Cost Segregation in California

The nation's highest property values generate massive federal cost seg savings — but California DOES NOT conform to federal bonus depreciation, meaning state tax benefits must follow regular depreciation schedules. Federal savings alone still make the math compelling.

Population
39.0M
Median Home
$750K
Property Tax
0.71%
15th lowest in U.S.
State Income Tax
13.3%
Top Rate (Graduated — Highest in Nation)
Bonus Depreciation
Partial
State Conformity
Avg. Insurance
$1,800
22% below average
Tax Strategy

Cost Segregation & Tax Rules in California

Understanding how federal and California state tax rules interact is critical to maximizing your cost segregation benefits.

Cost Seg Overview
State vs. Federal Rules
Tax Landscape
Median Home Price
$750K
Building Value
65%
of purchase price
Cost Seg Range
25-40%
of building reclassified
Median Home Age
38 yrs
Built ~1986
What Gets Reclassified

A cost segregation study identifies building components that can be depreciated over 5, 7, or 15 years instead of the standard 27.5 or 39 years. In California, typical reclassification rates are 25-40% of building value.

Common Property Types
Single-Family DetachedCondos/TownhomesSpanish-Style HomesMid-Century ModernSmall Multi-Family
California's high property values mean higher study fees but also much larger absolute dollar savings. A study costing $7,500 that generates $54K in federal Year 1 savings represents a 7x+ ROI. The deferred state savings add an additional $14-19K over the study life.
Overline Study Cost & ROI
Overline Study Cost
$499 - $2,000
Avg. ROI
10-40x

The math: A $750K property with 65% building value and 30% reclassification yields ~$54K in Year 1 federal tax savings at the 37% bracket — significantly more ROI than traditional studies costing $5,000-$10,000+.

Housing Stock Advantage

With a median build year of 1986, California's housing stock has identifiable components (HVAC, electrical, plumbing, landscaping) that are strong candidates for accelerated depreciation.

Non-Conformity — California DOES NOT allow bonus depreciation
California Bonus Depreciation Conformity

California does NOT conform to federal bonus depreciation under Section 168(k). For state tax purposes, you must use the regular MACRS depreciation schedule (5, 7, 15, or 39-year class lives) instead of claiming 100% in Year 1. This is the single most important tax planning consideration for CA investors.

What This Means for Your Investment: Federal cost seg benefits still apply in full — you get 100% bonus depreciation on your federal return. However, for your California state return, reclassified components follow regular MACRS schedules. This means your state tax savings are spread over 5-15 years instead of Year 1. Given CA's 9.3-13.3% tax rate, this deferred state benefit is still very valuable.

Federal vs. CA Depreciation Timeline
PeriodFederal TreatmentCA State Treatment
Year 1100% bonus depreciation on reclassified componentsRegular MACRS first-year depreciation only (20% for 5-yr, 14.29% for 7-yr, 5% for 15-yr)
Years 2-5Standard MACRS on remaining basisRegular MACRS depreciation continues
Years 6-15Standard MACRS on 15-year componentsRegular MACRS depreciation continues for 15-year components
Section 179 Expensing
State ConformityLimited

California's $25,000 Section 179 limit is drastically lower than the federal $1.16M limit. This further limits Year 1 state deductions. Plan your cost seg strategy primarily around federal benefits.

Key Takeaway

A $750K property with a $487,500 depreciable basis and 30% cost seg reclassification yields ~$54,113 in federal tax savings in Year 1. California state savings of $0 in bonus depreciation Year 1 — but the regular MACRS state deductions over 5-15 years at 9.3-13.3% tax rates are worth ~$14,000-19,000 total. Federal savings alone justify the study.

Bottom Line

Federal savings are immediate and substantial. California state savings are deferred over MACRS class lives (5-15 years for most cost seg components). The high state tax rate (9.3-13.3%) means these deferred deductions are still very valuable — just not in Year 1. Plan accordingly.

Eff. Property Tax
0.71%
15th lowest in U.S.
Transfer Tax
$1.10 per $1,000 of sale price (county) + city transfer taxes in some cities (LA: $5.50/$1,000)
State Income Tax
13.3%
Top Rate (Graduated — Highest in Nation)
Property Tax Details

Proposition 13 (1978) caps property tax at 1% of assessed value and limits annual increases to 2%. Properties are only reassessed upon sale or new construction. This is a HUGE advantage for long-term holders — your property tax stays low even as values appreciate dramatically.

Assessment Methodology
MethodProp 13 — acquired value base with max 2% annual increase
Reassessment CycleAt acquisition, then max 2% annual increase
Assessment BodyCounty Assessor
Appeal WindowJuly 2 – November 30 (annual filing period)
Appeal Success Likelihood
Good
LowModerateGoodVery High

Prop 13 limits reassessment to change of ownership or new construction. In market downturns, temporary Prop 8 reductions are available when market value drops below the factored base year value. Los Angeles County alone processes 100K+ appeals in down markets.

Work with Overline — Our team helps California investors identify over-assessed properties and file tax appeals. A successful appeal can save thousands annually and compounds your cost seg savings.

