Does California Conform to Bonus Depreciation for Real Estate?

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Dylan Scandalios

Dylan Scandalios

Co-founder & CEO, Seneca Cost Segregation

Dylan Scandalios is the Co-founder and CEO of Seneca Cost Segregation where he has helped real estate investors save millions on their taxes. Before starting Seneca Cost Segregation, Dylan led Sales and Product teams and initiatives for multiple multi-million and multi-billion dollar companies in the United States. A real estate investor himself, Dylan Scandalios is always looking to help other investors invest in their next project faster and build a long-term moat.

California does not conform to federal bonus depreciation, so the 100% first-year write-off restored by federal law in 2025 applies to your federal return only. On your California return, the same assets are depreciated over their normal recovery periods, and the federal excess is added back to state income.

As co-founder of Seneca Cost Segregation and a real estate investor myself, I’ve watched this gap surprise California owners more than any other part of a study. When our California reports reach a client’s CPA, the first question is rarely about the federal number; the CPA wants to know what the study does on Form 540.

Below, I explain why California stays out, how the add-back works asset by asset, and which state rules change the value of a cost segregation study for investors.

TL;DR — Does California Conform to Bonus Depreciation

  • ●California does not allow bonus depreciation on the state return: you claim 100% bonus federally and add the difference back for California.
  • ●A study still speeds up your California deductions: individuals and partnerships follow federal MACRS lives, so 5-, 7-, and 15-year components still beat 27.5- or 39-year building basis.
  • ●In our illustrative $250,000 reclassification, $215,000 is added back in year one: those deductions then arrive in California over the following years instead of disappearing.
  • ●Rental losses are always passive in California: a federal real estate professional loss can sit suspended on Form 540.
  • ●Section 179 is capped at $25,000 for California: expensing a roof or HVAC under the federal limits creates a large state difference.
  • ●Your California basis is higher when you sell: state gain is figured on that basis, so keep the schedule for the life of the property.
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Why California Does Not Follow Federal Bonus Depreciation

California writes its own depreciation rules and adopts federal changes selectively.

Conformity
The degree to which a state adopts the Internal Revenue Code as its own starting point for computing taxable income. California conforms to the Code as of a fixed date and then lists the provisions it declines, and bonus depreciation has stayed on that list.

How the Personal Income Tax Law Treats Bonus Depreciation

Individuals, partnerships, and most LLCs that own real estate fall under California’s personal income tax law.

According to the FTB’s analysis of federal tax changes, that law conforms to federal MACRS depreciation under IRC Section 168 as of January 1, 2025, with modifications. The same analysis states that it specifically does not conform to bonus depreciation, so the expanded federal write-off is not applicable.

The practical result is a split. Your recovery periods and methods generally match federal MACRS, and only the first-year bonus is stripped out.

How the Corporation Tax Law Treats Depreciation

C corporations face a wider gap, since California’s corporation tax law does not adopt MACRS at all.

The corporate rules substantially follow the pre-1981 Class Life Asset Depreciation Range system. The 2025 FTB 3885 instructions allow an additional first-year deduction of 20% of the cost of qualifying tangible personal property, capped at $2,000, and buildings and structural components are excluded.

A corporation may take that deduction or the California Section 179 election for a given year, but not both. MACRS reaches a corporation only when it is passed through from a partnership.

What the 2025 Conformity Update Changed

California’s 2025 legislation moved its conformity date forward without bringing bonus depreciation along.

SB 711, signed on October 1, 2025, moved the conformity date from January 1, 2015 to January 1, 2025 for taxable years beginning on or after January 1, 2025. The One Big Beautiful Bill was signed on July 4, 2025, after that date, and the FTB lists its permanent 100% bonus provision as not adopted.

Our breakdown of the Big Beautiful Bill changes covers the federal side, including the January 19, 2025 acquisition date and the binding contract rule.

Federal and California Depreciation Side by Side

Here is how the two systems compare on the provisions that matter for a property owner.

