Kentucky's IRC conformity for depreciation is frozen at December 31, 2001 — before §168(k) was enacted in its modern form. Kentucky STR investors get the full federal deduction with a 100% Kentucky add-back, recomputed on Form 4562-K. At the 3.5% flat rate, the Year-1 state miss on a $150,000 federal deduction is ~$5,250. See the full 50-state conformity map to compare Kentucky's treatment to every other US jurisdiction.
Modeled on a $150,000 federal §168(k) deduction. Run your own numbers in the Conformity Tool →
Lake Cumberland is the #1 STR market in the country — and Kentucky decouples from §168(k)
Lake Cumberland, KY tops the DepreciMax 2026 STR Bonus Depreciation Study by median bonus-eligible percentage. It's a lakefront cabin market with very low land value ratios, high FF&E density on furnished rentals, and heavy 15-year land-improvement content (docks, decks, fire pits, outdoor kitchens). The federal §168(k) math is exceptional. But the state layer requires an add-back — because Kentucky's IRC conformity for depreciation has been frozen at December 31, 2001 for over two decades.
What that means in practice: on a $1.2M Lake Cumberland cabin with a 30% bonus-eligible carve-out ($360,000 of 5-year and 15-year property), the federal Year-1 §168(k) deduction is $360,000 — worth ~$133,200 at the 37% top federal bracket. On the Kentucky return, that entire $360,000 must be added back, and Kentucky depreciation is recomputed as if §168(k) did not exist. At Kentucky's 3.5% flat rate, that's ~$12,600 in Year-1 state savings deferred — recovered as Kentucky depreciation exceeds federal in years 2 through the property's MACRS life.
The federal deduction is unaffected. The STR loophole's ability to offset W-2 income at the federal level is unaffected. Only the Kentucky state-return timing changes.
The Kentucky statute — KRS §141.010 and the 2001 IRC lock
Kentucky Revised Statutes §141.010 defines the Internal Revenue Code for Kentucky income tax purposes as "the Internal Revenue Code in effect on December 31, 2001, exclusive of any amendments made subsequent to that date" for depreciation and §179 purposes. That December 2001 lock date predates:
- The Job Creation and Worker Assistance Act of 2002 (which first enacted §168(k) at 30% bonus)
- Every subsequent §168(k) expansion — 50% (2003), 100% (2010), and the TCJA / OBBBA 100% permanent restoration (2025)
- Every §179 expansion since 2003 (Kentucky still caps §179 at $100,000)
Kentucky did not exclude §168(k) — Kentucky's IRC conformity date is simply older than the statute itself. There is no live conformity debate in Frankfort in 2026: the 2001 lock is stable. See the 50-state conformity hub for a comparison against other frozen-conformity states like Virginia and Wisconsin.
How much the Kentucky add-back costs at three deduction sizes
The Kentucky Year-1 state miss scales linearly with the federal §168(k) deduction, because Kentucky's flat 3.5% rate applies uniformly. Three example STR purchase scenarios:
| Federal §168(k) deduction | Federal Y1 savings (37%) | KY Y1 state miss (3.5%) | Combined Y1 net |
|---|---|---|---|
| $50,000 (small cabin, ~$250K purchase) | $18,500 | -$1,750 | $16,750 |
| $150,000 (mid Lake Cumberland cabin, ~$700K) | $55,500 | -$5,250 | $50,250 |
| $500,000 (luxury lakefront, ~$1.7M with heavy amenities) | $185,000 | -$17,500 | $167,500 |
The "Y1 state miss" is deferred, not lost. Kentucky depreciation exceeds federal in years 2 through the property's MACRS life (5, 15, or 27.5 years depending on classification) and the taxpayer recovers the deferred deduction as a subtraction modification on Form 4562-K. Run any purchase price through the Kentucky Conformity Tool to see the year-by-year state cash flow.
Kentucky vs. other decoupled states — timing hit is small at 3.5%
Kentucky's 3.5% flat rate is the third-lowest of any decoupled state (behind Arizona's 2.5% and Indiana's 2.95%). Even with the full 100% add-back, the Year-1 dollar impact is modest compared to:
- California (13.3% top marginal, 100% add-back): ~$19,950 Year-1 miss on the same $150K deduction — nearly 4× Kentucky. See the California conformity guide.
- New York (10.9% top marginal, 100% add-back): ~$16,350 Year-1 miss — plus NYC's additional 3.876% city tax on residents. See the New York conformity guide.
- Kentucky (3.5% flat, 100% add-back): ~$5,250 Year-1 miss. The lowest-friction full-decoupler at scale.
