- The “Big Beautiful Bill” expanded bonus depreciation, accelerating write-offs for newly acquired property—but it’s now increasing the tax burden on distressed asset dispositions.
- Depreciation recapture has become a major concern in workouts, as defaults and foreclosures can trigger large federal tax bills, even on paper losses.
- Experts warn that transactional investors and short-term holders face especially high exposure, urging new modeling frameworks that account for potential recapture liabilities.
New Bill, New Headaches
The Big Beautiful Bill gave CRE investors an upfront tax advantage through expanded bonus depreciation. But that benefit comes at a cost. Many distressed owners now face large federal tax bills when walking away from troubled properties, as reported by GlobeSt.
How Recapture Works
Speaking on Trepp’s latest podcast, Research Director Steven Bushbaum explained the mechanics. When a borrower defaults and transfers the property back to a lender, the IRS treats it as a sale. The gain equals the loan balance minus the depreciated basis. For example, a $10m property with $3m in depreciation has a $7M basis. If the loan is $12M, the gain is $5M. Of that, $3M is taxed as depreciation recapture (25%), and $2M as a capital gain (20%).
The Real Cost of Accelerated Depreciation
That $3M depreciation deduction helped front-load tax benefits—but it now creates a sizable tax bill when the property is surrendered. “This is the part the Instagram gurus and cost segregation evangelists don’t talk about,” said Trepp CPO Lonnie Hendry. While accelerated depreciation works well for long-term holders or legacy transfers, it becomes a liability in short holds or distressed sales.
A Strategic Shift in Workouts
The implications are forcing sponsors to rethink exit strategies. For those facing mounting office delinquencies and declining asset values, simply “handing back the keys” may no longer be the clean break it once seemed. Instead, executives must weigh whether injecting fresh capital to stabilize an asset might be preferable to incurring a large tax bill at disposition.
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Modeling for Recapture Risk
Hendry emphasized the need for a new financial framework that integrates recapture tax exposure into disposition models. Without it, asset managers risk overlooking a key cost that can shift the economics of a foreclosure or deed-in-lieu transaction.
Looking Ahead
As more distressed assets come to market and investors face tough decisions, depreciation recapture—long a tax footnote—is becoming a frontline concern. Sponsors who took full advantage of bonus depreciation must now engage tax counsel early and often to avoid surprises. In the post-Big Beautiful Bill era, rapid tax benefits can carry steep long-term costs.
