As of 2026, 11 states do not conform to federal §168(k) bonus depreciation: California, New York, New Jersey, Pennsylvania, Illinois, Massachusetts, Maryland, Kentucky, Louisiana (corporate only — individuals conform), Arkansas, North Carolina, and Wisconsin. Investors in these states get the full federal Year-1 deduction (unaffected) but must add back the bonus depreciation on the state return, depreciating it over standard MACRS lives instead. Nine states impose no individual income tax at all — making conformity moot and maximizing federal benefit: AK, FL, NV, NH, SD, TN, TX, WA, WY.
If you've read our STR loophole explainer, you understand the federal mechanics. What gets less coverage is the state side — and that's where the dollar impact varies wildly. A Joshua Tree STR investor in California faces a 13.3% state add-back. A Gatlinburg STR investor in Tennessee faces zero. Same federal benefit, very different all-in tax position. Our 2026 STR Bonus Depreciation Market Study pairs this state §168(k) conformity map with market-level bonus-eligible rankings across 197 US STR markets, so you can size both variables together.
This article is the reference table for that question. Sort by state, filter to conforming-only, and see the exact dollar impact on a typical $750,000 STR — calculated using a 22% bonus-eligible rate and the current state top marginal rate.
The 2026 conformity landscape at a glance
Full state conformity table — sortable
Click any column header to sort. The "Year-1 state tax savings on typical STR" column uses a $750,000 purchase with 22% bonus-eligible (~$165,000 deduction); for non-conforming states, the column shows $0 (no state-level benefit) — federal benefit is unchanged at ~$61,000 across all states.
| State | Abbr | Top rate | Conforms to §168(k)? | Year-1 state savings (on $165k bonus dep) |
|---|
How non-conforming states actually work
When a state "does not conform to §168(k)," it doesn't mean you lose the federal benefit. It means you compute state taxable income differently than federal. Specifically:
- On your federal return: take the full bonus deduction in Year 1 (e.g., $165,000 on a $750k STR).
- On your state return: add back the bonus deduction. Then take standard MACRS depreciation over 5 years (for personal property), 15 years (for land improvements), and 27.5 / 39 years (for the building).
- Over the property's life, total state depreciation equals total federal depreciation — but it's spread over years instead of concentrated in Year 1.
The net effect: in non-conforming states, the federal benefit is unchanged. The state-level benefit is deferred, not lost. A California STR investor still gets the same total state tax deduction over 5-15 years — just not all at once.
Why this matters anyway: For high-bracket STR investors, the time value of money on the state side can run $5,000-$15,000 over the deferral period. Plus: non-conformity adds bookkeeping complexity (your federal and state basis diverge for years). Choose a conforming state when you can — most top STR markets are.
Best states for STR investors by tax efficiency
Three groups stand out as "tax-friendly" for STR investing in 2026:
Zero income tax + full federal benefit: Texas, Florida, Tennessee, Nevada, Wyoming, Washington, New Hampshire, South Dakota, Alaska. STR investors here get the full federal Year-1 deduction with no state-level offset and no state recapture at sale. Top STR markets in this group: Gatlinburg/Smoky Mountains, Orlando, Galveston, Myrtle Beach (SC has income tax but conforms).
Conforming + low rate (2-4%): Arizona (2.5%), Indiana (3.15%), Pennsylvania (3.07% — but PA non-conforms), Ohio (3.5%), Louisiana (3.0%, individuals conform), Kentucky (3.5%, non-conforming), North Dakota (2.95%). These give you a small additional state-level deduction on top of federal — modest but free.
High rate but conforming: Utah (4.55%), Colorado (4.4%), Georgia (5.19%), South Carolina (6.4%). Solid state-level benefit stacked on federal — a Park City investor at the top federal bracket plus Utah's 4.55% effectively gets a 41.55% combined deduction rate.
