Section 179D: An Under-Discussed Deduction for 27.5-Year and 39-Year Assets Amid Bonus Depreciation Buzz

The Section 179D deduction is a game-changing tax incentive for energy-efficient improvements, offering significant flexibility for properties with 27.5-year (residential rental) or 39-year (commercial) depreciation schedules. With the Inflation Reduction Act (IRA) of 2022 enhancing its benefits and proposed tax legislation (the “one big bill”) likely preserving it, 179D remains a critical strategy for real estate investors, though it’s often overshadowed by the hype around bonus depreciation. Using a warehouse as an example, let’s explore how 179D applies to 39-year assets, its viability with or without a cost segregation study, and how it enhances upfront savings, particularly for components not reclassified from the cost basis.

What is Section 179D?

Purpose: 179D incentivizes energy-efficient upgrades in commercial buildings and multifamily residential buildings with four or more stories by allowing an immediate deduction of up to $5.81 per square foot (2025 rate, adjusted for inflation) for qualifying systems: interior lighting, HVAC, hot water systems, and building envelope (e.g., windows, insulation, roofing).

Eligibility: Applies to new construction or retrofits of depreciable property in the U.S., certified to reduce energy costs by at least 25% compared to ASHRAE Standard 90.1 (2019 for projects starting in 2023 or placed in service after January 1, 2027; 2007 for earlier projects).

Variability: The deduction scales with energy savings:

Base Deduction: $0.58 per square foot for 25% energy savings, increasing by $0.02 per point up to $1.16 for 50% savings.

Enhanced Deduction: $2.90 per square foot for 25% savings, increasing by $0.12 per point up to $5.81 for 50% savings, if prevailing wage and apprenticeship (PWA) requirements are met.

Recurring Opportunity: Buildings can claim 179D every four years for additional upgrades, making it a recurring benefit.

Warehouse Example: Cost Segregation and 179D

Let’s consider a warehouse acquired in August 2024 with a cost basis of $2,000,000, placed in service on August 1, 2024. A cost segregation study was conducted in April 2025, the first year of ownership, eliminating the need for a Form 3115. The study leverages 60% bonus depreciation (available for 2024) and allocates the cost basis as follows:

5-year property (200% Double Declining Balance): $400,000 (20%)

Examples: Movable equipment, office furnishings, certain lighting fixtures

15-year property (150% Double Declining Balance): $300,000 (15%)

Examples: Parking lots, landscaping, exterior site improvements

39-year property (Straight-Line): $1,300,000 (65%)

Examples: Building structure, walls, roof, foundation, permanent HVAC, electrical systems

Cost Segregation Savings

The study accelerates deductions for the 5- and 15-year property:

5-year property bonus: $400,000 × 60% = $240,000

15-year property bonus: $300,000 × 60% = $180,000

Total bonus depreciation: $240,000 + $180,000 = $420,000

Remaining 5-year property ($160,000): ~$32,000 (20% under 200% DB, mid-month convention)

Remaining 15-year property ($120,000): ~$6,000 (5% under 150% DB, mid-month convention)

Total first-year depreciation: $420,000 + $32,000 + $6,000 = $458,000

The 39-year assets ($1,300,000) yield an annual deduction of ~$33,333 ($1,300,000 ÷ 39), spread over 39 years, highlighting the slow pace of standard depreciation.

Why 27.5-Year Assets Are Not Allocated

Warehouses are classified as commercial real property under IRS rules (IRC Section 168), depreciated over 39 years using the straight-line method. Unlike residential rental properties (e.g., apartments, depreciated over 27.5 years), warehouses do not have 27.5-year assets in their cost basis. The $1,300,000 allocated to 39-year property includes structural components (e.g., walls, roof, permanent HVAC) that cannot be reclassified into shorter periods like 5- or 15-year categories due to IRS guidelines:

IRS Constraints: The IRS Cost Segregation Audit Techniques Guide mandates that structural components integral to the building’s operation (e.g., foundation, permanent systems) remain in the 39-year category for commercial properties. Only removable personal property (5-year) or land improvements (15-year) can be reclassified.

Warehouse Context: The 35% allocation to 5- and 15-year property ($700,000) is typical for warehouses, which often have significant structural components. Over-allocating to shorter periods risks IRS audit scrutiny.

