlying real estate. That is precisely what allows a DST to serve as valid replacement property in a 1031 exchange into a DST — you are deemed to own real estate, not a security or a partnership interest, even though your investment trades and settles like one.

This grantor-trust treatment shapes your tax reporting. A DST investor is not a partner and does not receive a Schedule K-1. Instead, the trust issues a grantor letter (sometimes called a substitute statement) reporting your pro-rata share of rental income, operating expenses, interest, and — critically — depreciation. You report those items on Schedule E of your personal return, exactly as you would for a rental property you owned outright. The depreciation that shelters your DST distributions is therefore computed at the property level — using the method, basis allocation, and any cost segregation the sponsor has adopted — and then handed to you as a number on the grantor letter.

Two consequences follow, and they frame the rest of this article. First, because depreciation is determined at the property level, the sponsor's choices largely dictate how much accelerated depreciation you see. If the sponsor ran a cost segregation study and the deal is structured to pass bonus depreciation through, your grantor letter reflects a big first-year number. If it didn't, you see the slow straight-line figure. Second, because you are treated as a direct owner of real estate, you also have your own tax basis to account for — and the way a 1031 exchange splits that basis into two pieces is the key that unlocks (or limits) your ability to claim bonus depreciation at all.

Carryover Basis vs. Excess Basis: The Hinge of the Whole Question

When you exchange into a DST, your tax basis in the new interest is not simply what you invested. It comes in two layers. The carryover (or "exchanged") basis is the adjusted basis that follows you out of the property you sold — typically a low number, because you've been depreciating that old property and its value has grown. The excess basis is any additional cash you put in above that carryover amount — new money, including your share of new debt the DST takes on. If you sold a property with a $400,000 adjusted basis and invested $1,000,000 of equity into the DST, roughly $400,000 is carryover basis and $600,000 is excess basis.

This split matters enormously for bonus depreciation, because of a rule many investors miss. Under the Section 168(k) regulations, the carryover/exchanged basis of property received in a like-kind exchange is generally not eligible for bonus depreciation. That portion continues on the depreciation schedule of the property you relinquished — it keeps its old life and method. Only the excess basis is treated as newly acquired, placed-in-service property, and therefore only the excess basis can qualify for cost segregation and 100% bonus depreciation.

The practical translation: bonus depreciation in a DST is largely a function of how much new cash you bring. A pure swap — exchanging only your low carryover basis with no fresh equity — generates little bonus-eligible basis no matter how aggressive the cost segregation study is. By contrast, an investor placing significant new money (or stepping into meaningful new DST-level debt) creates a large pool of excess basis that cost segregation can carve up and bonus depreciation can accelerate. Many DSTs are deliberately structured with moderate leverage precisely so that an all-cash exchanger still ends up with excess basis — their share of the new mortgage — that can drive depreciation. This is the single most important nuance in the entire conversation, and it is the first thing to model with your CPA before assuming a headline depreciation figure applies to you.

What If You Invest Cash — Without a 1031 Exchange?

Not everyone enters a DST through a 1031 exchange. Accredited investors also buy DST interests with cash — to put proceeds from a business sale, an inheritance, or already-taxed savings into passive, professionally managed real estate and its tax shelter, without selling a property first. For these investors the depreciation analysis is actually simpler than for an exchanger, and in one important respect more favorable.

The reason is the mirror image of the carryover-basis problem above: a direct cash investor has no relinquished property, and therefore no carryover (exchanged) basis to carve out. Their entire investment is brand-new, placed-in-service basis. That means 100% of their basis — once a cost segregation study allocates it across 5-, 7-, 15-, and long-life classes — is potentially bonus-eligible, not just the slice above some carryover amount. Where a 1031 exchanger often brings mostly low carryover basis that can't take bonus depreciation, the cash investor's whole basis is on the table. Per dollar invested, a cash investor can sometimes capture more first-year bonus depreciation than an exchanger does.

Everything else about the structure is the same. Depreciation is still computed at the property level and reported to you on the grantor letter for Schedule E; the resulting loss is still passive under Section 469, so it shelters the DST's income and other passive income but generally not wages, and unused amounts suspend and carry forward; and the deal still needs a cost segregation study (or an allocation your CPA can work from) for acceleration to exist at all. A straight-line DST hands a cash investor the same modest first-year figure it hands everyone else.

