Bay Area Real Estate Accounting: A 2026 Guide to California Rules for Investors and Owners

Bay Area real estate accounting is federal rental accounting plus a second set of California books. California does not allow federal bonus depreciation, caps Section 179 expensing at $25,000, reassesses property under Proposition 13 when ownership changes, and charges every LLC an $800 annual tax, while cities such as Oakland add their own transfer tax at sale.

For an investor holding a San Francisco condo, an Oakland duplex or a San Jose single-family rental, those differences mean two depreciation schedules, a property tax file that tracks base year values, and an entity calendar that runs on Franchise Tax Board deadlines. This guide covers what Bay Area real estate accounting has to handle in 2026 and how to set up records that hold up at tax time.

What Bay Area Real Estate Accounting Covers

Most rental owners start with the federal picture: Schedule E income, expenses, depreciation and passive loss limits. Bay Area owners file a California return on top of that, and the state does not simply copy the federal numbers. The broader state rules for landlords, including how the state treats rental income, sit in our guide to California rental property tax rules. This page focuses on the accounting layer that Bay Area portfolios need on top of those rules.

In practice that layer has four parts:

• A California depreciation schedule kept alongside the federal one, because bonus depreciation and Section 179 amounts differ.
• A property tax file for each parcel showing its base year value, the date of acquisition and any new construction that could trigger a supplemental assessment.
• An entity file for each LLC that holds property, with the $800 annual tax, any LLC fee and the change in ownership filings that apply to legal entities.
• A closing file for each purchase and sale, recording city and county transfer taxes and how they affect basis or the amount realized.

Owners with several properties or entities usually keep these in one ledger with a class or location for each parcel. If the portfolio has grown past a handful of LLCs, the structure in our guide to multi-entity bookkeeping for real estate firms applies directly.

California Conformity: Where the State Return Departs From Federal

The biggest accounting difference for Bay Area investors in 2026 is depreciation. On the federal side, the One Big Beautiful Bill Act restored bonus depreciation at 100% on a permanent basis. IRS Notice 2026-11 explains that the law amended Section 168(k) "to provide taxpayers with a permanent 100 percent additional first year depreciation deduction for qualified property acquired and placed in service" after January 19, 2025 (IRS Notice 2026-11). Our explainer on Notice 2026-11 and the transition rules covers the federal election details.

California has not adopted that change. The Franchise Tax Board's 2025 instructions for Form FTB 3885A say California law conforms to the Internal Revenue Code "as of January 1, 2025," which predates the July 2025 federal law, and the same instructions list "Additional depreciation (IRC Section 168(k))" among the continuing federal and state differences (FTB 3885A instructions). Those instructions also set the California Section 179 limit: "For California purposes, the maximum IRC Section 179 expense deduction allowed is $25,000," with that limit reduced dollar for dollar once the cost of qualifying property placed in service exceeds $200,000.

The result is that any component a federal return writes off in year one through bonus depreciation goes back on the regular MACRS schedule for California. The building itself is unaffected, because residential rental property is depreciated over 27.5 years under both systems and was never eligible for bonus depreciation. The gap opens on the shorter-lived components that a cost segregation study separates out, such as appliances, carpeting, fencing and paving.

Worked example: one Oakland duplex, two depreciation figures

Assume an investor buys an Oakland duplex in 2026 and a cost segregation study identifies $60,000 of 5-year property and $40,000 of 15-year land improvements. The figures below use the half-year convention and the standard MACRS methods (200% declining balance for 5-year property, 150% declining balance for 15-year property) set out in Publication 946.

The California return shows $86,000 less depreciation in year one than the federal return. That difference reverses over the following years as California keeps depreciating the components the federal return has already expensed, so the accounting file has to carry both schedules until every component is fully depreciated or sold. The two bases also differ at sale, which changes the gain and the depreciation recapture figure on each return.

Losses follow the same pattern. Federal passive activity loss rules decide how much of a rental loss is usable each year, and a California loss computed with lower depreciation will be smaller, so the suspended loss carryforwards on the two returns drift apart and need separate tracking.

Proposition 13 and Proposition 19 Reassessment Basics

Property tax is the second area where Bay Area accounting differs from most states. The State Board of Equalization explains that Proposition 13 "limited the property tax rate to 1 percent plus the rate necessary to fund local voter-approved bonded indebtedness" and that the assessed value for most property is "the prior year's assessed value adjusted for inflation up to 2 percent." When there is a change in ownership or completed new construction, "the new assessed value will be the market value of the property as of the date that it changed ownership or was newly constructed" (BOE Publication 29).

For accounting purposes, three events matter:

1. Purchase. The new base year value is set at market value, and the county issues a supplemental assessment for the rest of the fiscal year. That bill arrives separately from the regular annual bill, so the books need an accrual for it in the year of purchase.
2. New construction. An addition or a major remodel creates a new base year value for the added portion. Keeping a clear line between repairs and improvements in the ledger helps when the assessor asks what was built.
3. Entity changes. Moving property into an LLC, admitting new members or buying out a partner can count as a change in ownership or control of a legal entity. The BOE's Legal Entity Ownership Program requires the entity to file Form BOE-100-B within 90 days of a qualifying change, and penalties apply when it does not.

