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 Rhode Island comes in.
2. Rhode Island and federal bonus depreciation
Rhode Island has decoupled from IRC 168(k) bonus depreciation continuously since the federal 2002 Job Creation and Worker Assistance Act, for both personal and corporate income tax (R.I.G.L. 44-61-1). Any bonus depreciation claimed federally, including the permanent 100% bonus under the July 2025 OBBBA for property acquired after Jan 19, 2025, must be added back on the Rhode Island return (RI Schedule M for individuals; Schedule C additions for entities, flowing to owners via RI Schedule K-1). Rhode Island then allows depreciation recomputed as if bonus had never been enacted, i.e. regular MACRS over the asset's normal recovery period, taken as decreasing modifications in later years. Notably, the state's new 2025 Schedule HR1 addback forms (for OBBBA items) have no 168(k) line because the bonus addback was already permanent law; OBBBA changed nothing about Rhode Island's position, and the 2025-2026 sessions (FY2026 and FY2027 budgets) left the 44-61-1 bonus decoupling fully in place.
100% addback of federal bonus in year claimed (RI Schedule M increasing modification); recovered via annual decreasing modifications equal to depreciation recomputed without bonus over the asset's regular MACRS life; on disposition, gain is computed using a basis consistent with Rhode Island-allowed depreciation, so the difference is trued up at sale (R.I.G.L. 44-61-1(b)). Per ADV 2022-39, the addback is a statutory modification that cannot be reduced by passive losses.
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 Rhode Island return, the $250,000 federal bonus deduction is not allowed. 100% addback of federal bonus in year claimed (RI Schedule M increasing modification); recovered via annual decreasing modifications equal to depreciation recomputed without bonus over the asset's regular MACRS life; on disposition, gain is computed using a basis consistent with Rhode Island-allowed depreciation, so the difference is trued up at sale (R.I.G.L. 44-61-1(b)). Per ADV 2022-39, the addback is a statutory modification that cannot be reduced by passive losses.
Model your own numbers with the tax strategy projector.
3. Section 179 in Rhode Island
Rhode Island Section 179 cap: Same as federal for assets placed in service on or after Jan 1, 2014, EXCEPT for TY2025: the FY2026 budget decoupled from OBBBA's increased cap ($2.5M/$4M phaseout), so 2025 filers add back 179 expensing above the pre-OBBBA limits (about $1.25M/$3.13M inflation-adjusted) on Schedule HR1 line 1c. $25,000 cap applies only to assets placed in service before 2014..
R.I.G.L. 44-61-1.1 links Rhode Island Section 179 directly to federal law for assets placed in service on or after Jan 1, 2014 (ADV 2015-02); no modification is normally required. For TY2025 only, Rhode Island decoupled from the H.R. 1/OBBBA increase in the 179(b) cap: the excess deduction is added back on new Schedule HR1-Individual line 1c / HR1-Entity under regulation 280-RICR-20-55-16, flowing to RI Schedule M line 2k. Note that the regulation prescribes a decreasing-modification recovery schedule (capped at 20% of the initial addback per year) only for the Section 174A amortization addback; it specifies no corresponding recovery schedule for the 179(b) addback. The FY2027 enacted budget (June 2026) extended decoupling only for R&D expensing (TY2026+) and for QSBS and the business-interest provision (TY2027+); it did not extend the Section 179 cap decoupling, so under rolling conformity Rhode Island appears to follow the full federal 179 limits again starting TY2026. Verify against TY2026 form instructions when issued.
4. Does it still help in Rhode Island?
Yes. Rhode Island follows federal MACRS classifications and recovery periods; only the bonus layer is disallowed. Reclassifying components from 27.5/39-year property into 5-, 7-, and 15-year MACRS still front-loads Rhode Island deductions substantially, and the bonus addback is recovered over those same short lives rather than the building's life.
- •Rhode Island has decoupled from 168(k) bonus since 2002 (R.I.G.L. 44-61-1); OBBBA's permanent 100% bonus changed nothing because the addback was already permanent, which is why the new 2025 Schedule HR1 forms have no bonus depreciation line
- •Basis true-up on sale: gain on disposition is computed using Rhode Island-allowed depreciation, so the bonus addback is a pure timing difference, never a permanent loss (R.I.G.L. 44-61-1(b))
- •The bonus addback cannot be offset by passive losses; it is a statutory modification with no passive-activity netting (RI Division of Taxation ADV 2022-39)
- •Section 179: $25,000 Rhode Island cap applies ONLY to assets placed in service before Jan 1, 2014; full federal conformity since 2014 (ADV 2015-02, R.I.G.L. 44-61-1.1)
- •TY2025 only: FY2026 budget decoupled from OBBBA's increased 179 cap, 163(j) business interest, 174A R&D expensing, 181 sound-recording production deduction, and qualified opportunity zone changes; the above-the-line items are added back on new Schedule HR1-Individual / HR1-Entity under emergency regulation 280-RICR-20-55-16 (effective Dec 15, 2025)
- •The 20%-per-year decreasing-modification recovery under 280-RICR-20-55-16 applies specifically to the Section 174A amortization addback; the regulation prescribes no recovery schedule for the TY2025 Section 179 excess addback
- •FY2027 enacted budget (June 2026) extended decoupling only for R&D expensing (TY2026+) and QSBS plus business-interest (TY2027+); the 179 cap decoupling was not extended, implying reconformity to full federal 179 for TY2026
- •Rhode Island's top individual rate is 5.99% but a new surtax on income over $1M phases in: 6.99% TY2027, 7.99% TY2028, 8.99% TY2029, raising the stakes of depreciation addbacks for high-income real estate investors
- •Pass-through owners pick up the entity's HR1 and bonus addbacks via RI Schedule K-1; the PTE tax (SALT-cap workaround, enacted 2019) continues and was restructured to accommodate the new surtax
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.