Does your cost seg study show the STATE side of the savings?

Question

Something I keep noticing in cost segregation conversations (and provider projections): the savings numbers are almost always federal-only.

But states like CA, NY, and NJ decouple from federal bonus depreciation — meaning you add back the bonus portion on the state return and take it over normal MACRS life instead. That can change the real ROI of a study in a big way, especially for investors in those states.

Curious how this community handles it:

- Do your providers show federal and state separately, or just the federal headline number?

- For those in decoupled states, did the state math change your go/no-go decision on a study?

- CPAs: do you model both before recommending a study?

Not pitching anything — just think this deserves more airtime than it gets.

Chea Romine · Answer

Yes. Federal-only cost seg brochures are incomplete in decoupled states.

CA, NY, NJ and several others often require an addback of federal bonus / special depreciation, then you recover that basis under the state's slower rules. The federal year-one deduction can look huge while the state return claws a chunk back into taxable income. That changes payback math, especially if you are already in a high state bracket or you planned to use the federal loss against other income that the state does not treat the same way.

What I ask providers for before anyone pays for a study:

- Federal depreciation schedule AND a state schedule (or a clear addback / lag schedule) for the client's actual state(s).

- Whether the property is in a decoupled state different from the owner's resident state (nonresident filings complicate it further).

- Passive / at-risk / excess business loss limits on the federal side, because a big federal number that is suspended is not "savings" yet.

- Exit math: state depreciation differences become state gain differences on sale.

If the quote is only a federal tax-savings headline, ask them to rerun it with your state conformity rules before you green-light. Sometimes the study still wins. Sometimes the state addback makes a smaller federal election (or no bonus) the better overall plan.

Not advice for a specific property. Just the state lens I wish more pitch decks included.

Ashish Acharya · Answer

Sagiv, I completely agree that the state side deserves more attention. A cost segregation study can look extremely attractive when you only look at the federal depreciation benefit, but the actual after tax return can be different once state treatment is included. I’d want to see the federal and state calculations separately rather than treating the federal tax savings as the total benefit. The investor’s state, filing situation, expected holding period, current income, and whether the accelerated depreciation can actually be used all matter when deciding whether the study makes sense.

I also think the right comparison is not simply “how much depreciation does the study create?” It’s “what is the after tax benefit of the study compared with the cost of the study and the alternative of doing nothing?” That analysis can absolutely change the go or no go decision, particularly for investors in states that do not conform fully to federal depreciation rules.

Good topic. This is something I’d want modeled before recommending a study rather than relying on the federal projection alone.

Happy to connect!

Ming Yi · Answer

Ask your provider for a state-specific breakdown before you pay for the study. Reputable firms will model it; if yours will not, that tells you something about the firm.

On the math itself: federal bonus depreciation is only half the picture in a decoupling state. The state addback means your year-one state benefit shrinks and gets recovered over the normal MACRS life instead. On a single-family rental it rarely kills the study outright, but it can push the payback out far enough to change a go/no-go decision, especially in CA or NJ where the state tax rate makes the addback bite.

Have your CPA run both scenarios side by side. My rule of thumb: if the study does not pay back on the federal side alone, do not let the provider sell you on a blended number. The state addback is real money, and the provider's standard projection is written as if it is not.

Aaron Zimmerman · Answer

If it's the first year you've owned the property, it's easy enough for your cpa as the tax software Automatically decouples for states not allowing bonus depreciation. Where it gets Tricky is when you do the study in year 2 and a 3115 is filed. It is helpful if a state schedule is provided by cost seg company though

Kasing Ng · Answer

Hi Sagiv, CPA here. @Chea Romine covered the addback well, so just two things to add.

First, the addback is timing, not money lost. In a decoupled state you still depreciate that bonus basis, you just take it over the normal life on the state return instead of all in year one. So a federal year-one figure shown as permanent "savings" is really an acceleration, and in CA, NY, and NJ a lot of that acceleration is federal-only. Worth asking for the deduction by year, not just the headline.

Second, the exit usually gets left out. Since state depreciation is slower, your remaining basis on the state return is higher when you sell, so less state gain and recapture later. Some of what the state adds back during the hold comes back as lower tax at sale. A projection that only shows the hold years makes the state cost look worse than it nets out to.

And the one underneath all of it: a big federal loss that gets suspended, by the passive rules or the excess business loss cap, is not savings this year. If you cannot use it now, the time value of the study drops no matter what the state does.

So the study often still wins, usually on longer holds. Shorter holds in a high-tax state that also taxes the gain hard are where I would look closely before signing.

Not advice on a specific property.

Does your cost seg study show the STATE side of the savings?

Does your cost seg study show the STATE side of the savings?

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