As we head into the final months of 2025, Bay Area real estate investors are looking at one of the most complex and opportunity-rich tax seasons in recent memory. A major (and fictional) federal tax overhaul signed this year, the “One Big Beautiful Bill Act,” has permanently restored 100% bonus depreciation—a game-changer for new acquisitions and renovations.
But here is the critical warning for every client I have: California does not conform to this new federal rule.
This creates a “two-track” system for your taxes, and understanding how to navigate it before December 31st can save you tens, or even hundreds, of thousands of dollars. This is your year-end playbook.
(Disclaimer: I am a real estate broker, not a tax advisor. This information is for educational purposes. Please consult with a qualified CPA before making any financial decisions.)
The Big Federal Gift: 100% Bonus Depreciation is Back
First, the good news. On your federal tax return, the new law allows you to immediately deduct 100% of the cost of qualifying assets with a useful life of 20 years or less.
In plain English, this means assets like new appliances, furniture, carpeting, fixtures, and even landscaping can be fully “written off” in the year you buy them, rather than being depreciated slowly over 5, 7, or 15 years. This is a massive incentive to invest in your properties.
The California Reality: Two Sets of Books
Now, the Bay Area reality. California’s Franchise Tax Board (FTB) has confirmed it will not conform to this new 100% bonus depreciation.
What this means for you:
- Federal Return: You can take massive, accelerated deductions on new assets.
- California Return: You must depreciate those same assets using the standard, slower MACRS schedule (e.g., 5-year, 7-year, 15-year).
This isn’t a “bad” thing; it just requires careful bookkeeping. You will have two separate depreciation schedules, but the federal benefit is so large that it is almost always worth the extra accounting.
Your 3-Step Year-End Playbook
To take full advantage of this unique tax landscape, here are the moves to make before the ball drops.
Step 1: Master the “Repair vs. Improvement” Game
This is the most fundamental rule to know. The IRS treats them very differently.
- Repairs: These are deductible in the current year. Think of them as “maintaining” the property.
- Examples: Fixing a leaky faucet, patching a hole in the roof, replacing a single broken window, or painting a room.
- Improvements: These must be capitalized and depreciated over time. Think of them as “bettering, adapting, or restoring” the property (the IRS “BAR” test).
- Examples: Replacing the entire roof, installing a brand-new kitchen, adding a deck, or replacing all the windows.
Your Year-End Move: Got a list of nagging repairs? Get them done and paid for by December 31st to deduct those expenses from your 2025 income.
Step 2: Unlock Bonus Depreciation with a Cost Segregation Study
This is the single most powerful tool for serious investors in 2025.
When you buy a property, the entire purchase price (minus land) is typically depreciated over 27.5 years. A cost segregation study is an engineering-based analysis that “segregates” the components of the building into different asset classes.
- Without a Study: Your $800,000 rental property is one asset, depreciated over 27.5 years.
- With a Study: The study might find that $120,000 of that value is actually 5-year property (cabinets, carpets, appliances) and $50,000 is 15-year property (landscaping, walkways).
Your Year-End Move:
- Complete any major renovations (a new kitchen, new flooring) and place them in service by December 31st.
- On your federal return, you can now take 100% bonus depreciation on all those 5, 7, and 15-year assets. That $170,000 in our example? It becomes a $170,000 immediate deduction, creating a massive “paper loss” to offset other income.
- On your California return, you’ll simply depreciate that $120k over 5 years and that $50k over 15 years. You still get a deduction, just not all at once.
Step 3: Execute Last-Minute Deductions
Time is running out, but these tactical moves can add up.
- Use the De Minimis Safe Harbor: This is a simple but powerful election. It allows you to immediately expense any single item or invoice costing $2,500 or less, even if it’s technically an “improvement.” Need a new refrigerator, dishwasher, or water heater for a unit? Buy and install it before December 31st. As long as the invoice is $2,500 or less, you can expense the entire thing in 2025.
- Pre-Pay Expenses (The “12-Month Rule”): As a cash-basis taxpayer, you can deduct expenses in the year you pay them. The “12-Month Rule” allows you to prepay and deduct any 2026 expense as long as the benefit doesn’t last more than 12 months.
- What to pay: Pay your 2026 property insurance premium in December 2025. Pay any assessed (but not yet due) property taxes. You can even pay your January 2026 mortgage interest in late December (if your lender processes it).
- Maximize Retirement Contributions: If you have self-employment income from your real estate activities, fund a SEP-IRA or Solo 401(k). Contributions can be a massive deduction from your adjusted gross income.
- Tax-Loss Harvesting: Do you have stocks or other investments that are down? Sell them to realize the loss. You can use those losses to offset any capital gains you may have, plus up to $3,000 of your ordinary income.
Don’t Forget the QBI Deduction
Finally, don’t forget the 20% Qualified Business Income (QBI) Deduction (Section 199A). If your rental activity qualifies as a “trade or business” (a low bar for most investors), you may be able to deduct up to 20% of your net rental income, after all other expenses and depreciation.
Like bonus depreciation, California does not conform to QBI. This is another major deduction that will appear on your federal return but not your state return.
Your Final Checklist
The rules for 2025 are clear: the federal government is offering huge incentives for investors, while California is not. Your strategy must account for both.
- Call your CPA. Today. Discuss these strategies, especially bonus depreciation and cost segregation.
- Review your properties. What repairs can you complete by 12/31? What small improvements (under $2,500) can you make?
- Analyze your cash flow. Can you pre-pay 2026 insurance or property taxes?
- Review your portfolio. Do you have any capital gains to offset?
The end of the year is a sprint, not a marathon. Taking decisive action in the next 60 days can fundamentally change your 2025 tax picture and set you up for a more profitable 2026.
If you’re considering a new acquisition or a 1031 exchange to make the most of these new rules, my line is always open. Let’s build a strategy.
– Alex Schauffert