Texas Bonus Depreciation: No Personal Income Tax, No State Add-Back.
Texas does not impose a personal income tax. For an individual Texas real estate investor, a federal cost segregation study generally does not create a Texas personal-income-tax depreciation add-back, decoupling adjustment, or state bonus-depreciation clawback. The deduction is still a federal tax item, and actual current-year usability depends on federal limitations such as passive activity, at-risk, basis, and taxpayer-specific rules.
Reviewed by Cost Seg Smart Editorial Team · Last reviewed: · Cites Tex. Const. Art. 8, §24, Texas Comptroller (Franchise Tax)
The 30-second answer: Texas has no personal income tax (Texas Constitution, Article 8, Section 24, reinforced by 2019's Proposition 4), so an individual investor claiming federal §168(k) bonus depreciation on 5, 7, and 15-year cost-segregated components generally has no Texas personal-income-tax return on which to add it back.
On a $750K Texas rental with $600K depreciable basis and 18.3% reclassified to shorter-life property, the reclassified components generate about $109,800 of federal Year-1 depreciation. At a 37% federal bracket, that is about $40,600 of federal savings from the reclassified components alone; including regular depreciation on the remaining building basis, total illustrative Year-1 federal savings are about $43,900.
The Texas franchise (margin) tax may apply to some entities, but it is a separate entity-level margin tax, not a personal income tax, and current-year use of the federal deduction still depends on passive-loss, at-risk, and basis limits.
Federal vs Texas, Side by Side
For an individual investor's cost-segregation-reclassified components:
| Tax provision | Federal (IRC) | Texas |
|---|---|---|
| Bonus depreciation under §168(k) | 100% may apply to qualified property acquired and placed in service after January 19, 2025, subject to §168(k) eligibility, related-party/prior-use, binding-contract, and election rules | No state bonus rules to conform to. Texas has no personal income tax |
| Personal income tax on rental income | Ordinary rates, up to 37% | None. No personal income tax (Tex. Const. Art. 8, §24) |
| State depreciation add-back or decoupling | Not applicable | None. No personal-income-tax return adds back the federal bonus deduction |
| Federal usability of the deduction | Subject to passive activity, at-risk, basis, and business-interest limits | Same federal limits apply; Texas adds no state-level reduction |
| MACRS asset class lives | 5 / 7 / 15 / 27.5 / 39 yr per Rev. Proc. 87-56 | No individual income tax uses them; the federal schedule stands alone |
| Franchise (margin) tax | Not applicable | Applies to entities (LLCs, corporations), not individuals; $2.65M no-tax-due threshold (2026 reports); computed on gross margin, not federal taxable income; confirm entity treatment separately |
| Depreciation form the individual files with the state | Form 4562 → Schedule E (rental) | None. No personal income tax return to file |
Sources: Tex. Const. Art. 8, §24, Texas Comptroller (Franchise Tax), IRC §168(k). Bonus figures reflect current law under the One Big Beautiful Bill Act (OBBBA, 2025); eligibility depends on acquisition and placed-in-service dates and elections.
How Texas's no-income-tax status affects your cost segregation study
The study itself does not change. The same engineering-based reclassification, using nationally-recognized 2026 construction cost data, MACRS classification per Rev. Proc. 87-56, and IRS Pub 5653 ATG-aligned documentation, produces the same component schedule whether the property sits in Texas, California, or Nevada. What changes is what happens after the federal deduction: in a non-conforming state, your CPA maintains a parallel state depreciation book and reconciles a Year-1 add-back. In Texas, there is no individual state depreciation book to maintain for personal-income-tax purposes.
Your CPA receives the same Cost Seg Smart engineered report, the same Form 4562-ready schedule, and the same Form 3115 §481(a) section if this is a lookback study. On the federal return the components run through one calculation:
- Federal book: bonus depreciation on eligible 5/7/15-year components in Year 1, plus half-year-convention MACRS on the 27.5-year residential (or 39-year commercial) remainder, subject to the federal passive-loss, at-risk, basis, and business-interest limits.
- Texas: no individual state depreciation book, because there is no personal income tax return. Nothing to add back at the state level, nothing to defer for personal-income-tax purposes.
The practical advantage of a no-income-tax state is that there is no Texas personal-income-tax add-back reducing or deferring the federal deduction, and the after-study bookkeeping is lighter because there is no second set of state depreciation schedules to track through disposition. How much of the federal deduction you actually use in the current year still depends on your passive-loss, at-risk, basis, and business-interest situation.
