Key Takeaways

• California does not conform to federal bonus depreciation under Internal Revenue Code section 168(k), and it never has.
• California’s Section 179 expensing limit is capped at $25,000 — a small fraction of the federal limit, which the 2025 federal legislation raised to roughly $2.56 million for 2026.
• A real estate acquisition can produce a large first-year federal depreciation deduction and only a modest California deduction on the same property in the same year.
• The federal excess must be added back on the California return (Schedule CA), and a separate California depreciation schedule must be maintained for the life of the asset.
• If you plan around the federal number alone, you will overestimate your total tax benefit — sometimes dramatically — and create a multi-year tracking obligation that is easy to get wrong.

California’s Depreciation Conformity Gap: Why Bonus Depreciation Only Half-Works Here

The short answer

No — California does not conform to federal bonus depreciation. The 100% first-year bonus depreciation that the 2025 federal legislation made permanent under Section 168(k) applies only to your federal return. For California purposes, those same property components must be depreciated over their normal recovery periods, with no bonus acceleration. The difference is added back to your California taxable income, and you carry two depreciation schedules, one federal, one California, for as long as you own the asset. This single gap is one of the most consequential and most frequently overlooked features of real estate tax planning for California residents.

What “non-conformity” actually means

Federal and state tax systems do not automatically track each other. When Congress changes federal depreciation rules, California decides separately whether to “conform” — to adopt the same treatment for state income tax. On depreciation acceleration, California has consistently declined.

The Franchise Tax Board states the position plainly in its depreciation form instructions: California law does not conform to the federal rules under Section 168(k) for the depreciation deduction on certain assets. This is not a temporary mismatch tied to the recent federal legislation. California has never conformed to bonus depreciation in any of its versions, and there is no indication that will change.

The practical effect is that a strategy built on accelerated federal depreciation delivers its full benefit only against your federal tax — and California, with one of the highest income tax rates in the country, keeps taxing as if the acceleration never happened.

The two pieces of the gap

Bonus depreciation (Section 168(k)). Federally, qualifying property — generally tangible property with a recovery period of 20 years or less, including the short-lived components a cost segregation study identifies — can be 100% expensed in the first year for property acquired and placed in service after January 19, 2025. California allows none of that bonus. The components are instead depreciated on their ordinary schedules (5-year, 7-year, 15-year, and so on under the standard system).

Section 179 expensing. Federally, the 2025 legislation raised the Section 179 limit to roughly $2.56 million for 2026 (with a phase-out beginning around $4.09 million of qualifying property; both figures are inflation-adjusted, so confirm the current year’s numbers). California’s Section 179 limit, by contrast, remains capped at $25,000, with its own phase-out beginning at $200,000 of qualifying property. For a buyer placing hundreds of thousands of dollars of equipment or qualifying components in service, the California immediate deduction is a rounding error next to the federal one.

A side-by-side, in illustrative terms

Consider a commercial acquisition where a defensible cost segregation study reclassifies a large block of the purchase price into short-lived property eligible for federal bonus depreciation. The numbers below are illustrative only — your actual result depends entirely on the property, the quality of the engineering study, your rate, and whether the loss is usable at all (which depends on the passive activity rules covered elsewhere in this series).

Suppose the study identifies a substantial first-year federal deduction. Federally, at a 37% rate, that deduction translates into significant first-year tax savings. For California, the same components yield only a small first-year deduction — the ordinary depreciation on those assets, plus up to the $25,000 Section 179 amount if applicable, and the rest is added back. The California benefit in year one might be a small fraction of the federal benefit.

The point is not the specific dollar figures, which will vary widely and should never be treated as a promise. The point is the shape: the federal and California benefits are not the same number, and they are not close. A taxpayer who hears “you’ll get a $500,000 deduction” and mentally applies a 50%-plus combined rate to it is overestimating the real cash benefit, because the California portion of that combined rate largely does not apply to the accelerated piece in year one.

What the addback and dual-tracking actually require

Two consequences follow, and both are ongoing rather than one-time.

The Schedule CA addback. The excess of the federal depreciation deduction over the California-allowed amount is added back to income on the California return in the year of acceleration. That raises your California taxable income in the year you take the big federal deduction — the opposite of the federal effect, in the same year.

Permanent dual depreciation schedules. Because the federal and California basis and recovery now diverge, you must maintain two separate depreciation schedules for the asset — federal and California — for its entire life. In later years, California allows depreciation deductions on amounts the federal system already fully expensed, so the relationship reverses: California deductions in later years partly offset the earlier addback. The total deduction over the asset’s life is similar; the timing is radically different. Getting the multi-year tracking right is essential, and it is a common source of error when a CPA unfamiliar with California real estate inherits the file.

