Cost Segregation in Texas and Florida (2026 Guide)

Texas and Florida impose no individual income tax, which makes cost segregation modeling refreshingly simple. There is no addback, no separate state depreciation schedule, no divergent basis, and no state passive loss analysis.

What the federal return shows is what you get. That simplicity is real, but it also means three other things carry more weight than investors expect.

The Federal Deduction Is the Entire Deduction

In states like California or New York, an investor tracks two depreciation schedules for the life of the property and reconciles two different bases at disposition. In Texas and Florida, there is one schedule.

That removes a genuine ongoing compliance cost. It also removes the modeling complexity that causes so many investors in decoupled states to overestimate their benefit.

For an investor comparing markets, this is a real if modest advantage. A study producing $600,000 of federal deduction in Texas produces $600,000 of usable deduction. The same study in New Jersey produces $600,000 federally and a much smaller, differently structured state result.

Texas Franchise Tax

Texas imposes a franchise tax, often called the margin tax, on entities doing business in the state. There is a no-tax-due threshold that exempts entities below a revenue level, and many small real estate holding entities fall below it.

Above the threshold, the tax is computed on taxable margin, generally the lesser of 70% of total revenue, total revenue less cost of goods sold, or total revenue less compensation, with a separate calculation available for entities below a revenue ceiling.

For real estate entities, the cost of goods sold subtraction is generally unavailable for rental activity, which pushes most rental entities to the compensation subtraction or the 70% method.

The rate is low, but the tax applies to margin rather than net income, so an entity with a large depreciation deduction and negative taxable income can still owe franchise tax. Depreciation does not reduce the margin tax base the way it reduces income tax.

Passive entities meeting specific statutory requirements may be exempt. The requirements are technical and turn on the composition of income, so entity structuring for Texas property should account for this rather than assume exemption.

Florida Corporate Income Tax and Entity Choice

Florida imposes no individual income tax but does impose a corporate income tax on entities taxed as corporations. Partnerships and disregarded entities are generally not subject to it, which is one reason Florida real estate is rarely held in corporate form.

Florida decouples from federal bonus depreciation for corporate income tax purposes, requiring an addback with recovery over subsequent years. This is irrelevant to an individual investor holding through an LLC taxed as a partnership or disregarded entity, and highly relevant to anyone holding through a C corporation.

The practical guidance is straightforward. Hold Florida real estate in a pass-through structure and the corporate rules never apply.

Property Tax Carries More Weight

Both states fund heavily through property tax, and rates in many Texas jurisdictions exceed 2% of assessed value. On a $4,000,000 property that is $80,000 annually, which is larger than the state income tax an investor would have paid in most states.

Texas has no cap on annual assessment increases for non-homestead property, so commercial and rental assessments can rise sharply after an acquisition. The purchase price itself frequently triggers reassessment.

Florida's Save Our Homes cap applies to homestead property, not to rental or commercial property, which is subject to a separate and higher assessment growth cap.

Protesting assessments is a routine and worthwhile exercise in both states, and it is a larger annual line item than most state income tax planning would be.

Residency Planning Is the Larger Opportunity

For an investor currently residing in a high-tax state, the more consequential planning question is not how the study performs in Texas or Florida but whether the investor should become a resident.

A move from California or New York to Florida or Texas eliminates state tax on all income, not just rental income. For a household with $1,200,000 of income, that is $130,000 or more annually.

High-tax states audit these moves aggressively. Establishing residency requires more than a lease and a driver's license. Domicile turns on where you actually live, where your family is, where your possessions are, where your professional and social connections are, and where you spend your days.

Day counting matters and is verifiable through cell phone records, credit card activity, and travel documentation. Investors making this move should assume the departure state will examine it and should document accordingly from the start.

Property in the former state continues to generate source income and filing obligations there regardless of residency.

Worked Example: Texas Acquisition

An investor acquires a Houston self-storage facility for $6,800,000. Land is allocated at $1,200,000, leaving $5,600,000 depreciable. A study reclassifies 32%, identifying $1,792,000 of bonus eligible components.

Federal first-year depreciation is $1,792,000 of bonus plus $97,641 of structural depreciation, for approximately $1,889,641. There is no state adjustment. The full amount is the deduction.

The property is held in a Texas LLC taxed as a partnership. The entity's total revenue is $840,000, above the no-tax-due threshold, so franchise tax applies on taxable margin. Depreciation does not reduce the margin base, so the franchise tax is owed regardless of the large income tax deduction.

Property tax at roughly 2.3% of assessed value runs approximately $156,000 annually and is a deductible operating expense.

The modeling is clean. One depreciation schedule, one basis, no reconciliation, and a franchise tax and property tax analysis that operates independently of the income tax result.

State conformity provisions are amended frequently and the mechanics below should be confirmed against the current year instructions before filing.

Frequently Asked Questions

Do Texas and Florida allow bonus depreciation?

The question does not arise for individual investors, since neither state imposes an individual income tax. The federal deduction is the entire deduction. Florida's corporate income tax does require a bonus depreciation addback, which is why Florida real estate is rarely held in corporate form.

Does depreciation reduce the Texas franchise tax?

No. The Texas franchise tax is computed on taxable margin rather than net income, so a large depreciation deduction does not reduce the base. An entity with negative taxable income for federal purposes can still owe franchise tax.

Is a cost segregation study more valuable in a no-income-tax state?

The federal benefit is identical everywhere. What changes is that there is no offsetting state complexity, no divergent basis to track, and no risk of overestimating a state benefit that does not materialize. The simplicity is real but the deduction itself is the same.

Should I move to Texas or Florida for tax reasons?

For a high-income household it can be worth six figures annually, well beyond any rental strategy. But high-tax states audit these moves aggressively. Domicile turns on where you actually live, and day counting is verifiable. Document the move thoroughly from the beginning.

Do I still owe tax in my old state if I keep property there?

Yes. Property in another state generates source income there and requires a nonresident return regardless of where you live. Moving changes the tax on your other income, not on income sourced to the state you left.

Cost Segregation in Texas and Florida: What No State Income Tax Actually Changes