Provision Federal California
Bonus depreciation 100% for property acquired and placed in service after January 19, 2025 Not allowed
MACRS for individuals and partnerships Yes Yes, as of January 1, 2025, with modifications
Corporate depreciation method MACRS ADR system, plus 20% first-year deduction up to $2,000
Section 179 dollar limit $2,500,000 for 2025, indexed after $25,000
Section 179 phase-out threshold $4,000,000 for 2025, indexed after $200,000
Qualified improvement property 15-year recovery period 15-year period not adopted
Qualified production property 100% deduction under Section 168(n) Not adopted
Real estate professional exception Rentals can be nonpassive All rentals passive
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Read the table as a summary: Each row turns on the facts of your property, your entity, and your filing year. Figures are illustrative estimates. Actual results depend on cost basis, asset composition, and effective tax rate. Confirm all projections with your CPA before making financial decisions.

How the California Add-Back Works on Your Return

The add-back is an accounting difference that follows each asset from the year you place it in service until you sell.

Keep a Separate California Depreciation Schedule

Every component a study identifies needs two running balances, one federal and one California.

Under the personal income tax law, the class lives and methods usually match, so the California schedule is the federal schedule with bonus removed. For corporations, the California schedule is built on ADR lives instead.

Report the Difference on Form FTB 3885A

Individuals report the gap on the form the FTB built for this purpose.

The 2025 FTB 3885A instructions say to use the form only when California and federal depreciation differ, with a separate form for each business or rental activity. The adjustment then flows to Schedule CA, and corporations use form FTB 3885.

Recover the Added-Back Basis Over the Normal Recovery Period

Nothing added back is lost, since the state deduction for each component simply arrives on its MACRS schedule.

Take a hypothetical study that reclassifies $250,000 of a rental building’s basis into $150,000 of 5-year property and $100,000 of 15-year land improvements. Using the first-year MACRS rates in IRS Publication 946, here is how year one compares.

Component Federal year one California year one Year-one add-back
5-year property ($150,000) $150,000 $30,000 $120,000
15-year land improvements ($100,000) $100,000 $5,000 $95,000
Total $250,000 $35,000 $215,000

In a hypothetical 9.3% California bracket, that $215,000 timing difference represents about $19,995 of state deductions that shift to later years. The remaining building basis follows the same 27.5- or 39-year schedule on both returns.

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Illustrative only: Figures are illustrative estimates. Actual results depend on cost basis, asset composition, and effective tax rate. Confirm all projections with your CPA before making financial decisions.

Why a Cost Segregation Study Still Pays Off for California Owners

Non-conformity reduces the state benefit in year one, but the study keeps working on both returns.

On the federal side, nothing changes: the reclassified components qualify for full bonus depreciation through cost segregation as long as the timing rules are met.

On the California side, the study still moves basis out of the 27.5- or 39-year building and into shorter MACRS classes. What we find on California properties is that the 5-, 7-, and 15-year schedules still front-load state deductions well ahead of straight-line building depreciation, which our guide to accelerated depreciation schedules lays out class by class.

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A common misconception: We see this framing consistently from clients and CPAs: California’s non-conformity means a study only helps the federal return. California still recognizes the shorter MACRS lives for individuals, so the state deductions are accelerated too, just without the first-year bonus.

The cost of the study and the CPA’s extra schedule work belong in the same model. Our article on whether cost segregation is worth it walks through how to weigh fees against the combined benefit.

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California owners
See how a study plays out across California
Our California guide covers study costs, savings, and the state rules your CPA applies to the report.
Read the California guide →

California Rules That Change the Math for Real Estate Investors

Four state rules outside the bonus question decide how much of a study’s value reaches Form 540.

Rental Activities Stay Passive in California

California never adopted the federal real estate professional exception in IRC Section 469(c)(7).

The 2025 FTB 3801 instructions state that all rental activities are passive for California purposes. A loss that offsets wages on your federal return can remain suspended for California until you have passive income or sell the property, a point worth raising before you plan to offset W-2 income with cost segregation.

Section 179 Stops at $25,000

California follows the Section 179 election but not the federal dollar amounts.

The state limit is $25,000, reduced once total qualifying property placed in service exceeds $200,000. Any amount expensed federally above the California figure becomes another depreciation difference to track.