What does the cash investor give up, and keep? On the way in, there is no prior capital gain to defer — you invested cash, not exchange proceeds — so the 1031 deferral benefit simply doesn't apply at entry. But you still receive distributions that are substantially tax-sheltered in the early years, you can 1031 out of the DST at its full-cycle sale to defer future gains, and your heirs can take a stepped-up basis at death. For an investor sitting on cash, a cost-segregated, bonus-eligible DST can convert that cash into income that is largely shielded up front — and OBBBA's permanent 100% bonus depreciation makes that shield larger than it would have been a year ago. The one caution worth repeating: the size of the passive loss you can actually use still depends on your own passive-income picture, so model it with your CPA before assuming a headline depreciation factor translates dollar-for-dollar onto your return.

How the Bill Actually Benefits DST Investors

With the structure in mind, the benefit becomes concrete. A DST that (a) carries some leverage or accepts new equity, and (b) is supported by a cost segregation study, can pass through a substantial first-year depreciation deduction — now at the full 100% bonus rate OBBBA restored. For many investors the goal is a high "first-year depreciation factor": the share of invested equity returned as a paper loss in year one. Depending on the asset and leverage, sponsors may project first-year depreciation in the range of, very roughly, 30% to 70%+ of invested equity on cost-segregated, bonus-eligible deals.

What does that buy you? First, it shelters the DST's own cash distributions. A DST throwing off, say, 5% annual cash flow may report little or no taxable income for the first year or two because depreciation offsets it — you receive cash that is largely tax-deferred. Second, subject to the passive activity loss rules of Section 469, surplus depreciation can offset other passive income on your return — income from other rentals, other DSTs, or certain other passive investments. (It generally cannot offset wages or portfolio income; passive losses you can't use are suspended and carry forward, and are freed up when you eventually sell.) Third, the deduction improves your after-tax internal rate of return by pulling deductions forward, which is worth real money in present-value terms even though it is a timing shift.

Layer the other OBBBA provisions on top and the case strengthens. The permanent QBI deduction can apply to qualifying pass-through and REIT-dividend income some DST structures generate. The richer Section 163(j) interest rules let leveraged DSTs deduct more interest, lowering the taxable income that reaches you. And the higher estate exemption reinforces the classic endgame: exchange into DSTs, defer tax across your lifetime, and let heirs take a stepped-up basis at death that wipes out the deferred gain and recapture entirely. The exhibit below illustrates the first-year depreciation difference between a straight-line DST and a cost-segregated, bonus-eligible DST on a hypothetical $1,000,000 equity investment with excess basis.

Is It Baked Into the Offering? What to Look For

Because depreciation is set at the property level, the most important due-diligence question is whether the sponsor built acceleration into the deal. A few concrete things to look for in the private placement memorandum (PPM) and the sponsor's tax materials:

Start with the tax section of the PPM. Sponsors who intend to deliver acceleration typically disclose that a cost segregation study has been or will be performed, describe the projected first-year depreciation or "depreciation factor," and include a tax opinion addressing the treatment. Silence on cost segregation is itself a signal — it usually means the property will be depreciated straight-line. Ask directly: "Has a cost segregation study been commissioned, and what first-year depreciation are you projecting per dollar of equity?" Ask, too, how the projection splits between carryover and excess basis, since only the latter drives bonus depreciation for an exchanger.

Next, weigh leverage. A modestly leveraged DST gives an all-cash exchanger a share of new debt — excess basis — that supports depreciation; an all-cash (debt-free) DST may offer less bonus-eligible basis unless you personally contribute new equity above your carryover. Finally, confirm how and when you'll receive your grantor letter, since you'll need it to file, and ask whether the sponsor provides a cost segregation allocation schedule detailed enough for your CPA to work with. Reputable sponsors increasingly furnish exactly that, because a strong depreciation story helps them raise capital.

Can You Capture These Benefits on Your Own?

