California starts from federal tax law but departs from it on several rules that matter to rental owners. For taxable years beginning on or after January 1, 2025, California conforms to the Internal Revenue Code as of January 1, 2025 (SB 711; R&TC § 17024.5), but it did not adopt the 2025 federal law known as the One Big Beautiful Bill Act (OBBBA), and it keeps its own exceptions: no bonus depreciation, a $25,000 Section 179 limit, no QBI deduction, all rentals treated as passive, and no lower rate for capital gains.

The short version

  • Bonus depreciation: 100% federally for qualified property acquired after January 19, 2025. California does not allow it at all (R&TC § 17250(a)(11)).
  • Section 179: $2,500,000 federally for 2025. California caps it at $25,000, with the phase-out starting at $200,000 (2025).
  • QBI (Section 199A): 20% federally, now permanent. California has no QBI deduction.
  • Passive losses: the federal real estate professional exception does not apply in California. "For California purposes, all rental activities are passive activities."
  • Capital gains: federal rates of 0%, 15% and 20%, with up to 25% on unrecaptured § 1250 gain (the part of the building gain due to depreciation). California taxes all capital gains as ordinary income.
  • Exchanges: a California property swapped for out-of-state property in a 1031 exchange means filing FTB 3840 every year, generally until the deferred gain is recognized.

How California conformity works now

California adopts federal tax law as of a "specified date." SB 711, the Conformity Act of 2025 (Chapter 231, Statutes of 2025), enacted October 1, 2025, moved that date from January 1, 2015 to January 1, 2025, for taxable years beginning on or after January 1, 2025.

OBBBA, enacted July 4, 2025, came after that date, and FTB Publication 1001 (2025) says: "In general, California R&TC does not conform to the OBBBA." Older California exceptions also survive.

Differences are reported as adjustments on Schedule CA (540) for residents or Schedule CA (540NR) for nonresidents and part-year residents. Depreciation differences are figured on FTB 3885A, passive losses on FTB 3801, and gains on California Schedule D (540/540NR) or Schedule D-1 for business property.

The main differences at a glance

ItemFederalCalifornia
Bonus depreciation (§ 168(k))100% for qualified property acquired after January 19, 2025, permanent under current law. Only property with a recovery period of 20 years or less qualifies, so the 27.5-year building does notNot allowed (R&TC § 17250(a)(11)). Items are depreciated over their normal recovery periods
Section 179 expensing2025: $2,500,000, phase-out at $4,000,000. 2026: $2,560,000, phase-out at $4,090,000. Requires property used in the active conduct of a trade or business2025: $25,000, phase-out starts at $200,000. No election for certain qualified real property
QBI deduction (§ 199A)20% of qualified business income, made permanent by OBBBA, if the rental is a trade or businessNo deduction (R&TC § 17201.6)
Real estate professional (§ 469(c)(7))More than 750 hours and more than half of personal services in real property businesses, plus material participation, can make a rental nonpassiveDoes not apply (R&TC § 17561(a)). All rentals are passive
$25,000 special allowanceAvailable with active participation; phased out between $100,000 and $150,000 of MAGIAvailable on FTB 3801, using $150,000 as the phase-out end
Capital gains rates0%, 15% and 20%; unrecaptured § 1250 gain taxed at up to 25%No lower rate. All gains are ordinary income. Top regular rate 12.3%, plus 1% on taxable income over $1 million (2025)
Like-kind exchanges (§ 1031)Real property only since January 1, 2018Real property only for taxable years beginning on or after January 1, 2025. FTB 3840 required when the replacement property is outside California
Home sale exclusion (§ 121)$250,000 or $500,000, 2-of-5-year testConforms, and adds a Peace Corps rule (up to 18 months)
Basis of inherited propertyGenerally fair market value at date of death (§ 1014)Same as federal for property inherited on or after January 1, 1987

Federal details are in the guides on bonus depreciation, the QBI deduction and passive loss rules. Federal Section 179 generally requires that the rental be a trade or business, and many individual landlords do not qualify; ask a tax professional.

Depreciation and basis: why you keep two schedules

California generally follows federal MACRS depreciation, but not bonus depreciation. The FTB summarizes it this way: California conforms to the federal MACRS rules "as of the specified date of January 1, 2025, with modifications. However, the PITL specifically does not conform to bonus depreciation." Publication 1001 says California also did not conform to the earlier federal bonus rules, including the 2001 to 2004 rules, the 2017 50% rule and the 2017 tax law's 100% and phase-down rules.

