Rental property tax strategy: steps that lower what you owe
Whether you own a rental now or are thinking about buying one, the biggest tax savings come from decisions made at purchase and in the first year. Here is how to approach it.
Before you buy: six steps
Decide how you will own it
Personal name, LLC, or with a partner. Ownership affects liability, California fees, and how future sales and transfers are taxed. Decide before closing, because moving title later can trigger reassessment or lender issues.
Pick long-term or short-term rental
Long-term rentals report on Schedule E under the passive activity rules. A short-term rental with an average guest stay of seven days or less, where you materially participate, may let losses offset other income. Check local short-term rental rules first.
Plan for the purchase price split
Only the building depreciates, not the land. In Los Angeles, land is often a large share of the price. A reasonable allocation, backed by the assessor's ratio or an appraisal, sets your depreciation for the next 27.5 years.
Ask about cost segregation
For larger purchases, a cost segregation study can move 20–30% of the building's cost into short-life categories. With 100% bonus depreciation now permanent for property acquired after January 19, 2025, much of that can be deducted in year one on your federal return.
Check your income against the loss limits
Use the estimator below. If your income is above $150,000, early-year losses may carry forward rather than lower this year's tax, which changes how aggressive depreciation should be.
Set up records from day one
A separate bank account, receipts for every repair and improvement, a mileage log, and a record of hours you spend if you may qualify as a real estate professional.
How much of a rental loss can you deduct this year?
Most owners who actively participate (approving tenants, setting rent, approving repairs) can deduct up to $25,000 of rental losses against wages and other income. The allowance phases out between $100,000 and $150,000 of modified adjusted gross income. Married couples filing separately have different limits.
An estimate only. Real estate professionals and qualifying short-term rentals are not subject to this limit.
Strategies for current owners
Repairs vs. improvements
Repairs are deducted now; improvements are depreciated. The de minimis safe harbor lets you expense items up to $2,500 per invoice when you elect it each year.
Catch up missed depreciation
If depreciation was never claimed, you can usually catch it up on one return with Form 3115, instead of amending past years.
Real estate professional status
More than 750 hours a year in real estate, and more than half your working time, can make rental losses fully deductible. It requires careful time records.
Property tax is fully deductible
Property tax on a rental is a Schedule E expense. It is not subject to the SALT cap that limits property tax on your home.
QBI deduction
Rentals run as a business may qualify for the 20% qualified business income deduction. A safe harbor applies at 250 hours of rental services a year.
Plan the exit
A 1031 exchange defers gain; converting a former home may allow part of the gain to be excluded. Depreciation taken is generally taxed at up to 25% on sale. Plan the sale a year ahead.
What changes on your state return
No bonus depreciation
California does not follow federal bonus depreciation, so expect a separate state depreciation schedule.
$800 LLC annual tax
A rental held in a California LLC owes at least $800 a year, plus an LLC fee once gross receipts reach $250,000.
Property tax and transfers
Proposition 13 sets the assessed value at purchase. Transfers into or out of entities, or to children, can trigger reassessment. Check before you change title.
Rental property questions
Should I put my rental in an LLC?
An LLC can help with liability, but for taxes a single-member LLC is usually ignored and the rental still goes on Schedule E. In California the LLC adds an $800 annual tax. We weigh the cost against the protection and your insurance.
Can I deduct rental losses against my salary?
Up to $25,000 a year if you actively participate and your modified AGI is under $100,000. The allowance shrinks by 50 cents for each dollar above $100,000 and is gone at $150,000. Unused losses carry forward.
Does California follow federal bonus depreciation?
No. California does not conform to federal bonus depreciation, so the same rental can have different depreciation on your federal and California returns. We track both.
What is a cost segregation study?
An engineering-based study that splits a building's cost into parts with shorter lives, such as flooring, cabinets, and site work. Those parts can be depreciated faster, and with 100% bonus depreciation, often written off in the first year.
How does a 1031 exchange work?
You sell investment property and buy replacement property through a qualified intermediary. You have 45 days to identify the replacement and 180 days to close. Done correctly, the gain is deferred.
Buying, owning, or selling a rental? Let's plan it first.
A short consultation before you sign can be worth more than any deduction found after the fact.