If you own rental property in San Diego County, depreciation is probably the single most valuable line item on your Schedule E. It's also one of the most misunderstood. We see it handled incorrectly — or not at all — more often than you'd expect, and the financial impact of getting it wrong compounds every year you own the property.

Here's the short version: the IRS allows you to deduct the cost of your rental property over time, even though the property itself may be appreciating. Depreciation is a non-cash deduction — you’re not writing a check for it — but it lowers your taxable rental income every year.

The longer version contains details that most generic overviews skip.

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How the Basic Calculation Works

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Residential rental property is depreciated over 27.5 years using the straight-line method under MACRS. Commercial property uses 39 years.

Your depreciable basis is:

• the purchase price
• plus allowable closing costs (e.g., title insurance, recording fees, transfer taxes),
• minus the value of the land

Land never depreciates under IRS rules, so you must back it out.

Example:
A San Diego rental purchased for $700,000 with land valued at $200,000 produces a depreciable basis of $500,000. Over 27.5 years, that yields roughly $18,182 per year in depreciation — every year, for nearly three decades.

One thing we flag often: the land-to-improvement ratio matters more in San Diego than people realize. Much of the region’s value is land-driven, especially in coastal ZIP codes. A condo in Pacific Beach and a home in Fallbrook may have similar prices but dramatically different land allocations. A higher improvement ratio means larger depreciation deductions — and we routinely see property owners using county default ratios without ever questioning them.

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Cost Segregation — Front-Loading Your Deductions

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The 27.5-year schedule applies only to the building structure. Many components inside and outside the building qualify as 5-year, 7-year, or 15-year property under MACRS.

A cost segregation study identifies items such as:

• appliances
• flooring and carpeting
• cabinets and millwork
• specialty electrical and plumbing
• parking pads, fencing, hardscape, and some landscaping
• certain site components

For a $500,000 depreciable basis, it is common for a study to reclassify $80,000–$120,000 into shorter-life categories. Instead of depreciating $100,000 over 27.5 years (~$3,636/year), you might deduct $20,000+ per year in the early years — dramatically improving cash-flow on paper.

Studies typically cost $3,000–$7,000 and usually make sense when the depreciable basis exceeds $300,000–$400,000, which includes most San Diego properties.

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Bonus Depreciation in 2025 — Where We Are Now

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For tax year 2025, federal bonus depreciation is 40% for qualifying assets with a recovery period of 20 years or less. This follows the step-down schedule enacted by the Tax Cuts and Jobs Act:

• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027: 0%

This is critical if you’re planning renovations or replacing systems. The year the asset is placed in service determines the bonus percentage.

Example:
A $30,000 renovation placed in service in 2025 yields $12,000 in bonus depreciation. Delay until 2026 and that drops to $6,000. Wait until 2027 and there is no bonus.

Congress could change this, but planning should be based on current law, not speculation.

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The Recapture Trap — And Why Not Claiming Depreciation Backfires

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When you sell a rental property, the IRS applies depreciation recapture on the amount of depreciation you were allowed to take — whether or not you actually claimed it.

The recapture rate for residential rental property is up to 25% under IRC §1250. This is in addition to capital gains tax on the property’s appreciation.

This leads to a very common and very costly misunderstanding:

“If I don’t take depreciation, I won’t have to recapture it.”

Incorrect. The IRS calculates recapture on allowed or allowable depreciation. If you owned the property 10 years and never claimed depreciation, the IRS still recaptures 10 years’ worth at sale — meaning you lose the deductions and still pay the tax.

If depreciation was missed in prior years, we can often correct it using Form 3115 (Change in Accounting Method) and take the entire missed depreciation in a single adjustment year. It’s not always simple, but it is frequently worthwhile.

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Improvements vs. Repairs — The Line Is Blurrier Than You Think

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Whether an expenditure is treated as a repair (current-year deduction) or a capital improvement (added to basis and depreciated) depends on the Tangible Property Regulations (the TPR rules).

In general:

• Repairs keep the property in ordinary working condition and are expensed immediately.
• Improvements are betterments, restorations, or adaptations, and must be depreciated.

Examples:

• Replacing a broken garbage disposal → repair
• Replacing all plumbing lines in a unit → improvement
• Installing a new roof → improvement
• Spot-repairing a roofing section → depends on scope
• Repainting → usually a repair, unless part of a larger capital project

These distinctions meaningfully affect your current-year tax liability, so we evaluate each item individually rather than lumping everything together.

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California Considerations

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California generally conforms to federal MACRS recovery periods and methods for real property — but not for bonus depreciation. The state did not adopt federal bonus depreciation under the TCJA, and it continues to require straight-line depreciation for many assets.

This means:

• Your federal and California depreciation schedules may differ significantly.
• The gap is most noticeable in the first few years, when federal depreciation is front-loaded and state depreciation is not.

California also has differences in:

• passive activity loss rules
• how suspended losses carry over
• state-level depreciation recapture mechanics (which can differ from federal)
• treatment of assets across multi-state holdings

If you own rentals in and out of California, the state-specific adjustments matter.

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The Bottom Line

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Depreciation isn’t optional, and it isn’t simple. Done properly, it’s the largest non-cash deduction most rental property owners will ever claim. Done incorrectly — or ignored — it leaves money on the table every year and still hits you with recapture when you sell.

If you own rental property in San Diego County and aren’t confident your depreciation has been calculated correctly, that’s a conversation worth having. San Diego Tax Associates works with rental property owners across the region — reach out and we’ll take a look.

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