Illustrative Example

Cost Seg Example for California

This example assumes a purchase eligible for 100% bonus depreciation. All factors below are based on averages from our historical cost segregation studies for CA properties. To see your exact savings, run a property-specific cost seg analysis below.

Typical California Property Details
$
50%95%
5%35%
2%25%
Total Reclassified30% of building
10%37%
Estimated Year 1 Tax Savings
Building Value$487,500
$750,000 x 65%
Normal Annual Depreciation$17,727
$487,500 ÷ 27.5 yr (residential)
5-Year Reclassified$87,750
15-Year Reclassified$58,500
Total Accelerated$146,250
30% of $487,500 building value
Federal Tax Savings (Year 1)$54,113
$146,250 x 37% bracket
Total Year 1 Tax Savings$54,113
8.3x normal annual deduction captured in Year 1

CA State Tax: Federal cost seg benefits still apply in full — you get 100% bonus depreciation on your federal return. However, for your California state return, reclassified components follow regular MACRS schedules. This means your state tax savings are spread over 5-15 years instead of Year 1. Given CA's 9.3-13.3% tax rate, this deferred state benefit is still very valuable.

Depreciable Basis

Land vs. Building Value in California

The land-to-building ratio directly impacts your cost segregation benefit — only the building portion is depreciable. Here is how California breaks down by region.

Statewide Average
Building (Depreciable)65%
Land (Non-Depreciable)35%
65%
Depreciable Basis
Breakdown by Region
Los Angeles Metro
60% Building

Very high land values in coastal and central LA. Inland Empire (Riverside, San Bernardino) offers better ratios at 70-75% building.

San Diego Metro
62% Building

Coastal premium inflates land values. East County and North County inland areas have 70%+ building ratios.

Sacramento Metro
72% Building

Most affordable major CA metro with the best building-to-value ratios for cost seg.

San Francisco Bay Area
55% Building

Extremely high land values, especially in SF, Palo Alto, and coastal Marin. East Bay (Oakland, Concord) is somewhat better.

Central Valley
80% Building

Affordable land creates excellent building ratios, but rental markets are smaller.

Investor Takeaway

California's high land values are the biggest challenge for cost seg. Sacramento (72% building) and the Inland Empire (70-75%) offer the best ratios. Coastal markets (LA, San Diego) have 60-65% building values — still workable given the high absolute dollar amounts. Avoid SF Peninsula for cost seg purposes.

Insurance & Risk

Insurance Landscape in California

Insurance costs directly impact your cash flow. Understanding California's risk profile helps you budget accurately and avoid coverage gaps.

Avg. Annual Premium
$1,800
22% below average
National Average
$2,300
for comparison
Premium Trend
Rising 8-12% annually. Wildfire risk is causing carriers to non-renew policies in fire-prone areas. California FAIR Plan (insurer of last resort) is expanding rapidly.
Primary Risk Drivers
1
Wildfires
California's #1 insurance driver. The Camp Fire (2018) destroyed 18,800 structures. Carriers are non-renewing policies in WUI (Wildland-Urban Interface) zones statewide.
2
Earthquakes
Earthquake insurance is separate and expensive ($3-8K/year). Standard policies do NOT cover earthquake damage. California Earthquake Authority (CEA) is the primary provider.
3
Mudslides & Flooding
Post-wildfire mudslides and atmospheric river flooding are increasing. Flood insurance is separate and essential in many areas.
Coverage Recommendations
Verify insurability BEFORE purchasing — some fire-prone areas have no private market options
California FAIR Plan as last resort, but it covers fire/wind only — you need a DIC (Difference in Conditions) policy for full coverage
Earthquake insurance (CEA or private) — expensive but essential in seismically active areas
Umbrella liability policy ($1M+) for rental properties
Cost Seg + Insurance Connection

California's insurance market is in flux due to wildfire risk. A cost seg study provides component-level building documentation that supports accurate replacement cost estimates — critical when carriers are scrutinizing coverage amounts. This documentation can help you negotiate adequate coverage and substantiate claims.

Market Fundamentals

Economy & Housing Demand in California

Strong economic engines create stable rental demand. Here is what drives California's economy and housing market.

