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 Illinois comes in.
2. Illinois and federal bonus depreciation
Illinois decouples from IRC 168(k) bonus depreciation for both individual (4.95% flat) and corporate (7% plus replacement tax) returns. Every taxpayer who claims federal bonus must file Form IL-4562, which adds the full bonus amount back to Illinois income (Schedule M Line 5 for individuals) and then allows an annual Illinois subtraction instead. For 100% bonus property acquired after January 19, 2025 (the OBBBA window), the subtraction each year equals the regular federal depreciation the taxpayer would have claimed had they elected out of bonus under IRC 168(k)(7), i.e. normal MACRS over the asset's recovery period. Per IDOR Bulletin FY 2026-15, P.A. 104-0453 also decouples Illinois from the new OBBBA 100% qualified production property expensing under IRC 168(n) for tax years beginning on or after January 1, 2026 (SB 1911, signed December 12, 2025, further extended the depreciation addback), so neither OBBBA expensing provision survives on the Illinois return.
100% addback of all 168(k)/168(n) bonus on Form IL-4562 Step 2 in the year claimed federally; recovered via an annual Step 3 subtraction equal to the regular MACRS depreciation that would have been allowed with no bonus election (Line 16 for 100% bonus property). All remaining additions and subtractions reverse in the final year or on sale/disposition, so total Illinois depreciation equals total federal depreciation over the asset's life; the difference is purely timing.
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 Illinois return, the $250,000 federal bonus deduction is not allowed. 100% addback of all 168(k)/168(n) bonus on Form IL-4562 Step 2 in the year claimed federally; recovered via an annual Step 3 subtraction equal to the regular MACRS depreciation that would have been allowed with no bonus election (Line 16 for 100% bonus property). All remaining additions and subtractions reverse in the final year or on sale/disposition, so total Illinois depreciation equals total federal depreciation over the asset's life; the difference is purely timing.
Model your own numbers with the tax strategy projector.
3. Section 179 in Illinois
Illinois has no addback or modification for IRC Section 179 expensing. Because Illinois is a rolling-conformity state, the OBBBA-enhanced federal limits (up to $2.5 million deduction with a $4 million phase-out threshold for 2025, indexed) flow through in full to the Illinois return. Form IL-4562 explicitly targets only the 168(k)/168(n) special depreciation allowance, not 179.
4. Does it still help in Illinois?
Yes. Illinois piggybacks on federal MACRS, so assets a cost seg study reclassifies into 5-, 7-, or 15-year property depreciate over those shorter lives on the Illinois return (and Section 179-eligible items can be expensed in full); only the 168(k) bonus portion gets deferred back onto the regular MACRS schedule.
- •Illinois is a rolling-conformity state that nevertheless decouples from bonus depreciation by statute; P.A. 102-0016 (2021) ended the old carve-out that had let 100% bonus through untouched, so for tax years ending on or after 12/31/2021 even 100% bonus is added back.
- •The IL-4562 subtraction for 100% bonus property is the depreciation you would have claimed had you elected out under IRC 168(k)(7), i.e. straight MACRS, computed and claimed starting in year one.
- •Trap for the 40% transition rate: taxpayers who claimed 40% bonus on property placed in service before 1/1/2025 get NO annual Illinois subtraction at all; the statute made no provision for 40%, so the entire recovery waits until disposition or the last year of regular depreciation (2025 IL-4562 instructions). Property hitting 40% under the OBBBA transition election does get annual subtractions.
- •P.A. 104-0453 decoupled Illinois from the OBBBA's new IRC 168(n) 100% qualified production property expensing for tax years beginning on or after 1/1/2026, and SB 1911 (signed 12/12/2025) expanded the depreciation addback; IDOR Bulletin FY 2026-15 and the R-12/25 IL-4562 instructions already implement it on Line 16.
- •The addback/subtraction is entity-level for pass-throughs: partnerships and S corps compute it on their IL-1065/IL-1120-ST and pass the modifications to owners on Schedule K-1-P; owners do not re-report those amounts on their own IL-4562.
- •Everything reverses at sale or end of depreciable life, so Illinois depreciation equals federal over the full holding period; the state cost is purely time-value, which matters more for short-hold real estate strategies.
- •Illinois individual rate is a flat 4.95%; pass-through entities also face the 1.5% personal property replacement tax (2.5% for C corps on top of the 7% corporate rate), so the bonus deferral bites at both levels for entity-held rentals.
- •Section 179 passes through with no Illinois cap, making 179 (where eligible, e.g. qualified improvement property on commercial rentals) relatively more attractive than bonus for Illinois taxpayers.
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.