Cost Segregation Study in Missouri
Missouri became one of the most interesting states in the country for real estate tax planning in 2025, and the reason has nothing to do with depreciation. House Bill 594, signed in July 2025, allows individuals a 100% subtraction of capital gains reported on the federal return, effective for tax years beginning on or after January 1, 2025. Missouri is the first state to exempt individual capital gains outright.
Layer that on top of full federal conformity for depreciation and you get a state that is generous going in and generous coming out. But the two provisions interact in a way that creates a genuine planning trap for anyone running a cost segregation study, and it is worth understanding before you commission one.
How Missouri Income Tax Interacts With Federal Strategy
Missouri's individual income tax is graduated with a top marginal rate of 4.7%, reduced from 4.8% under the trigger-based schedule created by Senate Bill 3 in 2022. Further reductions are possible when revenue growth targets are met.
Missouri starts from federal adjusted gross income, so federal depreciation flows directly into the Missouri computation. Kansas City and St. Louis each levy a 1% earnings tax on residents and on nonresidents working in the city, which applies to earned income and net profits from business rather than to rental income generally.
Missouri conforms to the federal passive activity loss rules of IRC Sec. 469. As everywhere, a loss suspended federally is suspended for Missouri.
Missouri Pass-Through Entity Tax
Missouri enacted the SALT Parity Act through House Bill 2400 in 2022, effective for tax years ending on or after December 31, 2022. The election is annual and made on the entity return.
The tax is imposed at the highest individual income tax rate in effect for the year, currently 4.7%, on the electing entity's Missouri source income. Members receive a Missouri credit for their share.
The federal benefit is the standard one: the entity deducts the Missouri tax on its federal return, moving that portion of Missouri tax outside the individual state and local tax deduction cap. At a 4.7% rate the absolute dollars are moderate, but the election is generally worth making for a profitable Missouri entity.
One Missouri-specific note. Because the new capital gains deduction operates at the individual level as a subtraction from Missouri adjusted gross income, an entity-level election interacts with it. Model both together rather than treating the PTET election as a standalone decision.
Missouri Depreciation Conformity
Missouri is a full conformity state. It adopts the Internal Revenue Code on a rolling basis and begins the individual computation with federal adjusted gross income, so bonus depreciation under IRC Sec. 168(k) and Section 179 expensing at full federal limits both flow through without addback.
Missouri briefly decoupled from bonus depreciation in the early 2000s but reconnected, and it has conformed since. There is no Missouri decoupling form, no separate state depreciation schedule, and no basis divergence. Missouri basis equals federal basis from acquisition to disposition.
That means a cost segregation study delivering a $600,000 first-year federal deduction delivers the same $600,000 deduction against Missouri income in the same year, worth up to 4.7% at the state level on top of the federal benefit.
Cost Segregation Considerations Specific to Missouri
The Missouri-specific issue is the interaction between the capital gains deduction and depreciation recapture, and it is the most important thing on this page.
Missouri's 100% subtraction applies to capital gains reported on the federal return. Depreciation recapture under IRC Sec. 1245 is not capital gain. It is ordinary income, and it is taxed at Missouri's full 4.7% rate with no subtraction available. Unrecaptured Section 1250 gain, by contrast, is capital gain for federal purposes and reported on Schedule D, so it should qualify for the Missouri subtraction.
A cost segregation study systematically converts what would have been Section 1250 property into Section 1245 personal property. That is precisely the conversion that moves gain from the exempt Missouri category into the taxable Missouri category. On a Missouri property held to sale, a study that reclassifies $600,000 into five and seven-year property creates up to $600,000 of Section 1245 ordinary recapture on exit that would otherwise have been Section 1250 gain eligible for the 100% Missouri deduction.
Run the numbers before assuming this kills the strategy, because it usually does not. The federal deduction at up to 37% today against Missouri recapture at 4.7% years later is still a strong trade, especially once you account for the time value of the deferral. But it is a real cost that exists in Missouri and almost nowhere else, and a federal-only model will not show it.