State GDP
$4.0T
Growing 2.8%/year
Unemployment
4.8%
Below national average
Median Income
$91,000
+18.5% over 5 years
Pop. Growth (1Y)
+0.2%
-210,000/year (domestic out-migration partially offset by international immigration) net migration
Major Industries
Technology18%
Silicon Valley (Apple, Google, Meta, Nvidia), plus growing tech hubs in LA (Snap, SpaceX), San Diego (Qualcomm), and Sacramento.
Entertainment & Media10%
Hollywood, streaming (Netflix, Disney+, Warner Bros.), gaming, and music. Los Angeles is the global entertainment capital.
Healthcare & Biotech12%
Kaiser Permanente, Cedars-Sinai, UCSF, and San Diego's biotech corridor (Illumina, Pfizer, Amgen).
Agriculture5%
California produces 50%+ of U.S. fruits, vegetables, and nuts. Central Valley is the nation's breadbasket. $50B+ annual agricultural output.
Defense & Aerospace8%
Camp Pendleton, Naval Base San Diego, Edwards AFB, Vandenberg SFB. Northrop Grumman, Raytheon, General Atomics.
Key Economic Engines
Silicon Valley: Apple ($3T), Google ($2T), Meta, Nvidia — the world's largest tech cluster
Hollywood/LA: $150B+ annual entertainment industry, streaming revolution HQ
San Diego Defense: Naval Base SD (largest on West Coast), Camp Pendleton, 25+ defense contractors
Ports of LA/Long Beach: 40% of U.S. container imports, $300B+ annual cargo value
Housing Demand Signals
5-Year Pop. Growth
-0.5%
Housing Permits YoY
+2.1%
Median Days on Market
25 days
Months of Inventory
1.8
Migration: Domestic out-migration to Texas, Arizona, Nevada, and Florida driven by cost of living and taxes. International immigration (tech workers, students) partially offsets losses. Population stabilizing after COVID-era exodus.
Construction: Stucco over wood frame, Spanish tile roofing, Slab-on-grade foundation, Post-and-pier (older hillside homes)
Landlord & STR Rules
Landlord Friendliness
Tenant-Friendly
Eviction Timeline
60-120 days
Rent Control
Statewide rent control (AB 1482): 5% + CPI (max 10%) annual increases for covered properties (15+ years old). Local ordinances in LA, SF, Oakland, and others are even more restrictive.
STR Regulation
Local control

California has no state-level STR preemption. Each city sets its own rules, creating a patchwork of regulations. Los Angeles caps non-primary-residence STRs. San Diego allows with permits. Sacramento is relatively permissive. San Francisco has strict rules. Research city-specific rules before investing.

Local Markets

Top Cities for Investors in California

Explore city-level cost segregation data, sample deals, and investment fundamentals for each major market in California.

Los Angeles, CA
Entertainment Capital
Median Home
$850K
Rent (3BR)
$3,200
Property Tax
0.72%
Avg. Insurance
$2,200/yr
Est. Year 1 Tax Savings$57K+
View Los Angeles Details
San Diego, CA
Biotech & Military
Median Home
$780K
Rent (3BR)
$3,100
Property Tax
0.73%
Avg. Insurance
$1,800/yr
Est. Year 1 Tax Savings$54K+
View San Diego Details
Sacramento, CA
#1 CA Affordability
Median Home
$500K
Rent (3BR)
$2,400
Property Tax
0.69%
Avg. Insurance
$1,500/yr
Est. Year 1 Tax Savings$40K+
View Sacramento Details
Local Partners

Investor-Friendly Partners in California

We are building a curated directory of top investor-friendly brokers, property management companies, and service providers in California.

Investor-Friendly Brokers

Top real estate agents who specialize in investment properties and understand cost segregation, 1031 exchanges, and cash-flow analysis.

Coming Soon
Property Management

Vetted property managers who handle tenant screening, maintenance, and rent collection for both long-term and short-term rentals.

Coming Soon
Insurance Agents

Independent insurance agents who specialize in rental property coverage and can leverage cost seg data for accurate replacement cost estimates.

Coming Soon

Are you a broker, property manager, or insurance agent serving investors in California?

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Frequently Asked Questions

Cost Segregation FAQ — California

Does California conform to federal bonus depreciation?

−

California does NOT conform to federal bonus depreciation under Section 168(k). For state tax purposes, you must use the regular MACRS depreciation schedule (5, 7, 15, or 39-year class lives) instead of claiming 100% in Year 1. This is the single most important tax planning consideration for CA investors.

What is the property tax rate in California?

+

The effective property tax rate in California is 0.71%, ranked 15th lowest in U.S. in the U.S. Proposition 13 (1978) caps property tax at 1% of assessed value and limits annual increases to 2%. Properties are only reassessed upon sale or new construction. This is a HUGE advantage for long-term holders — your property tax stays low even as values appreciate dramatically.

How much can I save with cost segregation in California?

+

A $750K property with a $487,500 depreciable basis and 30% cost seg reclassification yields ~$54,113 in federal tax savings in Year 1. California state savings of $0 in bonus depreciation Year 1 — but the regular MACRS state deductions over 5-15 years at 9.3-13.3% tax rates are worth ~$14,000-19,000 total. Federal savings alone justify the study.

What are the typical cost segregation reclassification rates in California?

+

In California, typical cost segregation studies reclassify 25-40% of building value into accelerated depreciation categories (5-year, 7-year, and 15-year property). Overline studies cost $499-$2,000 with 10-40x ROI.

What is the average insurance cost for rental properties in California?

+

The average annual homeowner insurance premium in California is $1,800, which is 22% below average the national average of $2,300. Key risk drivers include Wildfires and Earthquakes.

What is the state income tax rate in California?

+

California has a state income tax rate of 13.3% (Top Rate (Graduated — Highest in Nation)). California has the highest state income tax rate in the nation at 13.3% (on income above $1M). For most investors in higher brackets, the effective rate is 9.3-12.3%. This makes state depreciation deductions extremely valuable long-term, even without bonus depreciation conformity.

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