Cost Segregation in California

1. What a cost segregation study does

A building normally depreciates over 27.5 years (residential) or 39 years (commercial). A cost segregation study breaks the purchase price apart and reclassifies components like flooring, cabinetry, dedicated electrical, and land improvements into 5, 7, and 15-year property, so a large slice of the basis depreciates on much shorter schedules.

On the federal return, that reclassified property also qualifies for bonus depreciation, which restores a 100% first-year write-off for qualifying property acquired and placed in service after January 19, 2025. States set their own rules, which is where California comes in.

2. California and federal bonus depreciation

California has never conformed to IRC 168(k) in any form (30%, 50%, or 100% bonus), and that did not change with the OBBBA. R&TC Section 17250 (personal income tax) and Section 24349 (corporation tax) decouple from bonus depreciation entirely, and the 2025 FTB Form 3885A instructions list both IRC 168(k) and the new OBBBA IRC 168(n) 100% qualified production property election as nonconforming items. SB 711 (signed October 1, 2025) advanced California's static conformity date from January 1, 2015 to January 1, 2025 for tax years beginning on or after January 1, 2025, but that date precedes the OBBBA (July 4, 2025) and the bill kept the 168(k) decoupling in place, so permanent 100% federal bonus does not flow to California for 2025 or 2026.

Federal bonus depreciation is added back in full on Schedule CA (540/540NR) column B/C adjustments (computed on Form FTB 3885A for individuals), and the asset is instead depreciated for California over its regular MACRS recovery period, so the deduction is recovered year by year over the asset's class life; remaining basis differences reconcile as different California gain/loss on sale.

3. Section 179 in California

California Section 179 cap: $25,000 maximum deduction, phased out dollar-for-dollar above $200,000 of qualifying purchases (fully gone at $225,000).

California allows the Section 179 election but does not conform to the federal dollar limits under IRC 179(b)(1)-(2): the state cap is $25,000 with a $200,000 investment phase-out threshold, unchanged for decades and not indexed. California also does not allow 179 expensing for off-the-shelf computer software and does not conform to the federal expansion of 179 to qualified real property (roofs, HVAC, etc.). The state election is computed on the Tangible Property Expense Worksheet in the FTB 3885A instructions (individuals) or FTB 3885 (corporations).

4. Does it still help in California?

Yes, for individuals and pass-through owners: California personal income tax law conforms to MACRS, so reclassifying building components into 5-, 7-, and 15-year property still accelerates deductions on the California return versus 27.5/39-year straight-line, just without the federal 100% first-year write-off. For C corporations the benefit also survives but in a different system: the Corporation Tax Law does not permit MACRS at all (pre-1981 useful-life methods, e.g. 45-year office buildings), so segregating personal property into shorter guideline lives with 200%/150% declining balance still front-loads deductions; note MACRS passed through to a corporate partner from a partnership/LLC is respected.

• •California has NEVER conformed to any version of IRC 168(k) bonus depreciation, going back to the original 30% bonus in 2002 (R&TC 17250 for individuals, 24349 for corporations).
• •SB 711, signed October 1, 2025, advanced California's static conformity date from January 1, 2015 to January 1, 2025 for tax years beginning on or after January 1, 2025, but this predates the OBBBA (July 4, 2025), and the 168(k) decoupling was deliberately retained, so no OBBBA depreciation provision flows through.
• •California also does not conform to the OBBBA's new IRC 168(n) 100% expensing election for qualified production property, per the 2025 FTB 3885A instructions.
• •The California Section 179 cap has been frozen at $25,000 with a $200,000 phase-out threshold for decades (fully phased out at $225,000) and is not indexed for inflation; off-the-shelf software and qualified real property (roofs, HVAC) do not qualify.
• •C corporations cannot use MACRS at all for California purposes: the Corporation Tax Law requires pre-1981 useful-life methods (straight-line or declining balance over Rev. Proc. 87-56 guideline lives, e.g. 45 years for office buildings, 40 for apartments), except MACRS depreciation passed through from a partnership or LLC is respected (Form FTB 3885).
• •California does not conform to the federal rule that lets real estate professionals treat rental real estate as non-passive, a trap for RE investors planning to absorb cost-seg losses against other income on the state return (FTB 3885A instructions).
• •California does not conform to federal luxury auto depreciation limits under IRC 280F as modified by TCJA, publishing its own lower caps.
• •Because federal and California depreciation diverge from year one, investors carry dual depreciation schedules for the life of the asset, and the accumulated difference produces a different California gain or loss on disposition.

5. The exit: recapture and timing

The accelerated deductions come back into view when you sell. Gain attributable to the 5, 7, and 15-year property is Section 1245 recapture, taxed at ordinary rates, and the straight-line depreciation on the building itself is unrecaptured Section 1250 gain, taxed at up to 25%. A study does not create that bill, it moves deductions forward, but the timing of the sale decides how much of the benefit you keep.

Two levers manage the exit. A 1031 exchange defers both flavors of recapture along with the rest of the gain, and simply holding the property lets the time value of the early deductions do its work; most owners want a 3 to 5 year horizon before a taxable sale for the math to stay comfortably positive. Model the exit before you commission the study, not after.