New York Bonus Depreciation: Decoupling Rules + Cost Seg Impact.
New York has been decoupled from federal §168(k) bonus depreciation since 2003 — for both personal income tax and corporate franchise tax. Here's the dollar impact on a $750K NY rental, how your CPA files Form IT-398 + IT-225, and the narrow Resurgence Zone carve-out.
Reviewed by Cost Seg Smart Editorial Team · Last reviewed: · Cites NY Form IT-398, CT-399 (2025)
Federal vs New York — Side by Side
| Tax provision | Federal (IRC) | New York (NY Tax Law) |
|---|---|---|
| Bonus depreciation under §168(k) | 100% (permanent, OBBBA 2025+) | Disallowed — decoupled since TY 2003 |
| Replacement method | N/A | IRC §167 as of September 10, 2001 (pre-bonus MACRS) |
| §168(n) Qualified Production Property (OBBBA new) | Available 2025+ | Decoupled per NY S8631 (2025) |
| Resurgence/Liberty Zone carve-out | Applies federally | Conforms — but geographic restriction to lower Manhattan applies |
| Individual taxpayer form | Form 4562 | Form IT-398 → IT-225 (mod codes A-209 / S-213) → IT-201 |
| Corporate taxpayer form | Form 4562 | Form CT-399 → CT-225 → CT-3 |
Sources: NY Form IT-398, CT-399 (2025), NY S8631 (2025).
How NY decoupling affects your cost segregation study
The cost segregation study itself is identical to a study run on a Texas, Florida, or Nevada property — same RSMeans 2024 cost data, same MACRS classification per Rev. Proc. 87-56, same IRS Pub 5653 13-element framework. The reclassified components (5-year, 7-year, 15-year personal property and land improvements) are the same regardless of state.
What changes is how the schedule flows through two parallel depreciation books:
- Federal book: 100% bonus on 5/7/15-year reclassified components in Year 1 + standard MACRS on the 27.5-year residential (or 39-year commercial) remainder.
- New York book: standard MACRS on every component (no bonus), recovery periods identical to federal but Year 1 produces a much smaller deduction.
Per NY Form IT-398 instructions: "For tax years beginning after December 31, 2002, NYS does not allow the federal special depreciation deduction for Internal Revenue Code IRC § 168(k) property." The taxpayer instead computes depreciation as if §168(k) never existed.
Real numbers: $750K New York rental
| Line item | Federal | New York |
|---|---|---|
| Purchase price | $750,000 | $750,000 |
| Land allocation (typical 25% in NY metro) | $187,500 | $187,500 |
| Depreciable basis | $562,500 | $562,500 |
| Reclassified to 5/7/15-yr (18.3% SFR benchmark) | $102,938 | $102,938 |
| Year-1 deduction on reclassified components | $102,938 (100% bonus) | ~$22,650 (MACRS, blended half-year) |
| Year-1 deduction on remaining 27.5-yr basis | ~$8,353 | ~$8,353 |
| Total Year-1 deduction | $111,291 | ~$31,003 |
| Marginal tax rate | 37% | 6.85% (mid-bracket) |
| Year-1 tax savings | $41,178 | ~$2,124 |
| Cost Seg Smart study cost | $995 (residential under $1M basis) | |
| Combined Year-1 tax savings (federal + NY) | ~$43,302 | |
| ROI on $995 study fee | 44× | |
High-income NYC investors at the 10.9% top NY bracket (above $25M income) see slightly different NY savings, but the federal $41,178 dwarfs the state portion in both cases. NYC residents face an additional 3.876% NYC tax on top, but the cumulative state-and-local effect is still secondary to the federal benefit.
Forms your CPA files for New York
- Federal Form 4562 — depreciation including §168(k) bonus on reclassified components. Flows to Schedule E (rental) or Schedule C (active business).
- NY Form IT-398 — NY State Depreciation Schedule for IRC §168(k) Property. Computes the NY-only depreciation deduction (without bonus) on each cost-segregated component. IT-398 fillable PDF.
- NY Form IT-225 — NY State Modifications. Column G from IT-398 → IT-225 line 1, addition modification code A-209. Column F → IT-225 line 10, subtraction modification code S-213.
- NY Form IT-201 (or IT-203 for nonresidents) — IT-225 totals flow to IT-201 line 20 (additions) and line 31 (subtractions).
- Parallel basis tracking — NY basis on each cost-segregated component differs from federal basis from Year 1 forward. Reconciliation at sale via §1245 / §1250 recapture rules.
Corporations under Article 9-A: substitute Form CT-399 (Depreciation Adjustment Schedule) and CT-225. Flow to CT-3 line 2 (additions) / line 4 (subtractions).
The Resurgence Zone carve-out (rarely applicable)
NY's one §168(k) carve-out is the Qualified Resurgence Zone (and overlapping Liberty Zone, under IRC §1400L). For property meeting the geographic test, NY actually conforms to federal §168(k).
The Resurgence Zone is defined geographically as the area of lower Manhattan bounded approximately by Canal Street and Clarkson Street on the north, the Holland Tunnel on the west, and the East River and lower Manhattan waterfront on the south and east. For property physically located in this zone, federal §168(k) bonus depreciation flows through to the NY return.
Practical implication for cost segregation: very few NY real estate investors have property in the Resurgence Zone. NYC outer boroughs, Long Island, Westchester, and upstate are all excluded. If your property is in lower Manhattan, ask your CPA to verify Resurgence Zone qualification before relying on it — the geographic boundaries are precise.
