If you bought, built or substantially renovated a commercial or rental property in California in 2025 or 2026, someone will soon set up its depreciation schedule. By default, that schedule treats the building as a single asset and writes it off in equal amounts over 39 years for commercial property, or 27.5 years for residential rental property.
A cost segregation study is the main way to change that schedule. Whether one is worth paying for has two answers in California, one for your federal return and one for your state return, and owners who look only at the first can be surprised by the second.
What a Cost Segregation Study Changes
A building is an assembly of parts with very different working lives. Carpet, electrical work that serves specific equipment, cabinetry, decorative lighting, signage, paving, fencing and landscaping often belong in 5-, 7- or 15-year recovery classes instead of the 39-year or 27.5-year building cost. A cost segregation study identifies those components, assigns each a cost and a recovery class, and documents how the allocation was made.
The Federal Side: Why 2025 and 2026 Purchases Stand Out
The federal tax law enacted on July 4, 2025 permanently restored 100 percent bonus depreciation for qualified property acquired and placed in service after January 19, 2025. Bonus depreciation only reaches property with a recovery period of 20 years or less, so the building itself does not qualify for it. Reclassification is what brings components within reach: once a study moves costs into 5-, 7- and 15-year classes, those amounts can generally be deducted in full in the first year.
Two details decide whether a particular purchase gets the full rate. Property bought under a written binding contract signed before January 20, 2025 is treated as acquired before that date, even if the sale closed later, so it gets the older phase-down rate (40 percent if placed in service in 2025, 20 percent in 2026) instead of 100 percent. And an owner can elect out of bonus depreciation for a class of property when a slower deduction fits the tax picture better, for example when income is expected to rise.
The California Side: No Bonus, but Faster Lives Still Count
California does not follow federal bonus depreciation. For taxable years beginning on or after January 1, 2025, the state conforms to the Internal Revenue Code as it stood on January 1, 2025, a date that precedes the July 2025 federal law, and its Revenue and Taxation Code states that the federal bonus provision does not apply.
That does not make a study worthless on the state return. Individuals, partnerships, LLCs taxed as partnerships and S corporations use the federal MACRS classes and methods for California, just without bonus. A component reclassified to 5-year property is depreciated over five years in California instead of 39, so the state deductions still arrive much sooner than they would on the default schedule. C corporations work differently: California's Corporation Tax Law does not adopt MACRS, and a corporation depreciates its assets over useful lives under the state's own rules.
California also caps Section 179 expensing at $25,000, reduced once the Section 179 property placed in service during the year exceeds $200,000. The federal limits are many times higher.
Because the two returns diverge, each reclassified asset needs a California record next to the federal one. Individual owners report the yearly difference on form FTB 3885A, and the Franchise Tax Board's instructions for form FTB 3885A explain how the adjustment works. In the year federal bonus depreciation is claimed, the difference is added back to California income. In later years the California deduction is the larger one, and the gap closes as the assets are fully depreciated or sold.
Passive Losses Work Differently in California
On a newly acquired rental property, the federal benefit of a study often shows up as a tax loss. Whether that loss can offset other income depends on the passive activity rules. Federally, an owner who qualifies as a real estate professional and materially participates can treat rental real estate losses as nonpassive.
California does not allow that exception. Revenue and Taxation Code section 17561 turns off the federal real estate professional rule, and the Franchise Tax Board's instructions state that for California purposes all rental activities are passive activities. An owner who uses a study-driven loss against salary or business income on the federal return may find the same loss limited on the California return until there is passive income to absorb it or the property is sold.
Higher-income owners have one more state rule to watch. California has suspended the net operating loss deduction for taxable years 2024 through 2026 for individuals whose net business income and modified adjusted gross income are each $1,000,000 or more. The loss is still computed and carried forward, but it waits.
When a Study Tends to Pay for Itself
The property is large enough to justify the fee. According to CSSI Services, "a cost segregation study can range from $2,000 to $15,000, but it depends heavily on the asset and scope of the study." The share of a building's value that moves into shorter lives commonly falls between 20 and 40 percent, depending on the asset.
You can use the deductions. A loss suspended under the passive rules still has value, but later, so your tax position matters as much as the property.
You plan to hold the property for a while. A sale brings recapture. Much of the depreciation taken on reclassified components is recaptured at ordinary income rates to the extent of the gain, and depreciation on the building itself is taxed at a maximum federal rate of 25 percent as unrecaptured section 1250 gain.
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