🇺🇸 Made in America·100% U.S.-Based Team · 24+ Years in Cost Segregation
Yes. A condo you rent out can qualify for a cost segregation study, whether the unit sits in a high-rise or a beach low-rise. Depreciation is the yearly deduction the tax code gives you for wear on a rental. Basis is what you paid, plus certain closing costs. A study sorts that basis into groups: land, the long-life building, and the shorter-life property that the tax code lets you deduct faster. With 100 percent bonus depreciation available on qualifying property acquired after January 19, 2025, the shorter-life portion can be deducted in year one.
A condo has one wrinkle a house does not. You do not own the whole building. You own your unit, a share of the common elements, and a membership in the association. A good study knows where your ownership starts and stops, and it counts only what you own. That is what keeps the number defensible.
The second thing to know: a bigger deduction does nothing for you if the loss cannot be used. Whether it offsets your wages, your rental income, or waits for later depends on how you rent the unit and how many hours you put in. We cover both halves below, along with our guide to using a short-term rental cost segregation loss against your wages. Everything here is federal tax only.
Tom is a hospital administrator. Renata sells medical devices. Between them they earn about $560,000 a year in W-2 income, and they had never owned anything that rented.
In April 2026 they closed on a two-bedroom condo on the Gulf in Destin, Florida. They paid $600,000, and closing costs that had to be added to the basis came to another $12,000. They furnished it over a long weekend, listed it on the big booking sites, and hired a local cleaner. The first guests checked in on May 9. The average stay that first summer was about five nights.
In September their CPA sent over a draft depreciation schedule. One line read: building and improvements, $520,000, 39 years. Tom asked what it meant. The CPA said, "About $13,300 a year."
Tom looked at the unit through the booking app on his phone. The stone countertops. The refrigerator, the washer and dryer, the decorative light fixtures Renata picked, the window treatments. He asked a plain question. "Is every one of those on a 39-year schedule?"
Yes. Nobody had sorted a single item.
Here is what went wrong. The tax code does not make you wait 39 years on a dishwasher. It sorts property by what it is and how it works. But the sorting only happens if somebody does the work. When nobody does, the slowest schedule is the default. Tom and Renata were handing the IRS a 39-year loan at zero percent.
Before any engineer opens a floor plan, the first question is ownership. A condo purchase usually bundles three things.
First, the unit itself: the airspace inside your walls and everything you own within it, such as flooring, cabinets, fixtures, appliances and finishes. Second, an undivided interest in the common elements. In many condo regimes that means the roof, structure, hallways, elevators, pool, grounds and parking are owned by all the unit owners together, with the association managing them. Third, your membership in the association, which carries the right to use the amenities and the duty to pay assessments.
Not every regime is built the same way. In some communities the association holds title to certain amenities directly. Townhome and planned-community neighborhoods often work differently from a high-rise. Your declaration, sometimes called the master deed, and your closing documents say which structure you bought into. That document is the first thing we ask for, because a study cannot assign basis to property you do not own.
This changes your deduction. The price you paid bought all three bundles. The unit and your share of the common elements are depreciable to the extent they are used in your rental. The portion of the price that reflects land is not depreciable at all. The study sorts the depreciable part into groups.
A study works from tax law, not preference. Courts and the IRS sort building components by function. The Tax Court cases most often cited are Hospital Corporation of America v. Commissioner and Whiteco Industries v. Commissioner, and the IRS Cost Segregation Audit Technique Guide builds its framework on that case law. Does the item serve the building's structure and basic operation, or does it serve the business use of the space? Is it permanent, or could it be removed without damaging the building? An engineer applies those questions component by component.
In a rental condo, the groups typically look like this.
Personal property inside the unit. Appliances, removable floor coverings, window treatments, decorative lighting and similar items that are not structural components of the building. In a furnished rental, the furniture and housewares you bought are depreciable personal property too, and they are usually accounted for separately by your CPA.
