Cost segregation and 100% bonus depreciation: the 2026 investor's guide

Every rental building is depreciated over 27.5 years if it is residential, or 39 years if it is commercial. Short-term rentals where most stays are under 30 days are usually treated as 39-year property, because units rented mainly to transient guests don't count as residential "dwelling units." A cost segregation study accelerates this deliberately slow schedule by identifying the parts of the property that are not "building" for tax purposes and moving them into much shorter recovery periods.

What a study reclassifies

An engineer or specialist reviews plans, invoices, and the property itself and assigns basis to three groups:

On a typical residential acquisition, 20% to 35% of the depreciable basis lands in the 5-, 7-, and 15-year classes. Short-term rentals furnished as hospitality properties often run higher.

Why 100% bonus depreciation matters again

Bonus depreciation lets you deduct the full cost of property with a recovery period of 20 years or less in the year it is placed in service. The 2025 tax law made 100% bonus depreciation permanent for property acquired after January 19, 2025, after a period in which the rate had been phasing down. Every dollar the study moves into the 5-, 7-, and 15-year classes can therefore be deducted in year one. Acquisition is judged by when you signed a written binding contract, so a building under contract by January 19, 2025 gets the phased-down rate even if it closed later: 40% if placed in service in 2025 and 20% in 2026. Two limits apply to acquired buildings. Bonus isn't available if you used the property before or bought it from a related party, such as a spouse, parent, child or your own entity, and in a 1031 exchange it applies only to the basis above what carried over from the old property.

Key numbers: 100% bonus for property acquired after Jan. 19, 2025, based on the contract date · 27.5-year residential and 39-year nonresidential building lives, with 39 often applying to short-term rentals · Section 179 limit of $2.56 million for 2026.

Most landlords get little from Section 179. The deduction is restricted for property you lease to others and can't exceed your income from actively running a business, and residential buildings and their structural components don't qualify. Bonus therefore does most of the work.

In Connecticut

For its income tax, Connecticut decouples from bonus depreciation. You add back 100% of the federal bonus on your Connecticut return for the year you deduct it, then subtract 25% of that add-back in each of the next four years. Any §179 deduction is handled the same way, with 80% added back and recovered. The study still produces a state benefit, though it arrives in years two through five. See our Connecticut investor guide.

A worked example

Suppose you buy a furnished vacation rental for $1,500,000 and allocate $300,000 to land, which leaves $1,200,000 of depreciable basis. Because most guests stay less than 30 days, the building is depreciated over 39 years rather than 27.5.

• Without a study, depreciation is $1,200,000 ÷ 39 years ≈ $30,800 a year, with less in the first year because of the mid-month convention.
• With a study that assigns 30% to short-life property, $360,000 is deducted immediately with bonus, and the remaining $840,000 is depreciated over 39 years, or about $21,500 a year.

If the property is placed in service in January, first-year depreciation rises from roughly $30,000 to roughly $380,000. Whether that loss offsets your salary or only your other passive income depends on the activity rules, which are covered in our short-term rental guide and real estate professional guide.

Property you already own: look-back studies

If you bought a building years ago and never had a study done, you don't need to amend prior returns. Instead, you file Form 3115 to change your accounting method and take all of the missed depreciation as a single §481(a) adjustment in the current year. The bonus rate depends on the year the property was placed in service. A look-back on a 2021 purchase gets 100%, while one placed in service in 2023 gets 80% and one placed in service in 2024 gets 60%, and only if you didn't elect out of bonus for that class that year.

When a study is not worth it

• Below roughly $300,000 to $400,000 of building basis, study fees can exceed the present value of the tax savings.
• If the loss will be passive and you have no passive income, the deduction carries forward. It isn't lost, but its time value shrinks.
• A short holding period limits the benefit, because accelerated depreciation is recaptured on sale. Section 1245 property is recaptured as ordinary income, so a quick flip can convert a deferral into a wash.

Common mistakes

1. Using a "desktop" percentage estimate with no engineering support. The IRS expects a documented methodology.
2. Forgetting to allocate value to land, which is never depreciable.
3. Claiming bonus at 100% instead of the phased-down rate on property acquired before Jan. 20, 2025, including property under a binding contract signed by Jan. 19, 2025 that closed later.
4. Ignoring state conformity. Many states decouple from federal bonus depreciation.

How Summer Associates helps

Summer Associates' real estate tax team runs a benefit estimate before you commission a study, coordinates with the engineering firm, and files the Form 3115 when a look-back is involved. We also model the recapture you would face on a future sale so the decision isn't one-sided.

This guide is general education based on federal and Connecticut law as of 2026-11-15. State rules differ and facts matter. Before acting, get advice for your situation from Summer Associates or another qualified advisor.