Cost Segregation in Texas

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 Texas comes in.

2. Texas and federal bonus depreciation

Texas has no individual income tax, so IRC 168(k) bonus depreciation from a cost segregation study is purely a federal-return benefit for Texas resident investors. The only state-level angle is the franchise (margin) tax on entities: historically Texas computed COGS depreciation under the IRC as in effect Jan 1, 2007, which disallowed bonus depreciation entirely (the Economic Stimulus Act of 2008 bonus rules post-dated the conformity date). In a December 1, 2025 policy reversal (with supplemental guidance issued December 19, 2025 as STAR Memo 202512012M), the Comptroller announced that beginning with the 2026 franchise tax report (covering 2025 federal years), total revenue and COGS are computed under the current IRC, so OBBBA 100% bonus depreciation on property acquired after Jan 19, 2025 now flows into the COGS deduction for entities eligible to use COGS. Note that passive rental landlords generally cannot use the COGS method anyway (COGS is for sellers of goods and those who construct/improve real property), so the change matters most for developers, flippers, and builders.

No addback mechanism; Texas has no income tax. For franchise tax 2025 reports and earlier, bonus was simply excluded from COGS. For the 2026 report the Comptroller allows a one-time net depreciation catch-up adjustment capturing cumulative federal-vs-Texas depreciation differences on assets placed in service before 2026, with a carryforward to consecutive reports until exhausted if it exceeds available margin.

3. Section 179 in Texas

Texas Section 179 cap: $25,000 (with $200,000 phase-out) for franchise tax 2025 reports and earlier; full federal amounts conform beginning with the 2026 report.

Irrelevant to individuals (no income tax). For franchise tax COGS through the 2025 report year, Section 179 was frozen at the 2007-IRC level: a $25,000 expensing limit with a $200,000 phase-out threshold, per the Comptroller's COGS FAQ. Beginning with the 2026 franchise tax report, Texas follows the current IRC, so the full federal Section 179 election claimed on the federal return (OBBBA raised the cap to $2.5M for 2025) can be included in COGS for qualifying assets.

4. Does it still help in Texas?

For Texas residents, the entire cost segregation benefit (5/7/15-year reclassification plus 100% bonus) lands on the federal return undiluted, since there is no state income tax to decouple. On the franchise tax, depreciation only matters inside the COGS deduction, and as of the 2026 report year Texas simply uses the depreciation reported on the federal return, so MACRS lives and bonus from a cost seg flow through for COGS-eligible entities (builders/developers), while pure rental landlords typically use the 70%-of-revenue or compensation margin methods where depreciation is irrelevant.

• •Texas is one of the best cost-seg states in the country: no individual income tax (and a 2019 constitutional amendment, Prop 4, bans one), so 100% federal bonus depreciation is never clawed back on a state return.
• •The franchise (margin) tax was locked to the IRC as of Jan 1, 2007 for nearly two decades, meaning zero bonus depreciation and a $25,000 Section 179 cap inside COGS through the 2025 report year.
• •On December 1, 2025 the Comptroller reversed course (supplemental guidance December 19, 2025): beginning with the 2026 franchise tax report, total revenue and COGS follow the current IRC, aligning Texas with OBBBA 100% bonus for property acquired after Jan 19, 2025 (34 TAC 3.587-3.588 revisions pending).
• •The Comptroller is allowing a one-time 2026 net depreciation catch-up adjustment for cumulative federal-vs-Texas depreciation differences on pre-2026 assets, with any unused amount carrying forward to later reports until exhausted.
• •Most passive rental real estate entities cannot use the COGS margin method at all (COGS is limited to sellers of goods and entities that construct, improve, or remodel real property under Tex. Tax Code 171.1012), so for typical landlords franchise tax depreciation treatment is moot.
• •Entities under the no-tax-due revenue threshold ($2.47M annualized for 2024-2025 report years, $2.65M for the 2026 report year) owe no franchise tax, which exempts many small rental LLCs entirely.

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.