How the New Binding Contract Rule Affects Property Purchases and Self-Constructed Properties

With the passing of the “Big Beautiful Bill,” bonus depreciation is back at 100%—permanently. This is a major win for real estate investors and businesses planning large capital expenditures. However, a new detail buried in the law—the binding contract rule—adds a level of complexity that advisors and property owners must understand.

The Binding Contract Rule: What It Means

The binding contract rule determines which assets qualify for the 100% bonus depreciation provisions, and it applies differently depending on whether the property is purchased or self-constructed.

For property purchases, the rule is relatively straightforward. In order to qualify for 100% bonus depreciation under the new law:

1. The asset must be placed in service after January 19, 2025
2. The taxpayer must not have been under a binding contract to purchase that property before that same date

A binding contract is defined as an agreement that is legally enforceable under state law and cannot be canceled without a significant penalty. This means that if you enter into a purchase agreement before January 19, 2025—even if you close later that year—you may be only eligible for 40% bonus depreciation under the updated rules. In contrast, a similar property purchased under a contract signed on or after January 20, 2025, could qualify for 100% bonus depreciation. This seemingly minor timing detail can have a significant impact on your depreciation schedule and upfront tax benefits.

For self-constructed property, the situation is more nuanced. The IRS has long applied different timing rules for assets built by the taxpayer rather than purchased from a third party. Under the new law, the rule hinges on when construction meaningfully begins, not when a purchase contract is signed. This could include:

• Entering into binding contracts for major materials or labor
• Beginning physical work
• Taking other substantial steps toward project completion

If any of those steps occur before January 19, 2025, the project might not qualify for 100% bonus depreciation—even if it isn’t completed until much later. This is where the 10% rule may come into play. If 10% or more of a project’s total expected costs were incurred prior to January 19, 2025, the IRS may consider the project “commenced” and therefore subject to the old bonus depreciation rules.

Binding Contract Example

This can get even more confusing. The IRS allows for an election to treat components separately as it relates to bonus depreciation resulting in mixed treatment within the same project. In some projects some components qualify for bonus depreciation and others do not, depending on when costs were incurred. An example of this would be if the foundations, framing, and land improvements are 60% completed before January 20, 2025, qualifying assets within these components would only qualify for 40% bonus depreciation. But within the same contract, if the remaining components, such as electrical, plumbing, HVAC, and interiors, are only 8% completed before January 20, 2025, the qualifying assets within these components would qualify for 100% bonus depreciation. As such, proper cost tracking and documentation is crucial.

When Bonus Depreciation Isn’t an Option: Consider Section 179

In situations where 100% bonus depreciation is off the table due to timing or structural limitations, Section 179 expensing may serve as a viable alternative. Section 179 allows taxpayers to deduct the full cost of qualifying property placed in service, but without binding contract limitations.

Pros:

• More flexibility as it is based on the placed-in-service date
• Limits for 179 were increased under the new law

Considerations:

• Annual deduction caps, business income limitations apply
• Entity structure (pass-through entity vs. C corp.) impacts treatment

Advisors should evaluate Section 179 as an alternative when bonus depreciation eligibility is limited by timing or structure. Understanding when to use Section 179 versus bonus depreciation will be a key part of strategic tax planning moving forward.

The Bonus Depreciation Takeaway

If you’re involved in real estate investment, construction, or capital planning, now is the time to assess your projects and timelines. McGuire Sponsel’s Fixed Asset Services team is ready to help you review contracts and navigate the binding contract rule to ensure you don’t miss out on valuable depreciation opportunities and make a substantial difference in your tax position.