Rental Property Depreciation in California: How It Works

By Matthew Martinez, Founder, CEO & Managing Broker, Diamond Real Estate Group. California DRE #01869679.

Under IRS rules, a residential rental building is depreciated using the straight-line method over 27.5 years, starting when it is ready and available to rent. You depreciate only the building and improvements, never the land, so the first job is splitting your purchase price between the two. When you sell, the depreciation you took (or could have taken) comes back into play. Federally, that part of the gain can be taxed at up to 25%, and California taxes all capital gains as ordinary income.

This guide explains the mechanics so you can have a better conversation with your CPA. It is not tax advice, and the figures below come from the IRS and Franchise Tax Board publications listed at the end.

The basic rules

IRS Publication 527 (2025 edition) covers residential rental property. The points that matter most to California owners:

• When it starts: Depreciation begins when the property is placed in service, meaning ready and available for rent, even if no tenant has moved in yet.
• When it stops: When you have recovered your full basis or retire the property from service (sale, abandonment, destruction), whichever comes first.
• Vacancies: Depreciation continues through temporary idle periods, such as repairs between tenants.
• Land: Land is never depreciable.
• Method: Residential rental property uses the General Depreciation System (GDS) with a 27.5-year recovery period, straight line, and the mid-month convention.
• Reporting: Depreciation is generally figured on Form 4562. Rental income and expenses go on Schedule E (Form 1040).

The mid-month convention treats property as placed in service in the middle of the month, no matter the actual date. So the first year’s deduction covers only part of a year.

Recovery periods at a glance

ADS is the Alternative Depreciation System. Some owners must use it, and some elect it. Your tax preparer will know whether it applies to you.

Splitting the price between land and building

You can only depreciate the building, so the land/building split drives every year’s deduction. Publication 527 says to allocate your cost based on the fair market values of the land and the building at purchase. If those values are uncertain, you can use the ratio of the land and improvement values your county assessor uses for property tax.

How the assessor method works in practice. California property tax bills and assessor records generally show separate land and improvement values. Under Proposition 13, a change in ownership such as a purchase generally leads the assessor to reassess the property at market value as of the transfer date (BOE), so the assessor’s split after your purchase reflects values close to your acquisition date. A split carried from a decades-old assessment may not. Our guides to Prop 13 and California property tax for investors explain how reassessment works.

A hypothetical example. Say you buy a Santa Rosa duplex for $900,000 and the assessor’s new values show 35% land and 65% improvements. Using that ratio, $585,000 is building basis (before closing costs that are added to basis). Divided by 27.5 years, that is roughly $21,273 a year. Place it in service in July and the mid-month convention gives you 5.5 months for the first year, about $9,750. These numbers are illustrative only. The IRS tables in Publication 527 produce the exact percentages.

Land shares vary a lot with location, lot size and the age of the building, so don’t assume a rule-of-thumb percentage. An appraisal that separates land value, or a cost segregation study done by a qualified professional, is another way to support the split. Whatever method you use, keep the documents.

Repairs versus improvements

This is where most rental-owner questions come from. Publication 527 says improvements must be capitalized and depreciated, while repairs and maintenance that aren’t improvements may be deducted in the year paid. An expense is an improvement if it is a:

• Betterment: fixes a defect that existed before you bought the property, enlarges it, or increases its capacity or quality.
• Restoration: for example, replacing a substantial structural part of the property.
• Adaptation: converts the property to a use inconsistent with its original rental use.

Patching a roof leak is typically a repair. Replacing the roof is an improvement depreciated over 27.5 years from the date it is placed in service. Publication 527 also describes a de minimis safe harbor for small purchases and a routine maintenance safe harbor. Ask your preparer whether to elect them and what dollar limits apply to you.

California-specific items often blur the line: seismic retrofit work, balcony repairs found in an SB 721 inspection, defensible-space work, or converting a garage to an ADU. Most structural or added-space projects are capital improvements, but the classification depends on the facts.

Depreciation lowers your basis, even if you skip it

Publication 527 says your basis goes down by the depreciation you deducted or could have deducted. If you never claimed depreciation, you are still treated as if you had when you sell. That makes "I’ll just skip it" a costly choice: you lose the deduction and still face the tax effect at sale. If past returns missed depreciation, talk to your preparer about how to correct it.

What happens when you sell

When you sell a rental you’ve held more than a year, the gain tied to depreciation on the building is generally unrecaptured section 1250 gain. The 2025 Schedule D instructions describe it as the part of gain on depreciated real property held more than one year that is attributable to depreciation. The instructions include a worksheet that pulls figures from Form 4797. The IRS says in Topic 409 that this portion is taxed at a federal maximum of 25%. Remaining long-term gain is taxed at the regular capital gain rates. Topic 409 also points to the net investment income tax, which may apply to higher-income sellers.

