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 triple-deckers, two-families and condos in Boston and across Massachusetts, 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.
| Class | Typical items in a rental | Recovery period |
|---|---|---|
| Personal property | Appliances, carpet and some flooring, cabinets and fixtures that are not part of the building, window treatments, furniture in a furnished rental | 5 years |
| Land improvements | Driveways, parking, fencing, walkways, patios, landscaping, outdoor lighting, site drainage and utilities | 15 years |
| Building | Foundation, framing, roof, walls, windows, plumbing, electrical, HVAC | 27.5 or 39 years |
Why Boston rentals can be good candidates
- Two- and three-family homes. A triple-decker has three kitchens, three sets of baths and often separate heating systems, which adds short-life components.
- Renovated rentals. New appliances, flooring, cabinets and site work from a renovation can be separated out.
- Condos. A condo’s price is mostly the unit, not land, so more of it is depreciable.
- Watch the land share. In close-in Boston neighborhoods, land can be a large share of a property’s value, and land is never depreciable.
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
| Purchase price of a rental | $900,000 |
| Allocated to land | $300,000 |
| Building and site improvements | $600,000 |
| Reclassified to 5- and 15-year property (22%, assumed) | $132,000 |
| Deducted in year one with 100% bonus depreciation | $132,000, plus regular depreciation on the remaining $468,000 |
| Federal tax value of the bonus deduction at a 35% bracket | About $46,200 |
Without a study, the same property would produce roughly $21,800 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 Boston allows short-term rentals mainly in owner-occupied homes and buildings, so this rarely applies to an investor-owned unit in the city. See short-term rentals and hard money.
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 refinancing investment property in Massachusetts.
The state return
Massachusetts does not follow federal bonus depreciation, so your Massachusetts return generally depreciates those parts over their normal recovery periods instead. The full first-year benefit is on your federal return. If you live in another state, ask your CPA how your home state 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 in Massachusetts and refinancing investment property.
Common questions
It is a study that splits a rental’s cost into building, land improvements and personal property such as appliances and flooring. The non-building parts are depreciated over 5 or 15 years instead of 27.5 or 39, which moves deductions into the early years of ownership.
Generally yes. Under the 2025 tax law, 100% bonus depreciation is permanent for qualified property acquired after January 19, 2025, which covers the 5- and 15-year parts identified by a study. The building itself is not eligible.
Up to $25,000 a year can, if you actively participate and your modified adjusted gross income is under $100,000, phasing out by $150,000. Real estate professionals can use the full loss. Otherwise it carries forward.
Generally no. A property bought to resell is inventory and is not depreciated. Cost segregation applies to property you hold as a rental.
No. A DSCR loan is sized on the property’s rent against its monthly payment. We do not use your tax returns to qualify you.
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.