1. What a cost segregation study does
A building normally depreciates over 27.5 years (residential) or 39 years (commercial). A cost segregation study breaks the purchase price apart and reclassifies components like flooring, cabinetry, dedicated electrical, and land improvements into 5, 7, and 15-year property, so a large slice of the basis depreciates on much shorter schedules.
On the federal return, that reclassified property also qualifies for bonus depreciation, which restores a 100% first-year write-off for qualifying property acquired and placed in service after January 19, 2025. States set their own rules, which is where Maryland comes in.
2. Maryland and federal bonus depreciation
Maryland has been permanently decoupled from IRC 168(k) bonus depreciation since 2002 for both individual and corporate income tax, so OBBBA's permanent 100% bonus (property acquired after Jan 19, 2025) does not flow to the Maryland return. Taxpayers claim full bonus federally, then add back the entire 168(k) allowance on Form 500DM in the year claimed, using a pro forma federal return prepared without bonus. The sole exception: qualified manufacturing entities may take 168(k) without modification for property placed in service after Dec 31, 2018 (More Jobs for Marylanders Act of 2017); a 2026 bill to repeal that exception (HB 801) died in committee. The Comptroller's Jan 6, 2026 OBBBA alert also decoupled Maryland from the new IRC 168(n) qualified production property 100% expensing, the 174A R&E full expensing, and the 163(j) EBITDA-based ATI change for tax years beginning in 2025.
100% of the 168(k) allowance is added back on Form 500DM in the year claimed, then recovered as subtraction modifications in later years equal to the extra regular MACRS depreciation computed without bonus, 'in accordance with the applicable property depreciation method for the duration of the applicable recovery period' (AR 38). Requires maintaining pro forma federal returns without bonus for the life of each asset.
Worked example
A $1,000,000 building, with and without a study
Illustrative only. A residential rental purchased for $1,000,000 of building basis (land excluded), acquired and placed in service after January 19, 2025.
Building basis
$1,000,000
Reclassified to 5, 7, and 15-year property (25%)
$250,000
Federal first-year deduction at 100% bonus
$250,000
Year 1 on that $250,000 without a study (27.5-year straight line)
about $9,100
On the Maryland return, the $250,000 federal bonus deduction is not allowed. 100% of the 168(k) allowance is added back on Form 500DM in the year claimed, then recovered as subtraction modifications in later years equal to the extra regular MACRS depreciation computed without bonus, 'in accordance with the applicable property depreciation method for the duration of the applicable recovery period' (AR 38). Requires maintaining pro forma federal returns without bonus for the life of each asset.
Model your own numbers with the tax strategy projector.
3. Section 179 in Maryland
Maryland Section 179 cap: $25,000 deduction cap with $200,000 investment phase-out threshold (frozen at pre-2003 federal levels) for non-manufacturing taxpayers.
Maryland is permanently decoupled from every Section 179 enhancement enacted after Dec 31, 2002. Non-manufacturers are limited to $25,000 of 179 expensing (phase-out begins at $200,000 of purchases) versus the $2.5M+ federal limit under OBBBA. The federal excess over $25,000 is added back on Form 500DM and recovered as regular MACRS depreciation over the asset's recovery period; it cannot be carried forward as 179 expense. Qualified manufacturing entities use full federal 179 limits for property placed in service after 2018.
4. Does it still help in Maryland?
Yes. Maryland fully follows federal MACRS recovery periods and methods (IRS Pub 946) apart from the special allowances, so reclassifying components from 27.5/39-year real property into 5-, 7-, and 15-year MACRS classes still accelerates Maryland deductions materially; only the bonus layer gets added back, and even that is recovered over the shortened lives rather than 27.5/39 years.
- •Maryland is one of the few permanently decoupled states on BOTH bonus and 179: the 168(k) addback is 100% in year one (no partial addback like Minnesota's 80%), recovered only as regular-depreciation subtractions over each asset's MACRS life via Form 500DM.
- •Form 500DM requires maintaining separate pro forma federal returns without bonus/excess 179 for every affected year across the life of the assets, a real compliance cost for large cost seg studies.
- •Section 179 is frozen at the 2002-era $25,000 cap / $200,000 phase-out, among the lowest state caps in the country (comparable to California's $25,000).
- •Qualified manufacturing entities are exempt from the decoupling for property placed in service after Dec 31, 2018 (More Jobs for Marylanders Act 2017) and may take full federal bonus and 179; real estate rental activity does not qualify. HB 801 (2026 session) would have repealed this exemption but died in the Ways and Means Committee.
- •Maryland's Jan 6, 2026 OBBBA tax alert automatically decoupled (for tax years beginning in 2025) from IRC 168(n) qualified production property expensing, IRC 174A domestic R&E full expensing, and the OBBBA 163(j) EBITDA-based interest limitation; the interest change can bite leveraged real estate investors who elected into 163(j).
- •The state-level stakes are high and rose in 2025: the Budget Reconciliation and Financing Act of 2025 added new top brackets of 6.25% (taxable income over $500,000 single / $600,000 joint) and 6.5% (over $1,000,000 single / $1,200,000 joint) on top of the long-standing 5.75% bracket, and raised the county piggyback cap from 3.2% to 3.3%, so the bonus addback can defer roughly 8-10% combined tax on the reclassified amount in year one (up to about 9.8% at the top).
- •BRFA 2025 also added a 2% surtax on net capital gain for taxpayers with federal AGI over $350,000 (effective TY2025; primary residences sold under $1.5M and section 179 property are exempt), which raises Maryland's tax cost at sale of an investment property on top of the usual depreciation-recapture dynamics.
- •Timing-only difference: the addback is recovered in full over the recovery period and any remaining basis difference is trued up at sale, so Maryland bonus decoupling defers, not denies, the deduction.
5. The exit: recapture and timing
The accelerated deductions come back into view when you sell. Gain attributable to the 5, 7, and 15-year property is Section 1245 recapture, taxed at ordinary rates, and the straight-line depreciation on the building itself is unrecaptured Section 1250 gain, taxed at up to 25%. A study does not create that bill, it moves deductions forward, but the timing of the sale decides how much of the benefit you keep.
Two levers manage the exit. A 1031 exchange defers both flavors of recapture along with the rest of the gain, and simply holding the property lets the time value of the early deductions do its work; most owners want a 3 to 5 year horizon before a taxable sale for the math to stay comfortably positive. Model the exit before you commission the study, not after.