Land improvements. Your share of paving, walkways, landscaping and outdoor amenities, to the extent they are part of what you own. This group is smaller in a high-rise than in a beach cottage, and the engineer measures it instead of guessing.
Building structure and core systems. Roof, framing, load-bearing walls, the main plumbing and electrical, and the elevator system stay on the long schedule. A study does not move these, and anyone who says otherwise is making a number up.
Cost Seg America typically finds a 20 to 35 percent reclassification rate, meaning the share of depreciable basis that moves to shorter-life property. Results vary, and some properties fall outside that range. Where your unit lands depends on its finishes, its dedicated systems and your share of site improvements. The land share changes the dollars, not the percentage. The real number for your unit comes from a fully engineered and accounted study, not from a rule of thumb.
Let us finish Tom and Renata's example. These are illustrative figures, not a client result.
Their total basis: $600,000 purchase price plus $12,000 of capitalized closing costs, or $612,000.
The land number comes out first. The county assessor's roll for their building allocated about 15 percent of the value to land. On $612,000, that is roughly $92,000. Land never depreciates. That leaves a depreciable basis of $520,000, which matches the line on the CPA's draft schedule.
Now suppose the engineered study reclassifies 25 percent of that depreciable basis to shorter-life property, inside the typical range. That is $130,000.
With 100 percent bonus depreciation, the whole $130,000 can be deducted in the year the unit is placed in service. Their top federal bracket is 35 percent, but a deduction this size pulls income down through the 32 percent bracket, so we will use a blended 32 percent for illustration. The value of that deduction, if the loss is usable, is about $41,600 in federal tax. Their actual figure depends on their full return.
Now compare the same $130,000 with no study. It stays in the long schedule. With a five-night average stay, their CPA treats the unit as 39-year property, so the $130,000 comes back at about $3,333 a year. At 32 percent, that is roughly $1,070 of tax savings a year.
So the same dollars produce about $41,600 in year one, or about $1,070 a year spread over 39 years. Run it on a napkin. The total deduction is the same either way. The study changes when you get it.
A caution. The first-year deduction is a timing benefit. You pay the tax later, and you keep the cash now. Money in your pocket this year can be invested, used to pay down debt, or put toward the next property. But when you sell, recapture applies to the depreciation you took. Plan the sale at the same time you plan the study.
Land is the first number in every study, and it behaves differently in a condo. You do not own a lot. You own an undivided share of the land under the building, which is usually a small slice per unit.
Many owners use the county assessor's ratio of land value to total value for the property. Others use an appraisal. Either way, the allocation has to be reasonable and documented, and it has to be applied to your whole purchase price, not just the unit's interior.
A high-rise in a dense area can carry a low land share per unit, because many owners split the same parcel. A low-rise condo on a prime beachfront lot can carry a higher one. We cover the mechanics in our post on how the land value allocation is made before a cost segregation study begins.
Condo ownership comes with a bill that houses do not have: the association. Monthly dues for ordinary operation are generally a deductible rental expense, the same as any other cost of keeping the unit rented.
Special assessments are different, and they deserve a phone call to your CPA. An assessment that pays for ordinary repairs is generally deductible. An assessment that pays to improve or replace part of the building, such as a new roof or a new elevator, is generally a capital cost. Capitalized, it adds to your basis in the property and is recovered over time instead of deducted at once. The tangible property rules decide which side a given project lands on, and we explain that line in our post on repair versus improvement.
Why mention it in a post about cost segregation? Because association projects change what the building contains. Keep every assessment notice and the project documents. If the association replaced the roof last year and you bought this year, that matters to the picture. Hand your CPA and your study provider the same set of papers, and nobody has to guess.
This is the part that decides whether a $41,600 tax value is real or just a number on a page. Rental losses start out passive. Passive losses generally offset only passive income. Three doors open that rule, and you only need one.