Three mitigations are worth modeling. A 1031 exchange defers the recapture entirely, which preserves the federal acceleration without ever triggering the Missouri ordinary income. Holding the property until death gives a step-up in basis under IRC Sec. 1014 and eliminates the recapture. And structuring the disposition as an entity sale rather than an asset sale changes the character of the gain at the seller level.
Beyond that interaction, Missouri is administratively easy. One depreciation schedule, no decoupling form, federal gain equals Missouri gain.
Working With AE Tax Advisors in Missouri
AE Tax Advisors works with real estate investors, business owners, and high-income professionals across Missouri and all fifty states. We are a licensed CPA and IRS Enrolled Agent practice based in Billings, Montana, and we handle the engineering-based cost segregation study, the Missouri recapture modeling, the entity structuring, and the return preparation as one engagement.
Missouri is a state where a national cost segregation provider will give you a technically correct federal report and miss the state consequence completely, because the capital gains deduction is new and no other state has one like it. We model the study and the exit together, so you see the Missouri recapture cost before you decide, not after you sell.
Related reading: the complete guide to cost segregation, our cost segregation study service, short-term versus long-term rental tax treatment, lookback studies and Form 3115, and multi-state tax planning.
Missouri Cost Segregation and Tax Questions
Does Missouri allow bonus depreciation on a cost segregation study?
Yes. Missouri conforms to the Internal Revenue Code on a rolling basis and begins the individual computation with federal adjusted gross income, so bonus depreciation under IRC Sec. 168(k) and full Section 179 expensing flow through with no addback. There is no Missouri decoupling form and no separate state depreciation schedule. Missouri basis equals federal basis for the life of the asset.
Does Missouri's 100% capital gains deduction apply to depreciation recapture?
No, and this is the most important Missouri-specific point. House Bill 594 allows individuals a 100% subtraction of capital gains reported on the federal return starting in 2025, but Section 1245 depreciation recapture is ordinary income rather than capital gain, so it does not qualify. Unrecaptured Section 1250 gain is capital gain and should qualify for the subtraction.
Does a cost segregation study cost me the Missouri capital gains exemption on sale?
Partially, on the reclassified portion. A study converts Section 1250 real property into Section 1245 personal property, which moves the eventual gain from the Missouri-exempt capital gain category into taxable ordinary recapture at 4.7%. The federal deduction at up to 37% today usually still outweighs Missouri recapture at 4.7% years later, but this cost is unique to Missouri and needs to be modeled rather than assumed.
How can I avoid the Missouri recapture cost after running a cost segregation study?
Three approaches are worth modeling. A 1031 exchange under IRC Sec. 1031 defers the recapture indefinitely, preserving the federal acceleration without ever triggering Missouri ordinary income. Holding the property until death produces a basis step-up under IRC Sec. 1014 that eliminates recapture entirely. And selling entity interests rather than assets changes the character of the seller's gain.
What is the Missouri pass-through entity tax rate?
Missouri's SALT Parity Act tax, enacted by House Bill 2400 in 2022, is imposed at the highest individual income tax rate in effect for the year, currently 4.7%, on the electing entity's Missouri source income. The election is annual and made on the entity return, and members receive a Missouri credit for their share. Model it alongside the individual capital gains deduction rather than in isolation.
Book a Missouri Tax Strategy Call
Pick a time below. We will walk through your Missouri property or business, model how the capital gains deduction interacts with recapture, and tell you plainly whether a study is worth running.
Missouri tax rates, pass-through entity tax rules, and depreciation conformity provisions described on this page reflect law in effect as of August 2026 and are provided for general information only. State conformity changes frequently and often retroactively. Nothing here is tax advice for your situation, and no client relationship is created by reading it. Talk to us about your facts before acting.