Will Bonus Depreciation Survive? The 2026 Schedule for California Investors (and How to Keep Saving After Phaseout)
Most California real estate investors are staring down a sunset. The era of full bonus depreciation—where you could write off 100% of qualifying property in year one—ends for good after 2025 unless Washington pulls a last-minute reversal. While many investors think they “have time,” the 2026 schedule brings both a brutal federal phaseout and a continuation of California’s nonconformity, setting up a perfect storm that could cost the unprepared tens of thousands per property.
This isn’t a distant concern. As of November 14, 2025, federal law drops the deduction to 60% for assets placed in service in 2026. California still refuses to go along, making the state return even tougher for property owners. Sitting back means missing the last, best bite at accelerated cash flow, and failing to plan your 2026 projects could trigger audit flags, depreciation traps, and zeroed-out state benefits.
This information is current as of 11/14/2025. Tax laws change frequently. Always verify updates with the IRS or California FTB if reading this later.
Quick Answer: What Changes for Bonus Depreciation in 2026?
For 2026, federal bonus depreciation declines to 60% for eligible property (down from 80% in 2025 and 100% prior). Unless new legislation intervenes, this slide continues: 40% in 2027, and just 20% in 2028, with full phaseout after. California does not conform—meaning, bonus depreciation is simply not recognized on your state return—so you face two wildly different depreciation schedules in practice.
The bonus depreciation 2026 schedule creates an unusual planning window because the IRS still allows a 60% first-year deduction under §168(k), but only if the asset is placed in service during the 2026 tax year. For investors juggling construction delays or tenant improvements, this distinction is critical: a one-week slip from December 2025 to January 2026 can erase the outgoing 80% rate and lock you into the lower 60% tier. We routinely model “service-date risk” for clients so they can see the exact cash-flow delta between the two percentages before committing to timelines. Federal deductions rarely move in 20-point swings—this one does.
Example: If you close on a $1M multifamily in January 2026 and allocate $400,000 to eligible 5- and 15-year property through cost segregation, here’s how first-year deductions look:
- Federal: $240,000 (60% of $400,000)
- California: Only straight-line on the same $400,000—about $20,000–$28,000 in year one, depending on asset class
That delta can blow up your state tax bill, disrupt cash flow planning, and—if your CPA is careless—create misunderstandings about tax owed next April.
The bonus depreciation 2026 schedule also changes how partnership allocations behave, especially in syndications with preferred returns or waterfalls. Because only 60% of qualifying assets are expensed upfront, your capital account impact shifts, altering how losses and distributions flow under the operating agreement. We review partnership agreements for clients specifically to ensure bonus allocations don’t accidentally skew promote structures or trigger capital account deficits. A 20% rate drop can materially change an LP’s expected first-year tax shield.
What’s Actually Changing: The 2026 Bonus Depreciation Phaseout Explained
The 2017 Tax Cuts and Jobs Act (TCJA) gave investors the unprecedented ability to claim 100% bonus depreciation on new and used property with lifespans under 20 years (Section 168(k)), placed in service before January 1, 2023. Congress then extended the phaseout, but the glide path is locked:
- 2023: 80% bonus depreciation (now past)
- 2024: 80%
- 2025: 80%
- 2026: 60%
- 2027: 40%
- 2028: 20%
- 2029: 0% (fully gone)
The bonus depreciation 2026 schedule matters because the drop from 80% to 60% is not just cosmetic—it changes how fast your depreciable basis recovers and increases the proportion pushed into slower straight-line years. For example, if a cost segregation yields $500,000 of 5- and 15-year components, 2026 gives you a $300,000 deduction—$100,000 less than the prior year. That missing $100,000 can translate into a $24,000–$37,000 higher federal tax bill for investors in the 24%–37% brackets. Timing your placed-in-service date is one of the few legal levers that can shift a six-figure deduction overnight.
For projects placed in service in calendar year 2026, you’ll only get a 60% immediate deduction of eligible assets—the remaining 40% is depreciated over the normal life (see IRS Publication 946). Worse, if you contract for or start work in 2025 but the property isn’t placed in service by December 31, 2025, you fall under the new 60% limit for the whole schedule.
Under the bonus depreciation 2026 schedule, investors with heavy renovation cycles need to track “placed in service” dates for each improvement separately. IRS rules treat a late-year appliance replacement, HVAC upgrade, or parking lot improvement as its own eligible asset—meaning you can still capture 60% bonus on incremental cap-ex even if the main building was placed in service years earlier. We often recommend batching improvements strategically to group short-life assets in the same tax year, maximizing first-year deductions while keeping documentation clean for Form 4562. The difference between scattered and structured improvements can be tens of thousands in acceleration.
Meanwhile, California has not adopted (conformed to) bonus depreciation at all. For every year since TCJA, state returns require you to add back bonus depreciation, take only the standard straight-line deduction, and keep separate records for every property (California FTB Guidelines). For high-net-worth CA investors or partnership syndicates, this dual reporting isn’t just paperwork—it’s a direct threat to after-tax ROI.
Pro Tip: If you have escrow closings or new construction in late 2025, accelerate placed-in-service status before December 31 to lock in higher bonus rates. For 2026, every month you delay placement loses 20% of bonus deduction value compared to the outgoing 80% rate.