Qualified Improvement Property Keeps a Longer Life

Interior improvements to nonresidential buildings are a second area where the two schedules split.

The FTB’s analysis of SB 711 shows California again declined the TCJA recovery period changes for real property, the provision behind the federal 15-year life for qualified improvement property. A tenant buildout that a federal study places on a 15-year schedule can stay on the longer building life for California.

Gain on Sale Runs on Your California Basis

The add-back reverses at exit, because California depreciation taken is lower and the state basis is higher.

California uses Schedule D-1 when the California basis of business property differs from the federal basis. A smaller state gain partly offsets the year-one add-back, which is why the depreciation recapture tax rate on your federal return and the state result should be modeled together.

Mistakes to Avoid With California Bonus Depreciation

Each of these errors tends to surface at filing or at sale, when it costs the most to fix.

  • ●Carrying the federal basis onto the state return: the California schedule then understates depreciation in later years and overstates gain at sale. Build the state schedule from the study’s component detail on day one.
  • ●Assuming a federal real estate professional loss carries to Form 540: the loss stays passive for California, so the state refund you modeled never arrives. Run the passive loss rules separately for the state.
  • ●Expensing a roof or HVAC under Section 179 for both returns: California’s $25,000 cap leaves most of that cost on a long schedule. Plan the election with both limits in view.
  • ●Skipping the study because California does not conform: you give up the full federal benefit and the faster state MACRS lives. Model both returns before deciding.
  • ●Losing track of the schedule after a refinance or ownership change: the state basis difference survives the transaction and resurfaces at sale. Keep the California schedule with the property records.
  • ●Letting the CPA learn about the study at filing time: two schedules, Form 3885A, and passive loss worksheets take preparation time. Share the report as soon as it is final, using our notes on CPA integration of study results.
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Frequently Asked Questions

Below are the questions California owners and their CPAs ask us most about bonus depreciation on the state return.

Does California Allow 100% Bonus Depreciation in 2026?+

No. The permanent 100% federal bonus for property acquired and placed in service after January 19, 2025 is not adopted for California, so 2026 state returns still use regular depreciation on those assets.

Does the California Add-Back Apply to Short-Term Rentals?+

Yes. The add-back follows the asset rather than the rental model, so a short-term rental that claims bonus depreciation on furnishings and site work federally still recovers those costs over MACRS lives for California.

Will California Ever Adopt Federal Bonus Depreciation?+

Nobody can predict future legislation. California’s 2025 conformity update moved the date forward to January 1, 2025 and still left bonus depreciation out, so planning on the current rules is the safer approach.

Do Nonresidents Who Own California Property Face the Add-Back?+

Yes, for the California property. The FTB taxes nonresidents on rental income from property located in California, and the depreciation difference on that property is reported through Schedule CA (540NR).

Do Other States Also Decouple From Bonus Depreciation?+

Yes. Bloomberg Tax’s state conformity chart lists California alongside other non-conforming states such as Arkansas, so owners with properties in several states may carry more than one state schedule.

Should I Wait for California to Conform Before Ordering a Study?+

Waiting delays the federal benefit with no assurance that California will ever change. A study placed on the current rules captures federal bonus now and the faster state MACRS lives on the same report.

How Seneca Supports California Owners on Both Returns

A California study has to stand up on two schedules, and the engineering behind each component is what holds both together. Seneca’s in-house engineers document every reclassified asset, our Head of Engineering signs off on each report, and audit defense is part of the engagement.

Our team has assessed 10,200+ properties with that discipline, and Seneca has lost zero IRS audits. For a quick read on your own property, start with the cost segregation calculator.

Conclusion

The short answer is that California does not conform, and the longer answer is that the state still rewards a well-built study. Your federal return takes the full bonus, while California spreads the same deductions across the 5-, 7-, and 15-year schedules the study creates.

The planning work sits in the details: two depreciation schedules, Form 3885A, passive loss limits, and a higher state basis at sale. Bring your CPA in early, and reach out for a free estimate when you want both returns modeled on your own property.

dylan scandalios - cost segregation expert - Seneca Cost Segregation

Dylan Scandalios

Cost Segregation Expert | Owner of Seneca Cost Segregation​

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