For a Lake Cumberland investor, the Kentucky add-back is essentially a state cash-flow-timing footnote — the federal §168(k) deduction remains the dominant story. Compare against your alternative markets in the Conformity Tool.
What OBBBA did NOT do for Kentucky
OBBBA (P.L. 119-21, July 2025) restored 100% federal §168(k) permanently for property placed in service on or after January 19, 2025. That flowed automatically through rolling-conformity states (Colorado, Ohio, Utah, Kansas). Kentucky is in a different bucket: Kentucky's IRC conformity date for §168 is fixed at December 31, 2001, so OBBBA doesn't reach Kentucky returns.
The precedent for a state affirmatively excluding OBBBA even after conformity was California's SB 711 (October 2025), which advanced California's IRC conformity to January 1, 2025 but explicitly retained the §168(k) exclusion. No equivalent Kentucky bill is in circulation — because Kentucky wouldn't need one. The 2001 lock does the same work.
For the 2026 STR investor, the practical result: Kentucky's post-OBBBA position is identical to its pre-OBBBA position. Full federal deduction, full Kentucky add-back, recovery on Form 4562-K over MACRS lives.
Practical mechanics — filing a Kentucky STR return with bonus depreciation
The Kentucky depreciation workflow for a §168(k)-claiming STR investor:
- Claim federal §168(k) on federal Form 4562 as normal. This drives the federal Schedule E loss that offsets W-2 income under the STR loophole.
- Recompute depreciation on Kentucky Form 4562-K using IRC as of December 31, 2001 — no §168(k), §179 capped at $100,000.
- Report the difference (federal depreciation minus Kentucky depreciation) as an addition modification on Kentucky Form 740 Schedule M.
- In subsequent years, Kentucky depreciation will typically exceed federal (federal is front-loaded). Report the excess as a subtraction modification on Schedule M until full recovery.
- Track the state-federal basis difference for disposition. When you sell, capital gain / loss must be recalculated for Kentucky using the Kentucky basis.
The bigger picture: §168(k) is one lever in a broader accelerated-depreciation strategy. See our accelerated depreciation explained guide for how MACRS, §168(k), and §179 stack for a real estate investor.
Related state conformity guides
- California conformity guide
- New York conformity guide
- North Carolina (partial)
- 50-state conformity hub
Model any state at any deduction size
Free interactive tool — pick Kentucky, adjust the federal deduction amount, see the state add-back miss.
Open the Conformity Tool →Analyze a Lake Cumberland listing
DepreciMax's $99 property report — line-item finish classification with Kentucky-specific state impact math.
Analyze a property →Frequently asked questions
Does Kentucky conform to federal §168(k) bonus depreciation in 2026?
No. Kentucky's IRC conformity for depreciation is frozen at December 31, 2001 — before §168(k) was enacted in its modern form. Kentucky requires a 100% add-back of the federal §168(k) deduction on the state return and depreciation must be recomputed on Kentucky Form 4562-K without bonus.
Did OBBBA change Kentucky's bonus depreciation treatment?
No. OBBBA (P.L. 119-21, July 2025) restored 100% federal §168(k) permanently, but Kentucky's fixed-date IRC conformity at December 31, 2001 predates §168(k) entirely. OBBBA does not flow through to Kentucky returns.
How much does Kentucky non-conformity cost a Lake Cumberland STR investor?
On a $150,000 federal §168(k) deduction, a Kentucky STR investor at the 3.5% flat rate misses ~$5,250 in Year-1 state tax savings. The federal Year-1 deduction of $150,000 is unaffected, producing ~$55,500 in federal Year-1 savings at the 37% federal bracket.
What is the Kentucky statute for §168(k) non-conformity?
KRS §141.010, which fixes Kentucky's IRC conformity for §168 at the Internal Revenue Code as in effect December 31, 2001. Depreciation without bonus is computed on Kentucky Form 4562-K.
Does Kentucky non-conformity kill the STR loophole in Lake Cumberland?
No. The STR loophole is a federal §469 mechanism. Kentucky's add-back rule only changes state-level Year-1 timing. Lake Cumberland is the #1 market in the 2026 DepreciMax Study and the federal STR loophole benefit is fully preserved.
What is Kentucky Form 4562-K?
The Kentucky depreciation reconciliation schedule. Recomputes depreciation as if §168(k) did not exist, using IRC as in effect December 31, 2001. Kentucky also caps §179 at $100,000 regardless of the current federal §179 limit.
Every state's §168(k) position, in one place
Interactive map, sortable table, and deep-dive guide for each of the 51 jurisdictions — post-OBBBA verified.
See the 50-state map →