Illustrative numbers: $750K Texas rental
An illustrative example using the Cost Seg Smart residential benchmark (SFR reclass 18.3%) and 100% federal bonus depreciation for eligible components under current law:
| Line item | Federal | Texas |
|---|---|---|
| Purchase price | $750,000 | $750,000 |
| Land allocation (20%) | $150,000 | $150,000 |
| Depreciable basis | $600,000 | $600,000 |
| Reclassified to 5/7/15-yr (18.3% SFR benchmark) | $109,800 | $109,800 |
| Year-1 deduction on reclassified components | $109,800 (100% bonus, if eligible) | No state income tax |
| Year-1 depreciation on remaining 27.5-yr basis | ~$8,909 | No state income tax |
| Total Year-1 depreciation | $118,709 | No state income tax |
| Marginal tax rate | 37% | 0% (no personal income tax) |
| Illustrative Year-1 federal tax savings | ~$43,900 (37% × $118,709) | $0 state (nothing to add back) |
| Cost Seg Smart study cost | $995 (residential under $1M basis) | |
| ROI on $995 study fee (illustrative) | ~44× | |
In a non-conforming state, part of that Year-1 benefit would be deferred by a state add-back and recovered over 5 to 15 years. Texas imposes no personal-income-tax add-back, so there is no state-side deferral to track. Whether the full federal deduction is usable in the current year depends on your passive-loss, at-risk, basis, and business-interest situation. Figures are illustrative; your result depends on basis, land allocation, bracket, and eligibility.
See a sample cost segregation report
Look at exactly what your Texas study delivers: the component-by-component 5/7/15-year schedule, the Form 4562-ready numbers, and the documentation your CPA files. Real reports are our best answer to "is this legit?"
Forms your CPA files for a Texas property
Because Texas has no personal income tax, the reporting workflow for an individual investor is federal-only. There is no state depreciation form and no state add-back schedule:
- Federal Form 4562: depreciation and amortization, including the §168(k) bonus deduction on eligible reclassified components. Flows to Schedule E (rental) or Schedule C (active business).
- Schedule E (or Schedule C): the accelerated deduction reduces federal taxable income in Year 1, subject to the federal passive-loss, at-risk, and basis limits. No Texas equivalent exists, because Texas does not tax individual income.
- Form 3115 §481(a) section: included only if this is a lookback method change on a property placed in service in a prior year (see below).
- Entity margin-tax return (if applicable): an LLC or corporation over the $2.65M no-tax-due revenue threshold (2026 reports) files a Texas franchise (margin) tax report. That tax is computed under Texas margin rules rather than by starting from federal taxable income and adding back bonus depreciation, so its treatment should be confirmed separately. Many small real-estate entities are below the threshold, but entity filing obligations and gross-revenue aggregation rules should be confirmed by the taxpayer's advisor.
For an individual Texas investor, the single set of federal depreciation schedules is all you track through disposition. There is no parallel state basis to reconcile at sale.
Form 3115 lookback on a Texas property
If the property was placed in service in a prior tax year and depreciation has already been reported using a non-segregated method, a federal Form 3115 (Application for Change in Accounting Method) may allow a current-year §481(a) catch-up adjustment for the accelerated depreciation you missed, generally without amending prior returns. This is often the single biggest acceleration mechanism in cost segregation. The cumulative catch-up on a $750K property held several years is commonly in a five-figure range, but the actual amount depends on placed-in-service date, prior depreciation claimed, bonus eligibility, land allocation, and component mix. Figures are illustrative.
In Texas, the lookback is cleaner than in a non-conforming state. There is no state personal income tax, so there is no parallel state §481(a) equivalent to compute and no state schedule to restate. The catch-up is a federal-only calculation, still subject to the federal passive-loss, at-risk, and basis limits.
See our full Form 3115 cost segregation guide for federal mechanics, partnership and LLC pass-through treatment, and timing rules.
Should you skip cost segregation in Texas? No.
Texas is one of the more favorable states in the country for a cost-segregation-driven acceleration strategy, for three reasons:
- No Texas personal-income-tax add-back. Unlike non-conforming states, Texas does not add back or defer the federal deduction at the state level. How much of the federal deduction you use in the current year still depends on your passive-loss, at-risk, basis, and business-interest situation.
- No state reconciliation to track. Non-conforming states force a parallel depreciation book, a Year-1 income addition, and years of subtraction adjustments. Texas has none of that for personal-income-tax purposes, so the after-study bookkeeping is lighter for your CPA.
- The Form 3115 lookback is clean. If the property was placed in service in a prior year and depreciated without cost segregation, the federal §481(a) catch-up may be available, with no state-side adjustment to layer on top of it.
