Cost Segregation Study in Arkansas for Airbnb and Short-Term Rental Investors

Arkansas is a decoupled state, not a conforming one. Ark. Code Ann. § 26-51-428(a) ties the state's depreciation rules to IRC Sections 167 and 168(a)-(j) as they read on January 1, 2019 — a snapshot that predates the state's adoption of Section 168(k) bonus depreciation entirely. Practically, an Arkansas investor who takes the full federal bonus deduction under OBBBA reports that bonus amount as a depreciation/other-income addback: individuals use the depreciation-differences line on Form AR1000F or AR1000NR, while C-corporations and Sub-S corporations use Form AR1100ADJ (Line 3) or the AR1100REC reconciliation schedule, per DFA instructions — and then depreciate the same assets on the standard MACRS schedule for state purposes. A House bill introduced in the 2025 regular session, HB1501, would have adopted current-law bonus depreciation for tax years beginning in 2025, but it stalled in committee and died at sine die adjournment in May 2025 — so investors should plan around the existing add-back rule rather than assume it will change soon.

This is not the same as getting zero state benefit from a cost segregation study. Because Arkansas still follows IRC 168(a)-(j) — the ordinary MACRS framework, just without the bonus kicker — reclassifying components of a rental property into 5-, 7-, and 15-year recovery classes still front-loads depreciation faster than a flat 27.5-year or 39-year schedule at the state level. Combined with the fact that the full 100% federal bonus deduction still applies in the acquisition year, most Arkansas owners come out well ahead on their combined federal-and-state tax picture even after adding the bonus back for state purposes.

Property taxes add a second layer of context. Arkansas's average effective property tax rate runs roughly 0.55% to 0.57% of assessed value, one of the lower rates in the country, so property tax planning is a smaller lever here than in high-tax states. Arkansas also cut its top individual income tax rate to 3.7% in 2026, which modestly lowers the dollar value of the state-level add-back itself — another reason the federal-level acceleration from cost segregation carries most of the weight for Arkansas investors.

Without a cost segregation study, the IRS default is to spread the full cost of a residential rental over 27.5 years (39 years for commercial property) using straight-line depreciation — the same deduction amount every year, regardless of what's actually inside the building. A cost segregation study is an engineering-based analysis that walks the property and separates its cost basis into components: flooring, cabinetry, decorative and accent lighting, portions of the electrical and plumbing systems tied to specific appliances, exterior features like decks and landscaping, and more. Each component is then assigned to its proper federal recovery period under IRS guidance — typically 5, 7, or 15 years instead of 27.5 or 39. Under OBBBA, signed into law in July 2025, any qualifying 5-, 7-, or 15-year property acquired after January 19, 2025 is eligible for 100% bonus depreciation, meaning its entire reclassified cost can potentially be deducted in the very first year it's placed in service, at the federal level. The result is that a much larger share of a property's basis becomes deductible immediately, rather than trickling out in small increments over multiple decades.

For illustration only — your results depend on your property and tax situation, and this is not a projection of actual savings.

Suppose an investor buys a furnished cabin-style short-term rental near Eureka Springs for $450,000, with $90,000 of that price allocated to land (land is never depreciable) and $360,000 allocated to the building and its contents. Under straight-line depreciation alone, that $360,000 would be written off at roughly $13,000 a year over 27.5 years. A cost segregation study might reclassify around 25-30% of the building basis — say $95,000, illustratively — into 5-, 7-, and 15-year property such as flooring, furnishings, appliance-related electrical, and site improvements like decking and outdoor lighting. At the federal level, that reclassified $95,000 could be eligible for 100% bonus depreciation in year one under OBBBA, since the property was acquired after January 19, 2025. On the Arkansas return, the investor would add that federal bonus amount back and instead depreciate the same reclassified assets under standard MACRS, still faster than the original 27.5-year schedule would have allowed. These numbers are round and illustrative only; an actual study quantifies the real components and dollar amounts specific to the property.

Cost segregation isn't limited to the year of purchase. If you've owned an Arkansas rental for several years and never had a study performed, a look-back study lets you capture the missed depreciation without amending a single prior-year tax return. The mechanism is IRS Form 3115, Application for Change in Accounting Method, paired with a Section 481(a) adjustment. That adjustment calculates the cumulative difference between the depreciation you actually claimed and the depreciation you should have claimed had the study been done from day one, then lets you deduct that entire catch-up amount in the current tax year. For an investor who has held a Hot Springs or Northwest Arkansas rental for five or ten years, this can unlock a substantial one-time deduction in a single filing season — worth discussing with your CPA, particularly if you have a high-income year where the extra deduction would offset the most tax.

• Short-term rental and Airbnb hosts in established Arkansas vacation markets such as Eureka Springs, Hot Springs, and the Beaver Lake/Northwest Arkansas corridor (Bentonville, Rogers, Fayetteville), where furnished cabins and lake houses carry substantial personal-property and land-improvement basis
• Long-term rental property owners in markets like Little Rock, Fayetteville, and Jonesboro looking to accelerate depreciation on single-family or small multifamily holdings
• Recent buyers or renovators who purchased or substantially remodeled an Arkansas rental property within the last year and haven't yet finalized depreciation schedules
• High-income W-2 earners or business owners exploring the short-term rental material participation strategy, where average guest stays of seven days or less combined with material participation can let losses offset active income, not just passive income
• Owners nearing a sale who want to understand recapture exposure before deciding whether a study still makes sense this late in the hold period