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 Alabama comes in.
2. Alabama and federal bonus depreciation
Alabama fully conforms to IRC 168(k) bonus depreciation on both individual and corporate returns, with no addback and no separate state depreciation schedule. For individuals, Ala. Code § 40-18-15(a)(8) allows the depreciation deduction exactly as allowed under 26 U.S.C. §§ 167 and 168, which the Alabama DOR's official OBBBA analysis (Oct/Nov 2025) confirms is 'Tied to Federal: Yes' for the OBBBA's permanent 100% bonus on property acquired and placed in service on or after January 19, 2025. Corporate taxpayers start from federal taxable income under § 40-18-33, so 100% bonus flows through automatically there too (and via § 40-16-1(3) for the financial institution excise tax). The DOR analysis also confirms Alabama conforms to the new IRC 168(n) optional 100% allowance for qualified production property. No 2025-2026 Alabama legislation decoupled from any of this.
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
Alabama 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 Alabama
Alabama conforms to federal Section 179 at the full federal limits, including the OBBBA's increase to a $2.5 million expensing cap with a $4 million phaseout threshold (indexed after 2025). The DOR's OBBBA analysis lists IRC 179 as 'Tied to Federal: Yes' for individuals (Ala. Code § 40-18-15(a)(21)), corporations (§ 40-18-33), and financial institutions (§ 40-16-1(3)). There is no Alabama-specific 179 cap.
4. Does it still help in Alabama?
Yes, and in Alabama there is no gap to manage: because the state conforms to federal MACRS recovery periods and 100% bonus, assets a cost seg study reclassifies into 5-, 7-, and 15-year property get the same immediate 100% write-off on the Alabama return as on the federal return, with no state depreciation tracking schedule needed.
- •The Alabama DOR published its own line-by-line OBBBA conformity analysis (Executive Summary with Appendix A, updated 11/10/2025) explicitly confirming 168(k), 168(n), and 179 are all 'Tied to Federal: Yes' with statutory citations, which is unusually clear official guidance compared with most states.
- •Alabama's individual income tax uses 'piecemeal' conformity: an IRC provision only applies if an Alabama statute references it. Depreciation and 179 happen to be directly referenced (§ 40-18-15(a)(8) and (a)(21)), which is why bonus flows through even though Alabama is not a blanket rolling-conformity state on the individual side.
- •Alabama does NOT conform to the IRC 199A qualified business income (QBI) deduction on individual returns, so pass-through real estate income gets no state-level 20% deduction even though depreciation conforms.
- •Alabama is one of the few states that lets individuals deduct federal income taxes paid on the state return; a large federal deduction from cost seg plus bonus lowers your federal tax, which in turn slightly shrinks your Alabama federal-income-tax deduction, a modest second-order offset worth modeling.
- •Alabama also conforms to OBBBA's permanent restoration of EBITDA-based 163(j) interest limits and 174A R&E expensing, so leveraged real estate operators see the federal interest-limitation relief at the state level too.
- •Alabama's individual income tax rate tops out at 5%, so the state-side cash value of a cost seg study is real but smaller per dollar than in high-rate conforming states.
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.