Here's an actual example of Cost Seg + Bonus:
You buy a small apartment complex for $500,000
Normally you get to depreciate the building value of that over 39 years (not land)
So lets say your building is worth $400k we depreciate that equally over 39 years.
A cost segregation is something done by a qualifying firm/ expert where they separate out components of the building that may have shorter lives
Say they do their thing, separate a value for electrical, HVAC ect- and they say $250k of this is all components with 7 years lifes.
You can either, expense those portions over 7 years.
Or potentially apply bonus.
Bonus depreciation says assets with a life of LESS than 20 years, can be expensed 100% in year 1.
So that $250k you get to deduct in year 1. And then your remaining $150k is spread over the 39 years.
Things to consider:
If you're going to hold it long term, your taxable income later will be higher because you deducted most of your value up front.
If you're not a real estate professional, and your AGI is over $150k.....you are not allowed to use rental losses in the year they are incurred. So if you can't use the losses and you just generated a $200k loss, there's no real benefit that year. However, if you are selling another rental and generating say a $200k gain, you'll be able to offset that.
Also, with 1031 exchange there is a little concern with if there will be any issues. Since now we've separate out a portion from being a "qualified real estate" asset. The IRS definition of real estate for 1031 and the state law differ. I think they're still going to allow it with 1031, but we haven't seen any direct guidance or tax cases on this yet.