What California Investors Must Do Before 2026—And How to Stay Ahead
By January 2026, bonus depreciation will be less than two-thirds as valuable as it was last year, while state tax reporting remains just as unforgiving. Here are the action steps for California real estate owners:
- Cost Segregation Now: For any property you can place in service in 2025 (including renovations, furniture/equipment, or simple rehabs), execute a quality cost segregation study, and file for 80% bonus depreciation on eligible components.
- Don’t Wait on New Acquisitions: If you close or purchase between now and December 31, 2025, insist the property (or improvements) become operational before year-end. If it slips to 2026, big deductions are lost.
- Coordinate State and Federal Returns: Maintain parallel depreciation schedules: one with bonus for federal, and one without for California. Modern tax software is critical here.
- Pre-2026 Entity Restructuring: Consider shifting entity structures where you can migrate property or JV interests before schedule drops, especially if you expect to dispose of property and face potential depreciation recapture.
- Stay Conservative on Projections: Don’t overspend bonus depreciation in loss modeling, as your California state benefit will always be far lower.
For California owners, the bonus depreciation 2026 schedule introduces a widening gap between federal and state books that must be reconciled annually. Because California requires a full addback of federal bonus (CA Form 100/540), investors effectively run two depreciation universes—one accelerating 60% immediately, the other recognizing only standard MACRS deductions. This mismatch is where underpayment penalties typically occur, so we project federal and state liability side-by-side before recommending cap-ex timing or refinancing moves. When done correctly, you preserve federal cash flow without being surprised by the FTB the following April.
To analyze how these moves fit your holdings, consider our premium advisory services. For a more in-depth look at multigenerational asset transfers and estate impact, see our California Guide to Estate & Legacy Tax Planning 2025 Edition.
KDA Case Study: Dodging the 2026 Bonus Depreciation Cliff
Persona: High-Net-Worth California Real Estate Investor (net worth $14M, owns 17 doors in Orange County)
Marie closed on a $2.8M apartment in late October 2025, with plans to start occupancy after holiday renovations. Initially, her local accountant planned to place the asset in service January 10, 2026. If that happened, Marie would only get 60% bonus depreciation on $1.1M of cost-segregated property—netting a $660,000 federal deduction, but barely reducing her state taxes. KDA stepped in and worked with her contractors, pushing for occupancy certificates and operational status by December 28, 2025. With this timeline, Marie claimed 80% bonus depreciation: $880,000 federal deduction (difference: $220,000 more up-front). Even though California’s state schedule doesn’t allow bonus, her after-tax cash savings soared, as she was cash-flow positive months sooner.
Cost: $8,400 for cost segregation, $6,200 for premium advisory plus implementation. Immediate ROI: $220,000 net benefit on cash flow and financing alone—for a 13.8x return in year one. HNW investors routinely see six-figure swings based on placement dates—Marie’s scenario is the new rule, not the exception.
Ready to see how we can help you? Explore more success stories on our case studies page to discover proven strategies that have saved our clients thousands in taxes.
Why Most Investors Get Burned—and How to Avoid It for 2026
Red Flag Alert: The most common mistake in 2026 will be failing to distinguish between federal and CA depreciation. If your CPA (or software) uses only federal numbers and you repeat that on your state return, you risk underpayment, penalties, and audit red flags. Always review the state “add-backs” and maintain duplicate records.
Trap: Placing property in service “just after New Year’s” can erase 20% of your expected tax benefit. Many California syndications stumble on this—especially with complicated multi-state assets.
What the IRS and FTB won’t tell you: If you later sell or exchange property, recapture rules apply differently for the federal bonus depreciation you took vs. the lower state cost recovery. Detailed cost-segregation and disposition schedules are a non-negotiable defense (see IRS Form 4797 guidance).
FAQ: 2026 Bonus Depreciation for California Investors
What if I buy in 2025 but place the property in service in 2026?
You only get bonus depreciation based on the placed-in-service date—not the closing or purchase agreement. For 2025, that’s 80%. In 2026, it drops to 60%. If you buy in December 2025 but tenant improvements slow you down, you’re stuck with the lower rate unless you accelerate completion (IRS Publication 946).
Is cost segregation still worth it after bonus depreciation phases out?
Absolutely—advanced cost seg breaks property into asset classes regardless of bonus rules. While your immediate deduction is less, capturing 60% in year one is still powerful. After 2029, you’ll use conventional depreciation schedules, but can still maximize cash flow and tax offsets. Just take care to apply the correct state method for California.
Will California ever conform to bonus depreciation?
There’s no indication Sacramento will adopt the federal bonus depreciation rules—this has held true since 2017. Plan to keep parallel records for the foreseeable future.
2026 and Beyond: Top 3 Action Steps, Ready for Social
- Get your cost segregation study done and properties placed in service before December 31, 2025—don’t let delayed occupancy cost you $100K+
- Keep federal and CA depreciation schedules separate to avoid state audit headaches and underpayment
- Book your KDA strategy session now to review entity structure, timing, and maximize year-end tax savings
Book Your 2026 Strategy Session—Stay Ahead of Federal Phaseout
Don’t let the phaseout of bonus depreciation in 2026 blindside you. If you own, plan to acquire, or renovate California real estate, now is the moment for personalized strategy. We’ll analyze your portfolio, entity structure, and timing, so you keep every legal dollar—federal and state. Click here to book your consultation now and lock in your tax-efficient plan before Congress changes the game.