This is the question investors ask most, and the honest answer is a qualified "partly." You cannot unilaterally commission your own cost segregation study to override how the trust keeps its books. You don't control the property, you can't direct the trustee's accounting, and the property-level depreciation reported on your grantor letter is the sponsor's to determine. If the DST depreciates straight-line at the property level, you can't simply substitute a more aggressive schedule for the trust's reporting of trust-level basis.

But — and this is the part that surprises people — you are treated as a direct owner of an undivided real-property interest, and your excess basis is your own newly-acquired, placed-in-service property. That basis is yours to depreciate on your personal return. With a qualified CPA and a cost segregation engineer, you can apply a cost segregation analysis to your share of the property, allocate your excess basis across 5-, 7-, 15-, and 39/27.5-year classes, and claim bonus depreciation on the short-life portion — even if the sponsor's marketing didn't emphasize it. The catch is data: to do this credibly you need the property's component cost allocations (square footage, building systems, improvement detail), which realistically come from the sponsor. Well-run sponsors provide a study or allocation schedule precisely so investors can do this; without that underlying data, a defensible self-prepared study is difficult and should never be improvised.

So the realistic playbook is: choose offerings that support acceleration, then have your own CPA optimize your share — especially your excess basis. Two guardrails. First, remember that only excess basis is bonus-eligible; you cannot conjure bonus depreciation out of low carryover basis, no matter how the study is drawn. Second, this is precisely the kind of position where do-it-yourself is the wrong instinct — the interaction of like-kind exchange basis rules, the Section 168(k) regulations, passive-activity limits, and recapture is genuinely complex, and the cost of a professional study is trivial against the size of the deduction and the audit exposure of getting it wrong.

Which DST Property Types Benefit Most

Not every DST is an equally good vehicle for accelerated depreciation. The benefit scales with the share of a property's basis that can be reclassified into short-life components — and that share varies widely by asset type. As a rule of thumb, the more "stuff" a building contains beyond its bare structure — appliances, specialized systems, interior finishes, sitework — the larger the cost-segregation harvest.

Apartments and multifamily are the classic high performers: kitchens, appliances, flooring, and extensive land improvements often push 25%–35% of basis into 5- and 15-year property, and the 27.5-year residential life on the remainder is shorter than commercial. Senior housing, student housing, hospitality, and self-storage share that profile — furniture, fixtures, equipment, and heavy sitework. Industrial and distribution assets can carry significant specialized electrical, racking, and yard improvements. Medical office and data centers are component-rich, with extensive mechanical, electrical, and plumbing systems. At the other end, single-tenant net-lease retail — a long-life building with minimal personal property and little sitework — typically yields a smaller reclassification, and raw or unimproved land isn't depreciable at all. The table summarizes the spectrum.

Remember the framing from earlier: even a component-rich asset only delivers bonus depreciation to the extent you have excess basis to apply it against. The ideal setup pairs a depreciation-friendly asset type with a deal structure (leverage or new equity) that gives you meaningful excess basis — and a sponsor willing to hand your CPA the cost segregation detail to support it.

The Catch: Recapture, Passive Losses, and Timing

Accelerated and bonus depreciation are powerful, but they are not a free lunch, and a clear-eyed investor should hold three caveats in view. The first is depreciation recapture. Every dollar of depreciation you take lowers your basis, and when the DST eventually sells the property, the gain attributable to that depreciation is taxed — the personal-property portion as ordinary income, and the real-property portion as "unrecaptured Section 1250 gain" at rates up to 25%. Acceleration front-loads deductions, which means it also front-loads the recapture exposure. The standard answer is to keep exchanging: a subsequent 1031 exchange at the DST's full-cycle event defers the gain and recapture again, and a step-up in basis at death can eliminate them — which is exactly why the higher estate exemption and intact 1031 rules matter so much to this strategy.

The second caveat is the passive activity loss limitation. The large first-year loss a cost-segregated DST generates is a passive loss. It offsets the DST's own income and other passive income, but generally not your salary, business income, or portfolio income — unless you qualify as a real estate professional, a status most DST investors do not and, given the passive nature of a DST, typically cannot reach through the DST itself. Unused passive losses aren't lost; they suspend and carry forward, releasing when you dispose of the investment. The practical point is to size your expectations to your own passive-income picture, not to a headline deduction.