179D Application to 39-Year Assets

Unlike residential properties requiring four or more stories, all commercial buildings like warehouses qualify for 179D, making it highly applicable. Suppose the warehouse (50,000 square feet) includes energy-efficient upgrades:

HVAC System: $200,000 (part of the 39-year assets) upgraded to achieve 50% energy savings, meeting PWA requirements.

Lighting System: $100,000 (partly 5-year, partly 39-year) upgraded to high-efficiency LED systems.

179D Deduction:

Maximum Deduction: 50,000 sq ft × $5.81 = $290,500 (assuming full qualification across all systems).

HVAC Portion: The $200,000 HVAC system, normally depreciated over 39 years (~$5,128 annually), could be fully deducted in year one under 179D if certified.

Lighting Portion: If $50,000 of the lighting is 39-year property, it could also be deducted immediately, enhancing savings. 

Certification Cost: Energy modeling and certification by a qualified professional may cost $10,000–$20,000, but the upfront deduction often outweighs this expense.

How 179D Enhances Upfront Savings

Without 179D, the 39-year assets ($1,300,000) generate only ~$33,333 in first-year depreciation. With 179D, assuming $300,000 in qualifying upgrades (HVAC and lighting), the entire amount could be deducted in year one, reducing taxable income by $300,000 immediately. Combined with the cost segregation study’s $458,000 in first-year deductions, total savings could reach $758,000 in 2024, significantly boosting cash flow. Even if only the HVAC system ($200,000) qualifies, the additional $200,000 deduction accelerates savings compared to ~$5,128 annually over 39 years.

With or Without Cost Segregation

With Cost Segregation: The study maximizes bonus depreciation on 5- and 15-year property ($458,000 in year one). 179D complements this by targeting 39-year assets not reclassified (e.g., HVAC, roofing), allowing immediate deductions without altering the study’s allocations. 

Without Cost Segregation: 179D can be claimed independently for energy-efficient systems, ideal for older warehouses with limited 5-/15-year components. The deduction reduces the basis of qualifying assets, accelerating savings without the cost of a study (typically $5,000–$15,000). Combining both strategies often maximizes benefits, as cost segregation captures shorter-lived assets, and 179D targets longer-lived ones.

Legislative Status: 179D in the “One Big Bill”

Current Status: The IRA made 179D permanent in 2022, ensuring its availability through 2032 and beyond, with inflation-adjusted rates ($5.81 per square foot in 2025). Unlike bonus depreciation, which is phasing down (60% in 2024, 40% in 2025, 20% in 2026, 0% in 2027), 179D faces no expiration risk.

The “One Big Bill”: Proposed tax legislation, often referred to as the “one big bill,” is widely expected to extend or reinstate 100% bonus depreciation, possibly retroactively, based on Congressional discussions and tax policy updates as of May 27, 2025. While the bill emphasizes bonus depreciation, 179D is likely to remain intact due to its permanence under the IRA and bipartisan support for energy efficiency. Recent reports indicate 21 House Republicans urged preserving IRA green incentives, including 179D, to support sustainable building practices.

Why It Stays: 179D’s alignment with economic and environmental goals, plus its unique benefit for designers of tax-exempt buildings (e.g., schools, hospitals) via allocation, ensures its political resilience. Its permanence contrasts with the focus on bonus depreciation, which dominates tax discussions but faces uncertainty without legislative action.

Strategic Considerations

For Your Warehouse: 179D is highly applicable, potentially deducting up to $290,500 for a 50,000-square-foot warehouse with qualifying upgrades. Combine with cost segregation for maximum savings, targeting 39-year assets like HVAC and lighting for immediate deductions.

Without Cost Segregation: 179D can be claimed independently, ideal for older warehouses or those with limited 5-/15-year components. Certification costs ($10,000–$20,000) may apply, but the upfront deduction often justifies the expense.

Legislative Planning: With 179D secure and bonus depreciation likely to return, act now to claim 2024–2025 benefits. If 100% bonus depreciation is reinstated, your 5- and 15-year property ($700,000) could be fully deducted, further enhancing savings.  

Contact Credistry to assess 179D eligibility and optimize your strategy.