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 Hawaii comes in.
2. Hawaii and federal bonus depreciation
Hawaii has decoupled from IRC 168(k) bonus depreciation continuously since the provision was created in 2002, for both individual and corporate income tax. HRS 235-2.4 makes IRC 168 operative except that 168(k) (along with 168(j) Indian-reservation property and 168(m) reuse/recycling property) shall not be operative for Hawaii purposes, and the 2026 annual conformity act (HB 2329, enacted as Act 35 on May 26, 2026, updating conformity to the IRC as of December 31, 2025) re-enacted that exact carve-out, so OBBBA's permanent 100% bonus for property acquired after January 19, 2025 does NOT flow through to Hawaii. The same act also keeps OBBBA's new IRC 168(n) 100% deduction for qualified production property inoperative. Taxpayers claiming depreciation must complete a federal Form 4562 for Hawaii purposes using pre-bonus depreciation rules, attach it to the Hawaii return, and adjust for the federal-vs-Hawaii difference.
No formulaic addback-and-recover schedule (unlike MN or NC). Hawaii simply recomputes depreciation without 168(k): the federal bonus amount is backed out in year 1 and recovered through larger Hawaii regular MACRS deductions over the asset's recovery period, with separate federal/Hawaii basis records required (worksheet attached to the return; basis differences also affect gain/loss at sale).
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
On the Hawaii return, the $250,000 federal bonus deduction is not allowed. No formulaic addback-and-recover schedule (unlike MN or NC). Hawaii simply recomputes depreciation without 168(k): the federal bonus amount is backed out in year 1 and recovered through larger Hawaii regular MACRS deductions over the asset's recovery period, with separate federal/Hawaii basis records required (worksheet attached to the return; basis differences also affect gain/loss at sale).
Model your own numbers with the tax strategy projector.
3. Section 179 in Hawaii
Hawaii Section 179 cap: $25,000 maximum deduction; phase-out begins at $200,000 of qualifying purchases (vs. federal $2.5M/$4M under OBBBA).
HRS 235-2.4 makes IRC 179 operative but overrides the federal dollar limits: aggregate cost expensed may not exceed $25,000 and the phase-out reduction begins at $200,000, with no inflation indexing. Hawaii also excludes off-the-shelf computer software from section 179 property and does not allow the revocable-election rule of 179(c)(2). The 2026 conformity act (Act 35) re-enacted these caps unchanged, so they remain in force for 2026. Official N-40/N-30 instructions confirm: Hawaii has not adopted the increased expensing deduction under section 179 (Hawaii limit is $25,000).
4. Does it still help in Hawaii?
Yes. HRS 235-2.4 keeps IRC 168 (regular MACRS) fully operative for Hawaii, so a cost segregation study that reclassifies components into 5-, 7-, and 15-year property (vs. 27.5/39-year building) still accelerates Hawaii deductions through shorter recovery periods and 200%/150% declining-balance methods; only the 168(k) first-year bonus (and the new 168(n) allowance) is disallowed on the state return.
- •Hawaii is one of the longest-standing full decouplers: it has disallowed bonus depreciation since the original 2002 30% bonus (DOTAX Announcement 2003-10), through TCJA, and now through OBBBA.
- •The 2026 conformity act (HB 2329, Act 35, signed May 26, 2026) adopted the IRC as of December 31, 2025 (including OBBBA generally) but expressly kept 168(k) inoperative AND added OBBBA's new 168(n) qualified production property allowance to the not-operative list, so neither 100% write-off works in Hawaii.
- •Hawaii's Section 179 cap of $25,000 with a $200,000 phase-out is among the lowest in the nation (comparable to California's $25,000), and Hawaii even excludes off-the-shelf computer software from 179 property.
- •Mechanics are recompute-not-addback: taxpayers prepare a second, Hawaii-only federal Form 4562 using pre-bonus rules and attach it plus an adjustment worksheet to the Hawaii return, and must maintain dual federal/Hawaii basis records until the asset is disposed of.
- •Hawaii's individual rates reach 11% (among the highest state top rates), so the year-1 federal/state timing gap from a cost seg study is larger in dollar terms than in most states; the deductions are deferred, not lost.
- •Because Hawaii keeps regular MACRS operative, QIP and other reclassified property still use federal recovery periods and methods on the state return; depreciation differences also flow through to Hawaii gain/loss calculations on sale.
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.