As a result, many owners have a different depreciation total and a different adjusted basis for California. The FTB 3885A instructions say you prepare a separate FTB 3885A for each business or activity that has a difference. When you sell, the California gain can differ from the federal gain. Keep both depreciation schedules for as long as you own the property.

Losses, sales and exchanges

Passive losses. "Generally, California law is the same as federal law concerning PAL limitations," the FTB 3801 instructions say, but a loss allowed as nonpassive federally to a real estate professional may be limited or suspended for California, through a Schedule CA adjustment on FTB 3801.

Selling. Federally, a rental's gain can fall under the 0%, 15% or 20% rates, with unrecaptured § 1250 gain (generally the part of the building gain due to depreciation) taxed at up to 25%. FTB: "California does not have a lower rate for capital gains. All capital gains are taxed as ordinary income." That includes the part from depreciation. See selling a rental property.

Exchanging for out-of-state property. Under R&TC § 18032, if you defer gain on California property in a 1031 exchange and the replacement property is outside California, you file FTB 3840 for the year of the exchange and each later year, generally until the deferred gain is recognized. California keeps track of that deferred gain and can tax it when the out-of-state property is later sold in a taxable sale, even if you no longer live here. For a 2025 calendar-year individual, FTB 3840 is due April 15, 2026, or October 15, 2026 with an extension. See 1031 exchange basics for California owners.

California-only items for rental owners

These California rules appear in this series without a federal counterpart covered here:

California ruleWhat it isGuide
Real estate withholding (Form 593)Escrow generally withholds 3 1/3% of the sales price, or an elected amount based on gain, when the price is over $100,000Withholding when you sell
Nonresident rent withholding7% of rent paid to a nonresident owner through a manager, after the management fee7% rent withholding
LLC annual tax and fee$800 a year, plus a fee from $900 to $11,790 based on total California incomeHolding a rental in an LLC
NOL suspensionFor taxable years beginning in 2024 through 2026, the NOL carryover deduction is suspended; owners with net business income or modified AGI under $1,000,000 are not affectedAsk your CPA
Behavioral Health Services TaxAn extra 1% on taxable income over $1,000,000 (2025)Ask your CPA

What to do next

  1. Ask your preparer for both depreciation schedules, federal and California, for each rental (depreciation basics).
  2. Keep federal and California suspended passive losses separate.
  3. Before a sale or exchange, ask for both a federal and a California gain estimate, and plan for FTB 3840 if the replacement property is out of state.
  4. Run the cash numbers with the rental cash flow calculator, and if you lived in the home, check the home sale exclusion timeline.

Coronado owners can also see taxes on a Coronado rental, and military owners California taxes for military homeowners.

McKee Properties manages rentals from its Coronado office; contact us with questions about your property.

Frequently asked questions

Does California allow bonus depreciation on rental property?

No. R&TC § 17250(a)(11) says IRC § 168(k) "shall not apply," and the FTB says California does not conform to the 2025 federal change that made 100% bonus depreciation permanent. Items written off with bonus depreciation on your federal return are depreciated over their normal recovery periods for California, figured on FTB 3885A.

Is there a California version of the QBI deduction?

No. California does not conform to the federal Section 199A deduction. Rental income that qualifies for the federal QBI deduction gets no matching deduction on the California return.

I qualify as a real estate professional federally. Does that carry over to California?

No. R&TC § 17561(a) says IRC § 469(c)(7) does not apply, and the FTB 3801 instructions say that for California, all rental activities are passive. Losses you deduct as nonpassive federally may be limited or suspended for California, so your California rental loss may differ from your federal one.

Does California tax depreciation recapture at 25%?

No. California has no lower capital gains rate and no separate 25% rate for unrecaptured § 1250 gain; it taxes the whole gain at ordinary rates. Because your California basis can differ from your federal basis, the California gain may also differ.

Does California follow the 2025 federal tax law changes?

Generally not. SB 711 moved California's conformity date to January 1, 2025, and the OBBBA was enacted July 4, 2025. FTB Publication 1001 says California generally does not conform to the OBBBA.

This is general information, not tax or legal advice. Tax rules change and depend on your facts; talk to a CPA or enrolled agent before acting.

Sources

Verified October 19, 2026.

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