Cost Segregation for DC Rental Property: Bigger Deductions in Year One

A cost segregation study moves part of a rental’s purchase price out of the building, which is written off over decades, and into parts that can be written off much faster. With 100% bonus depreciation back for property acquired after January 19, 2025, most of that faster write-off can land in the first year. For investors holding rowhouses, condos and small multifamily in the District and the suburbs, it can change the after-tax return of a deal.

This article explains how it works for investors. It is general information, not tax advice. The rules have conditions, and your CPA should confirm how they apply to you before you act.

What cost segregation is

When you buy a rental, the land is not depreciable, and the building is normally written off in equal amounts over 27.5 years for residential rental property or 39 years for nonresidential property. A cost segregation study, prepared by an engineer or a specialist firm, breaks the purchase price into its parts and assigns each part its proper recovery period. The parts that are not structural can be depreciated far faster than the building.

Why DC-area rentals can be good candidates

• Renovated rowhouses. A gut renovation adds new appliances, flooring, cabinets, fixtures and site work that a study can separate out.
• Two-unit conversions and small multifamily. Extra kitchens, baths and separate systems add short-life components.
• Condos. A condo’s price is mostly the unit, not land, so more of it is depreciable.
• Watch the land share. In close-in neighborhoods, land can be a large share of a rowhouse’s value, and land is never depreciable.

DC specifics: historic rowhouses, licensing and vacant periods

Many rowhouses sit in historic districts such as Capitol Hill, Shaw and LeDroit Park, where exterior changes are reviewed by the DC Historic Preservation Office. If the rental is a contributing building and the renovation is a certified rehabilitation, it may qualify for the 20% federal historic tax credit. The credit reduces the depreciable basis, so plan the study and the credit together.

Depreciation starts when a unit is ready and available to rent. In DC that generally means the renovation is finished and the unit has its basic business license for rental housing, so keep the license and listing dates with your records.

A rowhouse that sits empty during a long renovation can be taxed at DC’s higher vacant property rate unless it qualifies for an exemption. See our guide to the DC vacant property tax.

100% bonus depreciation is back, and permanent

The 2025 federal tax law, known as the One Big Beautiful Bill Act, made 100% bonus depreciation permanent for qualified property acquired after January 19, 2025. Qualified property generally means assets with a recovery period of 20 years or less, which includes the 5-year and 15-year parts a study identifies. Those parts can be deducted in full in the year the property is placed in service. The building itself is not eligible.

Property acquired before January 20, 2025 and placed in service in 2025 qualifies for 40% bonus depreciation instead. If you signed a binding contract before January 20, 2025, the property may not qualify for 100% even if it closed later. The IRS issued interim guidance on these rules in Notice 2026-11.

An illustration

Without a study, the same property would produce roughly $17,800 of depreciation a year on a 27.5-year schedule.

Who can use the deduction

Depreciation this large usually creates a loss on paper. Rental losses are normally passive, which means they can offset only passive income, and the unused loss carries forward to future years and to the year you sell. Three rules decide whether you can use the loss sooner.

• The $25,000 allowance. If you actively participate in managing a long-term rental, up to $25,000 of rental losses a year can offset other income. The allowance phases out as modified adjusted gross income rises from $100,000 to $150,000.
• Real estate professional status. If you spend more than 750 hours a year and more than half of your working time in real estate businesses in which you materially participate, rental losses can be nonpassive and offset wages or business income.
• Short-term rentals. A short-term rental with an average stay of seven days or less is treated differently under the passive loss rules, but DC licenses short-term rentals only in a host’s own primary residence, so this rarely applies to an investment property here. See our guide to DC short-term rental rules.

If none of these applies, the study still works: the deductions shelter the property’s own rental income, then other passive income, and any remainder is used when you sell.

Flips do not qualify

A house bought to renovate and resell is generally treated as inventory, not as a rental, so it is not depreciated at all. Cost segregation applies to property you hold and rent. If you renovate a house and decide to keep it as a rental, a study after the work is done can capture the new appliances, flooring and site work, and a partial disposition election can write off components you removed. See fix and flip loans and DSCR rental loans.

The state return

The District of Columbia, Maryland and Virginia all decouple from federal bonus depreciation, so your local return generally depreciates those parts over their normal recovery periods instead. The full first-year benefit is on your federal return. Ask your CPA how your own jurisdiction treats it.

Timing, cost and the catch on resale

• Order the study for the year the property is placed in service, so the deduction is on that year’s return.
• Bought a rental in an earlier year? A look-back study can still capture missed depreciation through a change in accounting method on Form 3115, generally without amending old returns.
• Weigh the fee against the benefit. Studies on single-family rentals and small multifamily are often priced for smaller properties. Your CPA can tell you whether the deduction justifies the cost.
• Depreciation is recaptured when you sell. The depreciation you claim reduces your basis, and much of it is taxed when the property is sold, part of it at ordinary income rates. A 1031 exchange into another property can defer it.

How this fits your financing

A DSCR loan qualifies the property on its rental income, not on your tax return. A large depreciation loss can make a personal return look weak to a conventional lender, but it does not affect the debt service coverage ratio we use. The tax you save can go toward reserves or the down payment on the next rental.

See DSCR rental loans, how DSCR loans work on DC rentals and construction loans.

Common questions

This article is general information and not tax or legal advice. Talk to a CPA who works with rental property owners before you order a study. When you are ready to finance a rental, get pre-qualified or call (954) 598-4564.