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 Washington comes in.
2. Washington and federal bonus depreciation
Washington imposes no individual or corporate income tax, so there is no state conformity question for IRC 168(k). The full 100% permanent bonus depreciation under the One Big Beautiful Bill Act (property acquired after Jan 19, 2025) applies on the federal return with no Washington addback, no separate state depreciation schedule, and no state basis difference to track. Washington's Business & Occupation (B&O) tax is levied on gross receipts, so depreciation (bonus or otherwise) is simply irrelevant to it. Nothing in the 2025-2026 sessions changed this: SB 5813 (signed May 20, 2025) raised the capital gains excise rate to 9.9% on gains over $1M and other bills raised B&O rates and expanded sales tax to services, but none introduced an income tax or any depreciation concept.
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
Washington conforms to federal bonus depreciation, so the state return mirrors the $250,000 first-year deduction.
Model your own numbers with the tax strategy projector.
3. Section 179 in Washington
No state income tax means federal Section 179 expensing ($2.5M cap / $4M phase-out for 2025 under OBBBA) flows through with zero Washington adjustment. There is no state 179 cap because there is no state return on which to claim or limit it.
4. Does it still help in Washington?
Yes, trivially: a cost segregation study delivers its full federal benefit (100% bonus on reclassified 5/7/15-year property) with no state-level clawback, addback, or separate depreciation schedule, because Washington has no income tax return at all. There is no state-side MACRS question since depreciation never touches the B&O gross-receipts base.
- •Washington has no individual income tax and no corporate income tax; it is one of the few states where bonus depreciation conformity is completely moot.
- •The B&O (Business & Occupation) tax is a gross-receipts tax with no deductions for depreciation, Section 179, or any other expense -- cost basis and depreciation schedules simply do not exist at the state level.
- •Washington's 7% capital gains excise tax (enacted 2021, upheld 2023) explicitly exempts all sales of real estate, including rentals and land held directly -- a real estate investor's exit gain is not subject to it.
- •SB 5813 (signed May 20, 2025, retroactive to Jan 1, 2025) added a 2.9% surcharge on Washington capital gains over $1 million, making the top rate 9.9% -- but the real estate exemption is unchanged.
- •The 2025 session also raised B&O rates/surcharges on larger businesses and expanded sales tax to many services (SB 5814), so Washington landlords and operators should watch gross-receipts and sales tax exposure even though depreciation is irrelevant.
- •Because depreciation recapture is a federal-only concept here, Washington investors face no state-level recapture when they sell cost-segregated property.
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.