Should you skip cost segregation in New York? No.
New York decoupling defers a portion of the cost-seg benefit but doesn't eliminate it. The math overwhelmingly favors doing the study:
- Federal benefit is dominant. At 37% federal bracket, the Year-1 deduction produces ~$50,000+ on a $750K rental. The NY-portion deferral is roughly $7,000 — meaningful but secondary.
- NY depreciation recovers. Same reclassified basis depreciates on NY books over 5/7/15-year MACRS in years 2 through 16. Total lifetime NY deduction matches federal.
- NY's mid-brackets dilute the deferral cost. 6.85% bracket applies to most NY rental investors. NYC residents face an additional 3.876% NYC tax, but the cumulative effect is still secondary to the federal benefit.
- Federal Form 3115 lookback is unaffected. For NY properties held 2+ years and never cost-segregated, the federal §481(a) catch-up adjustment is available regardless of NY decoupling.
Frequently asked
Does New York State conform to federal §168(k) bonus depreciation?
No. NYS has been decoupled from federal §168(k) bonus depreciation since 2003 for both personal income tax (Article 22) and corporate franchise tax (Article 9-A). Per Form IT-398 (NY State Depreciation Schedule for IRC §168(k) Property): 'For tax years beginning after December 31, 2002, NYS does not allow the federal special depreciation deduction for Internal Revenue Code IRC § 168(k) property.' In place of §168(k), NYS allows depreciation computed under IRC §167 as it would have applied on September 10, 2001. NY Senate Bill S8631 (2025) reaffirmed decoupling and extended it to new §168(n) (OBBBA's Qualified Production Property).
Is there an exception for property in lower Manhattan?
Yes — narrow and rare for cost segregation purposes. The Qualified Resurgence Zone and Liberty Zone (IRC §1400L) provisions carve out property physically located in a defined area of lower Manhattan (Holland Tunnel to Clarkson Street). For property meeting the geographic test, NY follows federal §168(k). For standard NY rentals — residential or commercial — outside the zone, the carve-out doesn't apply. Most cost segregation studies on NY properties (NYC outer boroughs, Westchester, Long Island, upstate) cannot use this exception.
Which NY forms does my CPA file?
Individual taxpayer: Form IT-398 computes the federal-vs-NY §168(k) depreciation delta. Per the IT-398 instructions, the column G total transfers to Form IT-225 (NY State Modifications) line 1 as addition modification A-209; the column F total transfers to IT-225 line 10 as subtraction modification S-213. IT-225 flows to IT-201 line 20 (additions) and line 31 (subtractions). Corporate franchise tax (C-corps under Article 9-A): Form CT-399 → Form CT-225 → CT-3 line 2 (additions) / line 4 (subtractions). Asset basis is tracked separately on the NY books from Year 1 forward.
How much does NY non-conformity cost on a typical rental?
On a $750K NY rental with 18.3% cost-segregation reclassification ($137,250 reclassified basis) at a 6.85% NY bracket, the federal Year-1 deduction is $137,250 (federal savings $50,783 at 37% bracket); the NY Year-1 deduction is approximately $30,200 (NY savings ~$2,069). The NY-portion benefit isn't lost — it recovers over the asset class lives in years 2 through 16 — but it defers about $7,300 of state tax savings ($137,250 × 6.85% if NY conformed, minus the ~$2,069 actually received Year 1). The federal benefit remains fully available.
Does NY corporate franchise tax conform if I hold the property in a C-corp?
No. NY Article 9-A corporate franchise tax also requires add-back of federal §168(k) bonus depreciation. The mechanism is Form CT-399 (Depreciation Adjustment Schedule). C-corps in NY face the same decoupling as individuals — there's no entity-type escape. The header on the 2025 CT-399 confirms: 'Information on this page relates to a tax year that began on or after January 1, 2025, and before January 1, 2026.' Same rule applies.
Does federal Form 3115 lookback work for NY?
Federal Form 3115 captures the federal §481(a) catch-up adjustment for prior-year missed accelerated depreciation. NY's parallel state-side adjustment is much smaller — because NY never recognized federal §168(k) bonus, the NY-side lookback reflects only the difference between proper MACRS classification and whatever depreciation schedule was actually used on the NY books. The federal lookback is unaffected by NY non-conformity; the NY-side adjustment runs through Form IT-398 / CT-399 with cumulative basis corrections.
Should I still do cost segregation on a NY property?
Yes, in nearly every case. The federal benefit is dominant — on a $750K NY rental, the federal Year-1 deduction produces ~$50,783 in federal tax savings at 37% bracket. The NY-portion of the deferred state benefit (about $7,300 over 5-15 years vs Year-1) is meaningful but secondary. For NY investors using the STR loophole or REPS to convert losses to non-passive treatment offsetting W-2 wages, every dollar matters — but the federal benefit alone overwhelmingly justifies the study even before counting state effects.
Related guides
- Bonus depreciation by state — overview
- All 50 states — conformity reference table
- California bonus depreciation (PIT + corp non-conforming)
- New Jersey bonus depreciation (GIT + CBT non-conforming)
- Form 3115 cost segregation lookback — §481(a) mechanics
- Cost segregation New York City — NY-specific examples
- 100% bonus depreciation under OBBBA — federal mechanics
- Sample cost segregation reports (23 PDFs)
- Audit defense scope — 13 IRS Pub 5653 quality elements