Two ways owners reduce or defer this:

• A 1031 exchange into replacement investment real property lets you postpone tax on the gain. The 2025 Form 8824 instructions explain that the replacement property’s basis generally starts from the basis of the property you gave up, so your depreciation history carries forward. The same instructions note that in some exchanges part of the gain tied to depreciation can still be taxed, and Form 8824 has a line for it. The rules and deadlines are strict. See our 1031 exchange guide and, for California’s tracking of out-of-state replacements, our page on the FTB 3840 clawback.
• Moving into a former rental raises separate questions about the home-sale exclusion. Our guide to capital gains on a home sale in California explains the exclusion; get tax advice before you change how you use the property.

Where California differs

California follows federal depreciation rules in many respects but not all. The Franchise Tax Board’s Publication 1001 (2024) flags the main differences for individuals:

• Bonus depreciation: California does not conform to the federal additional first-year (bonus) depreciation under IRC §168(k).
• Section 179 expensing: California’s limit is $25,000, with a phaseout starting at $200,000, which is lower than federal.
• Different basis: Because of these differences, your California basis can differ from your federal basis, so the gain or loss at sale can differ too. California adjustments are figured on Form FTB 3885A, Schedule CA (540 or 540NR) and Schedule D-1.
• Capital gains rate: The FTB states that all capital gains are taxed as ordinary income in California. There is no lower rate for the depreciation portion or any other portion.

For a standard residential building on straight-line, 27.5-year depreciation, the yearly federal and California deductions are often the same. Differences tend to appear with personal property, cost segregation and bonus depreciation. Keep separate federal and state depreciation schedules if your preparer advises it.

Ownership structure and depreciation

How you hold title doesn’t change the 27.5-year schedule, but it can change who claims the deduction, what forms you file and what happens at transfer or death. See our LLC vs personal title guide and, for heirs, our page on inherited rental property. If you are still evaluating a purchase, our rental property analysis guide shows how depreciation fits into after-tax returns alongside cash-on-cash return.

Questions people ask

How many years do you depreciate a rental property?

Residential rental buildings are depreciated over 27.5 years under the General Depreciation System, using the straight-line method and the mid-month convention. Under ADS the period is 30 years for most property, per Publication 527.

Can I depreciate the land?

No. Land is never depreciable. Only the building, structural components and other improvements are.

Can I use the county assessor’s land and improvement values?

Publication 527 allows allocation by fair market value. If those values are uncertain, you can use the ratio of assessed land and improvement values. A recent post-purchase assessment usually reflects current values better than an old one.

Is a new roof a repair or an improvement?

A full roof replacement is generally an improvement and is depreciated over the same 27.5-year period as the building. Patching a leak is typically a repair.

What if I never took depreciation?

Your basis is still reduced by the depreciation you could have taken, so the tax effect at sale applies anyway. Ask a tax professional about correcting past returns.

What is depreciation recapture on a rental?

For straight-line residential rentals, the gain tied to prior depreciation is generally unrecaptured section 1250 gain. Federally, it is taxed at a maximum 25% rate. California taxes it, and all capital gains, as ordinary income.

Does California allow bonus depreciation?

No. FTB Publication 1001 states that California does not conform to federal bonus depreciation under IRC §168(k), and its Section 179 limits are lower.

Does a 1031 exchange avoid depreciation recapture?

A qualifying exchange postpones tax on the gain, and the replacement property generally carries over your old basis, so the deferred depreciation follows you. The Form 8824 instructions note that some depreciation recapture can still be taxed in certain exchanges. Confirm your situation with your intermediary and CPA.

Sources & notes

1. IRS Publication 527 (2025), Residential Rental Property: placed in service, land allocation (FMV or assessed value ratio), 27.5-year GDS, ADS periods, mid-month convention, improvements vs repairs, basis reduction, Form 4562/Schedule E.
2. IRS Publication 946 (2025), How to Depreciate Property: the general MACRS, Section 179 and special-allowance rules behind Publication 527.
3. Instructions for Schedule D (Form 1040), 2025: Unrecaptured Section 1250 Gain Worksheet.
4. IRS Topic No. 409, Capital gains and losses: 25% maximum on unrecaptured §1250 gain; 2025 capital gain rate thresholds.
5. FTB Publication 1001 (2024), Supplemental Guidelines to California Adjustments: bonus depreciation non-conformity, Section 179 limits, basis differences.
6. FTB: Capital gains and losses: California taxes capital gains as ordinary income.
7. Instructions for Form 8824 (2025), Like-Kind Exchanges: deferral, carryover basis, recapture line.
8. California BOE: Change in ownership FAQs: reassessment at market value on transfer.

Federal thresholds and California limits change. Check the current year’s publications before you file. Passive activity loss limits also affect whether depreciation lowers your current tax; see IRS Publication 925.

General information, not legal, tax or lending advice. Updated November 2026. Primary sources are linked in this guide.

Related: 1031 exchange guide · Capital gains on a home sale · LLC vs personal title · Investor services