The third is simply timing and permanence risk. Bonus depreciation is now permanent, which is a meaningful improvement over the prior phase-down, but tax law can always change, and the IRS is still finalizing regulations under the new provisions. Build your plan on the law as enacted, revisit it as guidance is issued, and lean on professionals. None of these caveats undercuts the core conclusion — OBBBA materially improved the after-tax math of a well-structured DST — but they explain why the right deal, the right basis structure, and the right CPA matter more than any single headline number.

The Bottom Line for 1031 Investors

The One Big Beautiful Bill did something real estate investors had wanted for years: it brought 100% bonus depreciation back and made it permanent, while leaving the 1031 exchange and the broader tax-deferral architecture intact. For a DST investor, that translates into a potentially larger first-year deduction — but only when three things line up. You need an asset type with real cost-segregation potential, a deal structure that gives you excess basis (through leverage or new equity), and a sponsor who commissioned the study and will share the detail your CPA needs.

If your offering already bakes this in, your grantor letter will tell the story and your CPA can confirm it. If it doesn't, the property-level reporting won't change — but your own excess basis is still yours to optimize with professional help. And if you're still selecting a DST, treat the depreciation question as a first-order item of due diligence, right alongside sponsor quality, asset, leverage, and the trade-offs of the DST structure itself. Used well, the new rules can meaningfully improve your after-tax return; used carelessly, they create recapture and passive-loss surprises. The difference is planning. At Baker 1031, we model the carryover-versus-excess-basis split and the projected depreciation for every offering we present, so the after-tax picture is clear before you commit capital.

Frequently Asked Questions

Glossary

Bonus Depreciation (§168(k))

A first-year deduction allowing property with a recovery period of 20 years or less to be written off immediately. OBBBA restored the rate to 100% and made it permanent for property placed in service after January 19, 2025.

Accelerated Depreciation

Depreciating a building faster than straight-line by assigning its components to shorter tax lives, typically via a cost segregation study.

Cost Segregation

An engineering-based study that reclassifies parts of a building into 5-, 7-, and 15-year property, making those components eligible for bonus depreciation.

MACRS

The Modified Accelerated Cost Recovery System — the federal depreciation framework that assigns recovery periods (e.g., 5, 7, 15, 27.5, 39 years) to different classes of property.

Qualified Production Property (§168(n))

A new OBBBA category allowing 100% first-year depreciation on the shell of certain manufacturing/production buildings; excludes offices, lodging, parking, and sales space, and rarely applies to DSTs.

Section 179 Expensing

An election to expense the cost of qualifying business property in the year placed in service. OBBBA raised the cap to $2.5 million with a $4 million phase-out, both indexed.

Carryover (Exchanged) Basis

The adjusted tax basis carried from a relinquished property into 1031 replacement property; it keeps its old depreciation schedule and is generally not eligible for bonus depreciation.

Excess Basis

New investment — additional cash and a share of new debt — above the carryover basis in an exchange. Treated as newly acquired property and eligible for cost segregation and bonus depreciation.

Grantor Letter

The annual tax statement a DST issues to investors (in lieu of a Schedule K-1) reporting their share of income, expenses, and depreciation for Schedule E.

Delaware Statutory Trust (DST)

A trust that holds real estate and, under Revenue Ruling 2004-86, lets investors own an undivided fractional interest treated as direct real-property ownership — qualifying as 1031 replacement property.

Passive Activity Loss (§469)

Rules that limit using losses from passive investments (like a DST) to offsetting passive income; unused losses suspend and carry forward until disposition.

Depreciation Recapture

Tax owed on the portion of gain attributable to prior depreciation when property is sold — ordinary income on personal property and up to 25% on unrecaptured Section 1250 real-property gain.

Qualified Business Income (QBI) Deduction (§199A)

A deduction of up to 20% of qualifying pass-through and REIT-dividend income, made permanent by OBBBA.

Like-Kind Exchange (§1031)

A transaction deferring capital gains tax when real property held for investment is exchanged for like-kind real property, including a qualifying DST interest. Preserved under OBBBA.

Sources & References

Disclosures