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 North Dakota comes in.
2. North Dakota and federal bonus depreciation
North Dakota fully conforms to IRC 168(k) bonus depreciation for both individual and corporate income tax. The state uses rolling conformity and begins its return with federal taxable income (N.D.C.C. 57-38-01 defines taxable income as federal taxable income under the IRC 'as amended'), with no depreciation addback or modification anywhere in the statute or form instructions. Because of rolling conformity, the OBBBA's permanent 100% bonus for property acquired after January 19, 2025 flows through to North Dakota returns automatically for 2025 and 2026; the North Dakota Office of State Tax Commissioner's own fiscal analysis of the federal law treats the bonus revenue loss as automatic, and the legislature took no action in the 2025 session (69th Legislative Assembly) to decouple.
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
North Dakota 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 North Dakota
Full conformity via rolling conformity to the IRC, including the OBBBA increase of the Section 179 cap to $2,500,000 (phase-out beginning at $4,000,000) for 2025. No North Dakota-specific cap or addback; whatever 179 expense is claimed federally carries into federal taxable income, which is the state starting point.
4. Does it still help in North Dakota?
Yes, trivially: because North Dakota takes federal taxable income with no depreciation adjustments, the full cost segregation result (5/7/15-year MACRS reclassification plus 100% bonus on those short-life assets) flows through dollar-for-dollar to the state return with zero extra schedules or tracking.
- •North Dakota is one of only a handful of states that starts the individual return with federal taxable income (not federal AGI), so federal deductions like the standard deduction and QBI (199A) also flow through automatically, N.D.C.C. 57-38-01.
- •North Dakota never decoupled from bonus depreciation, including during the 2002-2004 and TCJA eras when most states added it back, making it one of the roughly 15-20 states with an unbroken full-conformity record on 168(k).
- •Individual rates are 0% / 1.95% / 2.50% (top rate kicks in around $244,825 single / $298,075 MFJ for 2025), so a large 2025 bonus deduction may be worth only ~2 to 2.5 cents per dollar at the state level; many smaller landlords fall entirely in the 0% bracket.
- •Corporate income tax (rates up to 4.31%) also rides rolling conformity with federal taxable income as the starting point, so C-corp property owners get the same automatic 100% bonus with no addback.
- •Tax Foundation's July 2025 OBBBA analysis lists North Dakota as automatically inheriting permanent 100% bonus (estimated ~$205M state revenue reduction in 2026), and the state took no decoupling action in its 2025 legislative session.
- •Because there is never a federal-state depreciation difference, there is also no state basis difference on sale, so no separate North Dakota depreciation recapture or gain adjustment after a cost seg study.
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.