The nuance to flag with your CPA is entity structure: an LLC or corporation over the franchise-tax revenue threshold has its own margin-tax computation under Texas margin rules, which should be confirmed separately. For an individual Texas investor, there is no personal-income-tax add-back, though federal usability still depends on the taxpayer's passive-loss, at-risk, and basis situation.
Frequently asked
Does Texas have bonus depreciation?
Texas has no personal income tax, so for an individual investor there is no separate Texas bonus-depreciation question. Federal §168(k) bonus depreciation (100% may apply to qualified property acquired and placed in service after January 19, 2025, subject to eligibility, related-party/prior-use, binding-contract, and election rules) applies on your federal return, and Texas imposes no personal income tax that could add it back or defer it. Whether you can use the full federal deduction in the current year still depends on federal limitations such as passive activity, at-risk, basis, and business-interest rules.
Does Texas tax my rental income?
No. Texas levies no personal income tax. The Texas Constitution (Article 8, Section 24), reinforced by 2019's Proposition 4, bars a personal income tax without a statewide vote. Rental income you earn as an individual is not taxed by the State of Texas, so there is no state return on which a bonus-depreciation deduction would be reduced or added back.
Does the Texas franchise (margin) tax affect my cost seg deduction?
For most individual investors, no. The Texas franchise tax applies to business entities (LLCs, corporations), not to individuals, and it is computed under Texas margin-tax rules rather than by starting with federal taxable income and adding back bonus depreciation. For 2026 reports, entities at or below the no-tax-due threshold of $2.65M generally owe no franchise tax, though reporting obligations may still apply. Cost segregation can still affect federal returns and owner-level economics, but entity-level Texas franchise tax treatment, including gross-revenue aggregation rules, should be confirmed separately with your advisor.
Can I use Form 3115 on a Texas property I bought years ago?
Often, yes. If the property was placed in service in a prior tax year and depreciation has already been reported using a non-segregated method, a federal Form 3115 (Application for Change in Accounting Method) may allow a current-year §481(a) catch-up adjustment for the accelerated depreciation you missed, generally without amending prior returns. Because Texas has no personal income tax, there is no parallel state adjustment to reconcile; the lookback is a federal-only calculation.
How much does cost segregation save on a Texas rental?
On a $750,000 Texas rental with a $600,000 depreciable basis and 18.3% reclassified into shorter-life property (the Cost Seg Smart residential benchmark), roughly $109,800 moves into Year-1 bonus depreciation. At a 37% federal bracket, that is about $40,600 of federal savings from the reclassified components alone; including regular first-year depreciation on the remaining building basis, total illustrative Year-1 federal savings are about $43,900. Because Texas imposes no personal income tax, there is no state add-back reducing the benefit, though current-year usability still depends on federal passive-loss, at-risk, and basis limitations. Actual results depend on your basis, land allocation, bracket, and eligibility.
Is cost seg simpler in Texas than in a state like California?
In one clear respect, yes. Non-conforming states such as California require a parallel state depreciation book and a Year-1 add-back that defers part of the benefit over the asset lives. Texas has no personal income tax, so for personal-income-tax purposes there is no state book, no add-back, and no clawback to track. The federal deduction and its limitations are the same everywhere; Texas simply removes the state-side income-tax complexity, which makes the after-study bookkeeping lighter for your CPA.
Does Texas conform to federal depreciation rules?
Texas has no personal income tax, so there is no Texas personal-income-tax depreciation regime to conform or decouple from. Your federal depreciation, including cost-segregation bonus depreciation, governs your federal return, and Texas imposes no income tax that would modify it. The separate Texas franchise (margin) tax applies to entities under its own rules and is not a conformity question for individual income tax.
What does a Texas cost segregation study rely on for its numbers?
The study reclassifies building components into IRS-recognized MACRS class lives (5, 7, and 15-year) per Rev. Proc. 87-56, using an engineering-based methodology that follows the IRS Cost Segregation Audit Techniques Guide (Publication 5653). The reclassified components may then qualify for federal §168(k) bonus depreciation (100% for qualified property acquired and placed in service after January 19, 2025, subject to eligibility and election rules). The engine ships our own calibrated, nationally-recognized construction cost data.
Related guides
- Bonus depreciation by state: overview
- All 50 states: conformity reference table
- California bonus depreciation (non-conforming)
- New York bonus depreciation (non-conforming)
- New Jersey bonus depreciation (PIT non-conforming, CBT conforms)
- Form 3115 cost segregation lookback: §481(a) mechanics
- What is cost segregation: the full primer
- Cost segregation in Texas: market and property examples
- Sample cost segregation reports