The District of Columbia does not conform to federal §168(k) bonus depreciation. DC disallows §168(k), §168(n), and any §179 expense above $25,000 on D-20 and D-30 returns and requires a separate DC depreciation schedule. STR investors get the full federal deduction but must add back 100% on the DC return. On a $150,000 federal deduction, that costs about $16,125 in Year-1 tax timing. Visit the full state conformity hub to compare the District of Columbia's treatment to every other US jurisdiction.
Modeled on a $150,000 federal §168(k) deduction. Open the state conformity tool →
How DC Treats §168(k) — The Add-Back Mechanic
DC's decoupling is one of the most comprehensive in the country. Unlike some states that decouple only from §168(k) itself, DC also disallows §168(n) additional first-year depreciation and caps §179 expensing at $25,000 — a fraction of the federal §179 limit. The 2018 Bonus Depreciation Decoupling Act formalized this position across DC's business franchise tax (D-20) and unincorporated business franchise tax (D-30) returns.
The mechanic: compute federal taxable income using the full §168(k) deduction. On the DC return, add back the entire federal bonus amount. Take DC depreciation using standard MACRS without bonus. Because DC requires a separate DC depreciation schedule for the life of the asset, taxpayers effectively maintain two books — one for federal and one for DC purposes. In years 2 forward, DC depreciation exceeds federal depreciation (because federal was accelerated in Year 1) and the excess is reported as a subtraction modification until fully recovered.
The disposition mechanics matter more here than in most states. Because federal basis and DC basis diverge for the life of the asset, capital gain or loss on sale must be recalculated using the DC basis. The higher DC basis reduces DC-level gain, offsetting the earlier Year-1 add-back at sale.
Worked Example — $150,000 Federal Deduction on a DC STR
Consider an investor buying a $1.3M rowhouse STR in the Adams Morgan or Capitol Hill area, running a cost seg-style analysis, and identifying $150,000 in 5-year and 15-year bonus-eligible property (kitchen finishes, appliances, FF&E, exterior landscaping, roof deck). The federal §168(k) deduction is $150,000 in Year 1.
Assumptions: Federal marginal rate 37% · DC top marginal rate 10.75% · Bonus depreciation acquired and placed in service after January 19, 2025 · STR loophole (§469) qualification confirmed for federal purposes.
| Line | Federal return | DC return |
|---|---|---|
| §168(k) Year-1 deduction | $150,000 | $0 (100% add-back) |
| Year-1 tax rate | 37% | 10.75% |
| Year-1 tax savings | $55,500 | $0 |
| Year-1 tax savings missed | — | ~$16,125 |
| Recovery | N/A (fully deducted) | MACRS over 5/15/39 years + basis adjustment at sale |
DC's 10.75% top marginal rate produces one of the largest state timing hits in the country — roughly the same magnitude as New Jersey and New York State. The federal $55,500 Year-1 savings is unaffected.
The Statute Explained
The DC posture is aggressive by design. In addition to full §168(k) decoupling, DC caps §179 expensing at $25,000 (compared to the federal §179 limit north of $1M) and disallows §168(n). For STR investors used to combining §168(k) with §179 elections on the federal return, DC's regime materially limits state-level acceleration strategies across the board. When OBBBA restored 100% federal bonus depreciation for property acquired and placed in service after January 19, 2025, none of that flowed through to DC.
How DC Compares to Federal-Conforming States
Of the 50 US states plus DC, roughly half conform fully to federal §168(k) — including neighbors like Delaware, which flows the entire federal bonus through with no add-back. DC sits at the aggressive end of the decoupled camp with New Jersey, New York, and California. At 10.75%, DC's top marginal rate ties New Jersey for the highest state-level timing hit in the mid-Atlantic. Neighboring Virginia (5.75% top rate) shows a materially smaller state miss on the same deduction.
Use the state conformity tool to compare DC against any other state at any federal deduction amount, or browse the full 50-state hub for a side-by-side view.
What This Means for Your STR Purchase Decision
DC is a high-demand STR market — political tourism, embassy row, Georgetown, Adams Morgan — and rowhouse conversions with premium finishes can generate substantial bonus-eligible property. But DC's regime is one of the strictest in the country. Three practical implications:
- Federal Year-1 savings are your primary lever. On a Capitol Hill STR with $150,000 in bonus-eligible property, the $55,500 federal Year-1 savings is where the STR loophole delivers real dollars.
- Two depreciation schedules — plan tax prep accordingly. DC's separate depreciation schedule requirement means additional compliance work each year. Budget for it or find a preparer familiar with DC decoupling.
- Basis reconciliation at sale is significant. When you eventually sell, the DC basis calculation reduces DC-level gain — a meaningful offset to the earlier Year-1 add-back, but one that requires clean recordkeeping.
Before you write an offer on a DC STR, run the address on your property — the report models the full federal Year-1 deduction and lets you factor DC's timing shift into your underwriting.
Analyze a specific DC property
Run any DC STR listing through DepreciMax's $99 property report — line-item finish classification, federal §168(k) modeling, and DC timing math included.
Frequently asked questions
Does the District of Columbia conform to federal §168(k) bonus depreciation in 2026?
No. DC disallows §168(k), §168(n), and any §179 above $25,000. STR investors add back 100% on the DC return and keep a separate DC depreciation schedule under D.C. Code §47-1803.03(a)(7)(J).
How much does DC non-conformity cost a short-term rental investor?
On a $150,000 federal §168(k) deduction with DC's 10.75% top marginal rate and 100% add-back, the Year-1 tax miss is approximately $16,125. The federal $55,500 Year-1 savings is unaffected.
What is the DC statute for §168(k) non-conformity?
D.C. Code §47-1803.03(a)(7)(J). The 2018 Bonus Depreciation Decoupling Act formalized DC's position.
Does DC decoupling affect capital gains on disposition?
Yes. DC basis differs from federal basis for the life of the property. On sale, gain is recalculated using the higher DC basis — reducing DC-level gain and offsetting the earlier add-back.
Does DC non-conformity kill the short-term rental loophole?
No. The STR loophole is a federal §469 mechanism. DC's add-back only changes state-level Year-1 timing. The federal deduction and the federal STR loophole benefit are unaffected.
Did OBBBA change DC's treatment of bonus depreciation?
No. OBBBA restored 100% federal bonus depreciation for property acquired and placed in service after January 19, 2025 at the federal level. DC's disallowance is written directly into D.C. Code §47-1803.03(a)(7)(J) and is not tied to a conformity date.
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