As a California rental property owner, the state tax code allows you to claim deductions for mortgage interest, property taxes, repairs, maintenance, insurance, and even depreciation. Taking advantage of all these available tax benefits can help you reduce your overall tax burden and potentially increase your return on investment. 

Let’s cover the top deductions landlords in California can claim.

California rental property tax deduction rules

Tax write-offs for rental property owned in California can substantially lower your taxable net income. For example, paying $10,000 in mortgage interest and $5,000 in property taxes on your rental property could let you potentially deduct $15,000 from your rental income before calculating your tax liability. 

Here are some of the top tax deductions (and caveats) for California rental property owners.

Passive activity loss limitations

Rental activities are generally considered passive, limiting your ability to deduct losses against other income. You can deduct up to $25,000 in passive losses if your modified adjusted gross income is under $100,000. This deduction phases out as your income increases, disappearing entirely at $150,000 (Source: IRS Publication 925).

For real estate professionals spending over 750 hours annually on real estate activities, these limitations may not apply, but the requirements to meet real estate professional status (REPS) are significant, complicated and beyond the scope of this article.

Ordinary and necessary expenses

You can deduct ordinary and necessary expenses related to your rental property, including and not limited to:

• Mortgage interest
• Property management fees
• Repairs and maintenance
• Utilities
• Insurance premiums
• Advertising costs

Travel expenses for property management are also potentially deductible, but you must allocate costs if combining business with personal trips. Home office expenses may be deductible if you use a portion of your home exclusively to manage your rental properties.

Condominium and cooperative rules

If you own a condo or co-op unit that is held for investment purposes, you can typically deduct your share of property taxes and mortgage interest. Special assessments for improvements are typically not fully deductible in the year incurred but may increase your property’s basis.

Maintenance fees or dues are generally deductible as rental expenses. However, you must depreciate portions allocated to capital improvements over time rather than deduct them immediately.

Property tax deduction

You can deduct property taxes paid on your rental property. This deduction includes taxes assessed by state and local for general public welfare, such as roads or schools.

Special assessments for local benefits that increase property value are usually not deductible in the year incurred. However, you can often add these to your property’s overall cost basis.

Remember to prorate property taxes if you only owned the property for part of the tax year as you cannot deduct taxes paid by others prior to your period of ownership.

As with other expense records, keep all tax bills and payment records to support your deductions when filing your annual tax return.

Other rental property tax deductions in California

Schedule E is the form used for reporting rental income and deductions. You can often claim several additional tax deductions on this form to reduce your taxable rental income.

Professional services are usually deductible expenses. You can write off fees paid to attorneys, accountants, and property managers for rental-related activities. These expenses might include legal costs for eviction proceedings or accounting services for financial management.

Insurance premiums are another valuable deduction, and you can claim costs for the following:

• Fire insurance
• Theft coverage
• Flood protection
• Landlord liability policies

Travel expenses related to your rental property are also usually deductible. Keep detailed records of trips to perform rental-related activities, such as:

• Collect rent
• Handle tenant issues
• Perform maintenance

For auto expenses, you can deduct actual vehicle expenses (unusual) or use the standard mileage rate set by the IRS, which is the method favored by most rental property owners.

Home office deductions may apply if you use a portion of your home exclusively for rental business activities. That can include space for administrative work or a workshop for repairs.

As you grow your rental property portfolio, employee and contractor wages are deductible business expenses. This deduction covers payments to property managers, maintenance staff, or repair professionals hired for your rental property.

Tips for managing your rental property taxes, income, and expenses

To help your rental property management operations run smoothly, we recommend keeping meticulous records of all income and expenses related to your rental property. These records should include rent payments, maintenance costs, and property improvements.

A comprehensive management platform like Stessa makes this easy.

Stessa can import, categorize, and index all your expenses securely and seamlessly. Connect to banks, lenders, credit cards, and property managers to see all your data in one place:

• Bookkeeping: Traditional double-entry bookkeeping can be overkill for most rental property owners. Stessa keeps accounting easy so you can focus on growing your portfolio.
• Mobile app: Scan receipts to maximize tax deductions, categorize income and expenses on the go, and retrieve your data from virtually anywhere.
• Financial reporting: Stessa’s real-time dashboards and advanced reports help you own and manage your property like the pros.

With Stessa Cash Management, you also get a dedicated bank account for your rental business to simplify tracking your cash flow and expenses. This feature allows you to set up an unlimited number of accounts, requires no minimum balance, includes a cash-back debit card, and offers a competitive APY.

Plus, you get a personalized tax package with our Tax Center, which includes an income statement, net cash flow report, and a ZIP file with receipts for backup. 

Get started with Stessa for free and gain access to our comprehensive landlord tools and accounting resources. 

The information contained in this article is provided for informational purposes only and should not be construed as legal, tax, or financial advice on any matter. Stessa is not liable for any actions taken or not taken based on the contents of this article and advises readers to seek professional legal, tax, or financial advice on which to base their decisions.