Short-Term Rental Taxes in California: What Investors Need to Know About Bonus Depreciation
California does NOT conform to federal bonus depreciation. A $150,000 first-year bonus depreciation deduction on your federal return does not reduce your California taxable income by $150,000. California requires you to use regular MACRS depreciation schedules for CA purposes — creating a significant state tax impact in year one.
California is both one of the largest STR markets in the United States (Palm Springs, Lake Tahoe, Big Sur, San Diego) and one of the most tax-complex states for real estate investors. The combination of high income tax rates and non-conformity with federal bonus depreciation means California STR investors face a very different tax picture than investors in Florida, Texas, or Tennessee.
California's Non-Conformity with Bonus Depreciation
This is the critical issue for California investors. When you take 100% bonus depreciation on 5-year and 15-year property at the federal level, you deduct the full cost in year one on your federal Form 1040. California does not follow this treatment. Instead, California requires you to depreciate those same assets over their regular MACRS lives — 5 years, 15 years, etc. — using straight-line methods.
The practical result: if you take a $120,000 bonus depreciation deduction federally, your California taxable income is only reduced by approximately $24,000 (the first-year MACRS amount for 5-year property). You still owe California income tax on the remaining $96,000 that you deducted federally. At the 13.3% rate, that's approximately $12,768 in additional California state tax in year one compared to what you'd pay if California conformed.
What California Does Conform To
California does conform to MACRS regular depreciation schedules (just not bonus depreciation). So the cost segregation study is still valuable — you're still identifying 5-year and 15-year assets and getting accelerated (non-bonus) depreciation on those assets over their shorter MACRS lives at the state level. You also still get full federal bonus depreciation.
California does conform to Section 179 expensing (up to its own limit of $25,000 for 2025), which is lower than the federal limit. But §179 has income limitations that make it less useful for passive rental investors.
California Income Tax Rates for STR Investors
| Taxable Income (Single) | California Rate | Cumulative Rate with Federal (37% bracket) |
|---|---|---|
| $0–$10,099 | 1% | Up to 38% |
| $10,099–$23,942 | 2% | Up to 39% |
| $23,942–$37,788 | 4% | Up to 41% |
| $37,788–$52,455 | 6% | Up to 43% |
| $52,455–$66,295 | 8% | Up to 45% |
| $66,295–$338,639 | 9.3% | Up to 46.3% |
| $338,639–$406,364 | 10.3% | Up to 47.3% |
| $406,364–$677,275 | 11.3% | Up to 48.3% |
| $677,275–$1,000,000 | 12.3% | Up to 49.3% |
| Over $1,000,000 | 13.3% | Up to 50.3% |
California STR Markets and Investment Considerations
Palm Springs / Coachella Valley: One of the premier desert STR markets, with high occupancy and premium ADR. Strong personal property ratios (pools, outdoor entertainment are standard). Despite the California tax complexity, high property values make cost seg worthwhile.
Lake Tahoe (El Dorado, Placer, Nevada counties): Cross-border market where properties in Nevada counties benefit from Nevada's no-income-tax environment. El Dorado County properties on the California side face California's full tax regime including non-conforming bonus depreciation.
Big Bear Lake: Popular Southern California mountain market. High-demand, relatively accessible property prices compared to Palm Springs. Subject to San Bernardino County STR regulations.
Despite non-conformity, cost segregation still generates significant federal savings for California STR investors. A $120,000 federal deduction at 37% is $44,400 in federal savings, even if the California benefit is reduced. The net combined benefit is still typically 4–6× the study cost.
California STR Investors: Get Your Numbers
The California complexity is manageable. A qualified cost seg study and CPA can optimize both your federal and CA returns. Get your free estimate.
Get My Free Estimate