Cost Segregation Study in Maryland for Airbnb and Short-Term Rental Investors

Maryland has decoupled from federal bonus depreciation since the Budget Reconciliation and Financing Act of 2002 (Chapter 440), and that decoupling has stayed in place through every subsequent expansion of Section 168(k), including the Tax Cuts and Jobs Act and now the One Big Beautiful Bill Act. In practice, this means a non-manufacturing Maryland taxpayer who claims bonus depreciation on a federal return must file Form 500DM and add that deduction back into Maryland taxable income for the year it was claimed. Maryland then allows the same amount to be recovered gradually, through a corresponding subtraction modification, as the property would have depreciated under standard (non-bonus) MACRS rules. The net effect is deferral, not forfeiture — Maryland taxpayers eventually get the full depreciation benefit at the state level, just spread across the asset's normal recovery period instead of concentrated in year one. Lawmakers have periodically debated changing this framework; a 2026 bill, House Bill 801, would have repealed the existing carve-out that exempts manufacturing entities from this addback (along with unrelated addback provisions affecting QSBS gains and large restitution deductions), but it did not pass before the General Assembly's April 13, 2026 sine die adjournment and does not appear on the Assembly's list of bills passed by both chambers, so the standing decoupling rule remains the operative law for all Maryland owners, including non-manufacturing taxpayers.

This is exactly where cost segregation earns its keep in Maryland. A study doesn't just accelerate depreciation into the bonus-eligible bucket — it identifies and documents which components of a property genuinely belong in 5-, 7-, and 15-year MACRS classes versus the 27.5- or 39-year building shell. That reclassification drives real federal tax savings immediately (where Maryland's decoupling doesn't apply at all), and it also improves the quality and speed of the Maryland-side depreciation recovery once the addback and subtraction modifications work through. Owners who skip a study and simply depreciate the whole property on a straight-line schedule leave both federal acceleration and the correct component-level classification on the table.

Property taxes add another layer worth planning around. Maryland's statewide average effective property tax rate runs approximately 0.97% of assessed value (Tax Foundation), above the national average, but rates vary widely by jurisdiction. Baltimore City's nominal real property tax rate is $2.248 per $100 of assessed value — 2.248% — and that is the figure an investment or short-term-rental property should expect to pay; a lower ~1.5% effective rate sometimes cited for the city reflects the Homestead and Targeted Homeowners tax credits, which apply only to owner-occupied primary residences and are not available to rental or short-term-rental property. Counties like St. Mary's sit nearer 0.9%. For investors carrying multiple rental units or a portfolio spread across counties, a cost segregation study's component-level property records can also help substantiate valuation positions and depreciation schedules used in broader tax and financial planning.

Absent a study, the IRS default is to depreciate an entire residential rental building on a straight-line basis over 27.5 years, or 39 years for commercial property, treating the roof, the driveway, and the load-bearing walls exactly the same as the cabinetry and carpet. A cost segregation study brings in engineers and cost analysts to walk the property, review construction records or comparable cost data, and split out everything that legally qualifies for a shorter recovery period — items like decorative finishes, certain electrical and plumbing components tied to specific equipment, furniture and appliances, fencing, landscaping, and portions of site improvements — into 5-year, 7-year, and 15-year MACRS classes. Those reclassified components become eligible for federal bonus depreciation, which the One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, restored to 100% on a permanent basis for qualifying property acquired after January 19, 2025. The result is a much larger first-year federal deduction than straight-line depreciation alone would ever produce, concentrated in the tax year the property is placed in service rather than trickled out over decades.

For illustration only — your results depend on your property and tax situation, and this is not a projection of actual savings.

Consider an investor who buys a $650,000 short-term rental home near Ocean City in 2026, with roughly $520,000 allocated to the depreciable building after land value is backed out. Under a straight-line 27.5-year schedule, that owner would deduct about $18,900 per year. A cost segregation study might reclassify somewhere in the neighborhood of 25-30% of that basis — call it $145,000 — into 5-, 7-, and 15-year property. At the federal level, with 100% bonus depreciation available for property placed in service after January 19, 2025, that reclassified amount could be deducted in year one, on top of the remaining building's regular depreciation. On the Maryland return, that same $145,000 would need to be added back on Form 500DM in year one, then recovered through a subtraction modification as the assets would have depreciated on their normal schedules — meaning the Maryland-side benefit shows up over time rather than immediately. These figures are simplified, round-number illustrations, not a promise of any particular outcome.

Investors are sometimes surprised to learn that cost segregation isn't limited to the year of purchase. If you've owned a Maryland rental property for several years without ever having a study performed, a look-back study can still capture the missed depreciation. The mechanism is a Form 3115, Application for Change in Accounting Method, filed with your return, which triggers a Section 481(a) adjustment — a one-time catch-up deduction that captures the difference between what you actually depreciated and what you should have depreciated had a cost segregation study been performed from day one. Because this adjustment flows through the current year's return, there's no need to amend prior-year federal filings, which makes a look-back study a practical option for owners who missed the opportunity when they first acquired the property.

• Short-term rental and Airbnb hosts operating in Maryland's established vacation markets, including Ocean City's beach-house rental corridor, the four-season Deep Creek Lake and Wisp Resort area in Garrett County, and historic-district stays in Annapolis
• Long-term rental property owners with buildings in Baltimore, Silver Spring, Frederick, and other Maryland rental markets who want to accelerate depreciation on recently acquired or renovated buildings
• Investors who purchased, built, or substantially renovated a Maryland property within the last several years and have not yet had a cost segregation study performed
• High-income W-2 earners or business owners exploring the short-term rental material participation strategy, where meeting the tax code's material participation test — a separate test from real estate professional status, which generally applies to longer-term rentals — on a qualifying STR with an average guest stay of 7 days or less may allow rental losses to offset active income
• Owners weighing the interplay between Maryland's bonus depreciation addback and their broader multi-state or multi-property tax picture, who want documented, defensible cost detail before filing