Door one: the short-term rental rule. If the average guest stay is seven days or less, the activity is not treated as a rental activity under the passive loss rules. Tom and Renata's five-night average puts them in that lane. The activity is then treated as a business. It stays passive unless they materially participate. If they do, the loss can offset wages, subject to the excess business loss limit. Spouses' hours are combined for this test. The most common tests: more than 500 hours in the year, or more than 100 hours and at least as many as any other individual, counting the cleaner and any manager. A second path exists for stays up to 30 days where significant personal services are provided. Ordinary turnover cleaning does not usually count as that.
This is where a condo can trip people. If a rental program or on-site manager handles check-ins, marketing and housekeeping, their hours are not your hours. Owners who hand the whole job to a manager can fail the hours test and never realize it until the return is done. Keep a contemporaneous log. We walk through the details in our post on how to prove material participation on your rental.
Door two: real estate professional status. If you spend more than 750 hours a year in real property trades or businesses in which you materially participate, and more than half of all your working time goes to real estate, your rental losses are not automatically passive, though you must still materially participate in the rental or elect to group your rentals, and the 750 hour and more-than-half tests must be met by one spouse alone. Most full-time employees outside real estate cannot meet the more-than-half test. A spouse who qualifies can change the picture for a joint return, which we explain in our post on how one spouse can free the household's rental losses.
Door three: the $25,000 allowance. If you actively participate in a rental and your modified adjusted gross income is under $100,000, you can deduct up to $25,000 of rental loss against other income. The allowance shrinks by 50 cents for each dollar of income over $100,000 and is gone at $150,000. Tom and Renata, at $560,000, get none of it, and the allowance applies only to rental activities, which a unit averaging seven days or less is not. Our post on the $25,000 allowance shows how it works with a study.
If none of the doors open, the loss is not lost. It is suspended and carried forward, and it can be released against future passive income or when you sell your entire interest to an unrelated party in a fully taxable sale.
Even with a door open, one more ceiling applies. For 2026, the excess business loss limit is $256,000 for single filers and $512,000 for joint filers, indexed annually. Business losses above that cap carry forward as a net operating loss. Most condo owners never reach it, but a large study stacked on other losses can.
One more gate, if you use the unit yourself. If your personal use runs past 14 days or 10 percent of the days you rent it, whichever is greater, Section 280A treats the unit as a residence and caps your rental deductions at rental income. A condo that doubles as the family's spring-break house needs a calendar. We explain it in our 14-day rule post.
Two dates drive the math. The acquisition date decides which bonus percentage applies, and a unit under a written binding contract signed before January 20, 2025 is treated as acquired before that date. For qualifying property acquired after January 19, 2025, the One Big Beautiful Bill Act, signed July 4, 2025, restored 100 percent bonus depreciation on a permanent basis. The placed-in-service date, the day the unit is ready and available for rent, decides the tax year the deduction lands in. We explain that second one in what placed in service means.
Used property can qualify, which matters because most condos are resales. The usual conditions are that you did not use the property before, you bought it from an unrelated party, and your basis is not carried over from a gift, an inheritance or a like-kind exchange. Your CPA confirms how those rules apply to your purchase.
What about a condo you bought two, five or ten years ago? A study can still be done. If you have filed at least two returns on the old schedule, the missed depreciation can generally be claimed in the current year through a change in accounting method on Form 3115, and you do not amend prior returns. After only one return, the fix is usually an amended return. The catch-up shows up as one adjustment on the current return, and a unit bought before January 20, 2025 uses the bonus rate in effect for its acquisition date. Form 3115 support is available for an additional fee. Our post on how to catch up missed depreciation without amending returns covers it.
The deadline to remember: if the unit was placed in service by December 31, a study finished after year-end can still be used on that year's return, including a timely extended one. The filing date, not December 31, is the line that matters.