Why this changes the out-of-state question

The conformity gap is one of several reasons some California investors look at real estate in states that do conform, or that have no state income tax at all (Texas, Florida, Tennessee, Nevada). The reasoning is that if California will not honor the acceleration anyway, the state-level drag is the same wherever the property sits, so why not own where the broader tax climate is friendlier.

That reasoning is incomplete, and acting on it without understanding California’s reach can be an expensive mistake. California asserts a continuing claim on gain from California-source property even after it is exchanged into out-of-state replacement property — the clawback regime, with its annual filing requirement, that a separate article in this series addresses in detail. The conformity gap and the clawback are two distinct California traps, and a plan that solves for one while ignoring the other is not a plan.

The other California costs that widen the gap

Beyond income tax, California layers on costs that out-of-state commentary tends to skip:

• Reassessment on change of ownership. Under Proposition 13, a property is reassessed to current market value when it changes hands. A building carrying low assessed taxes under long-time ownership may see its property tax obligation jump substantially at acquisition — a real line item in any honest pro forma.
• Mello-Roos special taxes. In many newer California communities, special taxes levied outside Proposition 13’s 1% limit attach to the property and transfer with ownership.
• Documentary transfer taxes. County and city transfer taxes apply at purchase; in some cities they reach into the low single-digit percentages on high-value property.

None of these is a reason not to invest. All of them are reasons to model the real, California-specific numbers before signing — and to do that modeling with advisors who know which of these apply to your specific property and county.

The takeaway

Federal commentary on bonus depreciation and cost segregation is abundant, confident, and — for a California resident, only half the story. The acceleration is real and valuable federally. It is largely unavailable at the state level, it creates an addback in the year you most want a deduction, and it commits you to dual tracking for the life of the asset. A strategy designed around the federal number alone is a strategy designed to disappoint. The version that works accounts for both returns from the acquisition letter of intent forward.

Work with Bay Legal

The conformity gap is exactly the kind of detail that separates a plan that works from one that unravels three years later. Two depreciation schedules, two sets of basis tracking, one California return that does not behave like the federal one — get this wrong and you can spend years untangling it. To structure an acquisition with the California treatment built in from the start, call Bay Legal at (650) 668-8000 or reach us through baylegal.com/contact.

We coordinate with your CPA and your cost segregation engineer from the acquisition letter of intent forward, so the legal structure and the depreciation strategy support each other rather than working at cross purposes. If you are evaluating a California acquisition and want the state-level reality modeled before you commit, reach a California attorney at (650) 668-8000 or baylegal.com/contact.

Because the right structure depends on your specific property, county, and broader tax picture, the useful next step is a conversation about your situation. Call (650) 668-8000 to start.

Frequently Asked Questions

Does California conform to federal bonus depreciation?

No. California does not conform to federal bonus depreciation under Internal Revenue Code section 168(k), and it never has. The 100% first-year bonus depreciation available federally does not apply on the California return; those components must instead be depreciated over their ordinary recovery periods, and the federal excess is added back to California income.

What is California’s Section 179 limit?

California caps the Section 179 expensing deduction at $25,000, with a phase-out beginning at $200,000 of qualifying property. This is far below the federal limit, which the 2025 federal legislation raised to roughly $2.56 million for 2026 (inflation-adjusted). The figures are current as of drafting; confirm the present-year amounts with your tax advisor.

What is a Schedule CA depreciation addback?

When you claim accelerated federal depreciation that California does not allow, the difference between the federal deduction and the California-allowed amount is added back to your income on the California return (Schedule CA) in that year. This increases your California taxable income in the same year you take the large federal deduction.

Do I have to keep two depreciation schedules in California?

Generally yes. Because federal and California depreciation diverge for the same asset, you maintain separate federal and California depreciation schedules for the life of the asset. California allows deductions in later years on amounts already expensed federally, so accurate multi-year tracking is necessary to compute each return correctly.

Should California residents buy real estate out of state because of this?

Some do, reasoning that California will not honor the acceleration regardless. But California asserts a continuing claim on gain from California-source property exchanged into out-of-state property, with an annual filing requirement, so out-of-state ownership does not escape California tax automatically. The decision involves multiple California-specific rules and should be made with qualified counsel.

This article is general legal information, not legal, tax, or financial advice. Reading this article and contacting Bay Legal, PC do not create an attorney-client relationship; that relationship is formed only by a signed engagement agreement. This article addresses California law and is written for California residents; other states differ. The law changes, and the figures and rules described here are current only as of drafting and may have changed since publication.