Worst states for STR investors
Three groups to be aware of:
High-rate + non-conforming (worst combo): California (13.3% top + non-conforming), New York (10.9% top + non-conforming), New Jersey (10.75% top + non-conforming). Investors here pay the high state rate AND can't accelerate the deduction. For high-W-2 California or NY earners, the federal benefit is still massive — but the state-side complexity is real.
Mid-rate + non-conforming: Illinois (4.95%), Massachusetts (5.0% with 4% surcharge over $1M), Maryland (6.5% + local), Pennsylvania (3.07%), Kentucky (3.5%), Arkansas (3.9%), Wisconsin (7.65%), North Carolina (3.99%). Moderate but persistent state-side friction.
Special case — Louisiana: LA decoupled from §168(k) for corporate filings but conforms for individual returns. Most STR investors hold property personally or via single-member LLC and qualify for individual treatment — meaning Louisiana effectively conforms for most STR investors.
What changes by 2027?
Three states to watch:
- Kentucky: top rate dropped from 4.0% to 3.5% effective 1/1/2026. Further cuts proposed. Currently non-conforming but the relative impact is shrinking.
- North Carolina: rate cut from 4.25% to 3.99% effective 1/1/2026. Conformity remains an open legislative question.
- Mississippi: conforms to federal §168(k); top rate reduced from 4.4% to 4.0% for 2026.
- Arkansas: conformity status unchanged; rate dropped to 3.9% for 2026 (further to 3.7% per May 2026 legislation).
Watch state legislative sessions in spring 2027 — several states are pursuing rate cuts that may also include §168(k) conformity restoration.
Pick the right state — and the right zip — before you buy.
Run any active STR through our $99 property report. You'll see the federal §168(k) deduction, state conformity impact, and an item-by-item cost segregation estimate — closely calibrated to a $5,000–$8,000 formal study's bonus-eligible %.
Run a Property Report →Frequently asked questions
Which states do not conform to federal bonus depreciation in 2026?
Eleven states do not conform to federal §168(k) bonus depreciation in 2026: Arkansas, California, Illinois, Kentucky, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, and Wisconsin. These require a §168(k) add-back on the state return — the bonus-eligible property is depreciated over standard MACRS lives instead of taking the full deduction in Year 1. The federal Year-1 deduction is unaffected.
Which states have no income tax (best for STR exit / recapture)?
Nine states impose zero state individual income tax in 2026: Alaska, Florida, Nevada, New Hampshire (eliminated interest & dividends tax 1/1/2025), South Dakota, Tennessee, Texas, Washington, and Wyoming. For STR investors, these states offer maximum federal benefit (no state add-back) PLUS zero state recapture at sale — a meaningful advantage for buy-and-hold strategies.
How does California state non-conformity affect my STR bonus depreciation?
California decoupled from §168(k). You get the full federal deduction on your federal return (typically the larger of the two). On the California return, you depreciate the bonus-eligible property over standard MACRS lives — typically 5 and 15 years — instead of taking it in Year 1. The federal benefit on a typical $440k Joshua Tree STR (~$42k at 37% federal) is unaffected. The California impact is a multi-year deferral, not a permanent loss.
Does Texas conform to federal bonus depreciation?
Texas has no state individual income tax — conformity is moot for individual STR investors. The full federal §168(k) deduction applies with no state offset.
Will state conformity change in 2026 or 2027?
Several states have rolling conformity (auto-update to current federal law) and several have static conformity (require legislative action to update). After OBBBA permanently restored 100% bonus dep for property placed in service after 1/19/2025, rolling-conformity states automatically allow the full benefit. Static-conformity states (the 11 non-conforming) require legislatures to act. Watch Kentucky, North Carolina, and Maryland — all have ongoing tax cuts and may revisit §168(k) conformity in the next 2-3 sessions.
This article is for educational purposes only and does not constitute tax advice. State tax rules change frequently — consult a CPA familiar with the specific state(s) where you hold property before relying on these classifications.