Cost Seg America performs fully engineered and accounted cost segregation studies. For a condo that means the work starts with your closing statement, your declaration, the floor plan, your photos or video, and the assessor's land and improvement values. The study follows the detailed engineering approaches in the IRS audit guide, using a cost estimate reconciled to your purchase price where no construction records exist, as with most resale condos. We do not use modeled or template estimates.
You do not need an engineer at your front door. We use whichever method fits the property: an in-house analyst on larger buildings, a tele-engineering review over live video, or precise photo and video instructions that the team reviews. All engineering is done in the USA. Studies are delivered within 30 days of receiving your documents, and rush studies are available in under 30 days.
The study comes with audit support for as long as you own the property, with no cap and no fee. If the IRS asks, we provide the documentation and engineering support. One limit applies. Our minimum is $180,000 of depreciable basis after land is taken out. Tom and Renata's $520,000 clears it easily. A small studio condo may not, and we will tell you before you pay for anything.
Yes. A study applies to the portion of the property you own and use in a rental: your unit and your share of the common elements. It sorts that depreciable basis into land, long-life building and shorter-life property.
The shorter-life property identified in a study can qualify. For property acquired after January 19, 2025, the One Big Beautiful Bill Act provides 100 percent bonus depreciation. The building shell itself does not qualify for bonus.
It can be. If the average guest stay is seven days or less and you materially participate, the loss is not treated as passive. If a manager does most of the work, you may not meet the hours test. Our post on the short-term rental loophole and cost segregation explains the rule step by step.
It depends on how your community is set up. In many condos, all unit owners together own the common elements as an undivided interest, and the association manages them. In some communities the association owns certain amenities outright. Your declaration answers it.
It varies by building and location. The county assessor's land-to-total ratio is a common starting point, and an appraisal is another. The allocation must be reasonable and documented.
Yes. A look-back study can capture depreciation you missed in prior years. If you have filed at least two returns on the old schedule, your CPA generally files Form 3115 to claim it in the current year without amending earlier returns.
Regular dues are generally a rental expense. Special assessments that pay for capital improvements are generally added to your basis. Your CPA decides the treatment of each.
The fee depends on the size and complexity of the property, and we quote it up front, after we review your documents. Our post on what a cost segregation study costs and what the fee buys covers what drives the price.
No. A study does not trigger an audit by itself, and no study can rule one out. A fully engineered and accounted study follows methods the IRS describes in its audit guide. Cost Seg America backs every study with audit support for as long as you own the property, at no additional cost.
It is 39-year property when the average guest stay is seven days or less, and 27.5-year residential rental property for a typical long-term rental. Your CPA confirms the classification from how the unit is actually rented.
Yes, but personal use matters. Past 14 days or 10 percent of rental days, Section 280A can cap your deductions at rental income. Read our 14-day rule guide before you plan your own stays.
Depreciation recapture applies. Depreciation on reclassified property is generally recaptured as ordinary income, limited to the gain allocated to that property, and straight-line depreciation on the building is generally taxed at up to 25 percent. We recommend you model the sale and the study together. Our post on what you actually pay back in recapture after cost segregation shows the math.
In October, Tom emailed us the closing statement, the declaration, the floor plan and a walkthrough video he shot on his phone. Renata pulled the assessor's notice. Their CPA confirmed the average stay and had Tom start a simple log of his hours: the guest messages, the supply runs, the pricing changes, the repair calls.
The study came back within the month. Their CPA will claim the deduction on the 2026 return they file next spring, to the extent their situation allows. Whatever the limits hold back carries forward instead of disappearing.
Tom had one comment. "I thought the schedule was the schedule."
You can start now. If you own a condo you rent out, or you are about to buy one, send the closing statement and the date the unit was ready for guests. The team will tell you whether a study makes sense before you spend a dollar. Call 1-888-365-5023 or email info@costsegamerica.com.
Jim Dougherty and his team
This article is general education about federal tax rules and is not tax or legal advice. Talk to your CPA about your own situation. The examples are illustrative.
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