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 New Jersey comes in.
2. New Jersey and federal bonus depreciation
New Jersey decouples from IRC 168(k) bonus depreciation for both the Gross Income Tax (individuals, N.J.S.A. 54A:5-1.2 via P.L. 2004, c.65, for assets placed in service on or after Jan 1, 2004) and the Corporation Business Tax (property acquired after Sept 10, 2001). The GIT-DEP worksheet states the federal 50% (and by extension 100%) special depreciation allowance is not allowed; only the legacy 30% allowance was permitted if it was taken federally. Nothing post-OBBBA changed this: the Division of Taxation confirmed in December 2025 that OBBBA's federal deductions do not affect the Gross Income Tax, and New Jersey's June 2026 (FY2027) budget left the longstanding bonus and 179 decoupling intact while declining to decouple the CBT from OBBBA's restored Sec. 174 R&E expensing and EBITDA-based 163(j) limit, which flow through the CBT's rolling start from federal taxable income. So post-OBBBA, 100% federal bonus is fully added back on the NJ return; OBBBA's new 100% deduction for qualified production property (IRC 168(n)) is likewise unavailable for the GIT, though the state has not explicitly addressed 168(n) for the CBT.
Via Worksheet GIT-DEP (individuals, partnerships, S corps) or Schedule S (CBT): the federal bonus deduction is added back in year 1, and NJ keeps a separate, higher depreciable basis (federal basis before bonus). The difference is recovered through larger NJ depreciation deductions over the asset's remaining MACRS life using the same federal method and life, and any unrecovered difference is recovered at disposition through a NJ adjustment to federal gain or loss (GIT-DEP Part IV). Unused NJ depreciation adjustments cannot be carried forward, carried back, or applied against another GIT income category.
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 New Jersey return, the $250,000 federal bonus deduction is not allowed. Via Worksheet GIT-DEP (individuals, partnerships, S corps) or Schedule S (CBT): the federal bonus deduction is added back in year 1, and NJ keeps a separate, higher depreciable basis (federal basis before bonus). The difference is recovered through larger NJ depreciation deductions over the asset's remaining MACRS life using the same federal method and life, and any unrecovered difference is recovered at disposition through a NJ adjustment to federal gain or loss (GIT-DEP Part IV). Unused NJ depreciation adjustments cannot be carried forward, carried back, or applied against another GIT income category.
Model your own numbers with the tax strategy projector.
3. Section 179 in New Jersey
New Jersey Section 179 cap: $25,000 (with federal-style phase-out computed on the $25,000 NJ maximum; legacy NY Liberty Zone property got up to $60,000).
NJ froze Section 179 at the pre-2003 federal level: a $25,000 maximum per taxpayer (and per partnership/S corp at the entity level) for both GIT and CBT, versus the federal $2.5M OBBBA cap. The GIT version has no business income limitation, but unused deductions cannot be carried forward. Federal 179 above $25,000 is added back and recovered as NJ depreciation over the asset's federal MACRS life; NJ also separately recomputes Section 179 recapture income (GIT-DEP Part III).
4. Does it still help in New Jersey?
Yes. GIT-DEP Part II instructions direct taxpayers to use "the same method that was used for federal purposes" and "the same life that was used for federal purposes," so assets a cost seg study reclassifies into 5-, 7-, or 15-year MACRS classes are depreciated on those same accelerated lives for New Jersey. The study still front-loads NJ deductions materially versus 27.5/39-year straight-line, just without the year-1 100% bonus layer.
- •NJ is one of roughly 10 states that disallow federal bonus depreciation entirely for individuals; the 100% OBBBA bonus is added back in full via Worksheet GIT-DEP and recovered over the asset's regular MACRS life.
- •Section 179 is frozen at $25,000 (pre-2003 federal level) for both the Gross Income Tax and the Corporation Business Tax, versus the federal $2.5M cap, and unused NJ 179 amounts cannot be carried forward.
- •The Gross Income Tax has no loss netting across income categories and no loss carryforwards: a cost-seg-driven rental paper loss can zero out the NJ rents/royalties category but can never offset W-2 wages or business profits, and the excess loss is permanently lost for NJ purposes. The big federal year-1 benefit largely does not translate to the NJ-1040.
- •NJ keeps a separate depreciation schedule per asset: higher NJ basis means larger NJ depreciation in later years and a smaller NJ gain (or larger loss) on sale, computed on GIT-DEP Part IV, so the bonus disallowance is a timing difference, not a permanent one, at the asset level.
- •Partnerships and S corporations compute the NJ adjustment at the entity level (NJ-1065 / CBT-100S) and pass it through on the NJK-1/NJ-K-1; each entity is itself limited to $25,000 of Section 179.
- •If the initial required NJ depreciation adjustment for an asset was never reported, NJ basis defaults to federal basis and no adjustment is required or allowed in later years (a trap for investors who moved into NJ or started filing late).
- •Post-OBBBA, Trenton kept the bonus/179 decoupling: the Division of Taxation confirmed in December 2025 that OBBBA's federal deductions do not affect the Gross Income Tax, and the June 2026 (FY2027) budget declined to decouple the CBT from OBBBA's restored Sec. 174 R&E expensing and the EBITDA-based 163(j) limit, which flow through the CBT's rolling conformity. OBBBA's new 100% qualified production property deduction (IRC 168(n)) is unavailable for the GIT; its CBT treatment has not been explicitly addressed.
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.