Proposition 19 narrowed the parent-to-child exclusion that many Bay Area families relied on to pass rentals down at the parents' assessed value. According to the BOE, the exclusion now applies only to "a family home" or family farm that becomes "the principal residence of the transferee," and the exclusion is eliminated for "other real property other than the principal residence." Even for a qualifying family home, the exclusion is capped at the factored base year value plus $1 million, indexed to $1,044,586 for transfers from February 16, 2025 through February 15, 2027 (BOE Proposition 19). An inherited rental is therefore reassessed at market value, and the heir's books should budget for the higher bill from the date of transfer.

If an assessment looks too high after a purchase or a decline in market value, the property tax appeal process runs through the county assessment appeals board.

Transfer Taxes in San Francisco and Oakland

Transfer taxes are paid at closing and belong in the closing file. IRS Publication 551 lists transfer taxes among the settlement costs a buyer includes in the basis of the property, and a seller records the transfer tax it pays as a cost of the sale. Either way, the figure should come from the settlement statement and be posted to the right account.

Oakland's real property transfer tax is tiered by the value of the transfer. The City of Oakland publishes the following rates, effective since January 2019 (City of Oakland):

The city states that "the seller and buyer are jointly and severally liable for payment of the tax," and the tax is paid when the deed is recorded with the Alameda County Recorder. Who bears it in a given deal is a contract term, so the accounting entry should follow the settlement statement.

San Francisco charges its own tiered real property transfer tax, administered by the city's Assessor-Recorder. Pull the current San Francisco rate table from the Assessor-Recorder at the time of the transaction and record the actual amount from the closing statement.

Transfer taxes are separate from the income tax treatment of a sale. A 1031 exchange defers federal and California income tax on the gain, but the city transfer tax is still due at recording. For exchanges into replacement property in another state, see our guide to state-specific 1031 exchange rules.

The $800 California LLC Tax and LLC Fee

Many Bay Area investors hold each property in its own LLC for liability reasons. California charges each one a minimum annual amount. The Franchise Tax Board states: "Every LLC that is doing business or organized in California must pay an annual tax of $800. This yearly tax will be due, even if you are not conducting business, until you cancel your LLC" (FTB).

The first-year payment is due by the 15th day of the 4th month after the LLC files with the Secretary of State, and later payments are due by the 15th day of the 4th month of each taxable year, using Form FTB 3522. The temporary first-year exemption only covered tax years beginning from January 1, 2021 through December 31, 2023, so an LLC formed in 2026 owes the $800 for its first year.

An LLC with California total income above $250,000 also owes an LLC fee, estimated and paid by the 15th day of the 6th month of the current tax year on Form FTB 3536:

Investors weighing one LLC per property against a single holding company should price the $800 tax and any fee for each entity. Our guide to using a single-member LLC for a rental property walks through the federal side of that choice.

Setting Up Bay Area Real Estate Accounting Records

A workable setup for Bay Area real estate accounting tends to include the following:

• Two fixed asset registers per property, one federal and one California, built from the same cost segregation report so totals reconcile.
• A property tax calendar showing each parcel's base year, the supplemental bill from the purchase year and the installment dates on the annual bill.
• An entity compliance calendar listing the FTB 3522 and FTB 3536 due dates for every LLC and any BOE-100-B filings after ownership changes.
• Closing statements stored with the journal entries they support, so transfer taxes, prorations and loan costs are traceable.
• A suspended loss schedule for each return, since federal and California passive loss carryforwards diverge once depreciation differs.

Keeping these records monthly is easier than rebuilding them in March. An owner who receives a clean ledger, both depreciation schedules and a list of entity events each year gives the tax preparer what is needed to file both returns without guesswork.

Frequently Asked Questions

Does California allow 100% bonus depreciation on rental property in 2026? No. California conforms to the Internal Revenue Code as of January 1, 2025 and lists Section 168(k) additional depreciation as a continuing difference, so property expensed federally under bonus depreciation is depreciated under regular MACRS on the California return.

What is the California Section 179 limit? The FTB's 2025 instructions set a maximum California Section 179 deduction of $25,000, reduced dollar for dollar once the cost of qualifying property placed in service exceeds $200,000. The federal limit is much higher, so returns that elect Section 179 will usually carry a California adjustment.

Does an inherited Bay Area rental keep the parent's Prop 13 value? Generally not. Under Proposition 19, the parent-child exclusion applies only to a family home or family farm that becomes the child's principal residence, and even then only up to the indexed $1 million amount above the factored base year value. A rental property is reassessed at market value.

Do I pay the $800 LLC tax if my LLC had no rental income this year? Yes. The FTB states that the annual tax is due even if the LLC is not conducting business, until the LLC is cancelled.

Who pays the Oakland transfer tax? The City of Oakland says the buyer and seller are jointly and severally liable. The purchase contract decides who actually pays it, and the settlement statement shows the amount.

Next Step

Madras Accountancy supports US CPA firms and property owners with real estate bookkeeping, fixed asset and depreciation schedules, and tax return preparation support, including the separate state schedules that California returns require. To talk through your Bay Area portfolio or your firm's real estate clients, contact our team.