California landlords can deduct a wide range of expenses from their rental income. Knowing what qualifies—and what doesn't—helps you have informed conversations with your CPA and avoid leaving money on the table.
This article provides general information about tax deductions for educational purposes. It is not tax advice. Tax laws are complex and change frequently. Consult a qualified tax professional for guidance on your specific situation.
How Rental Income Is Reported
Most individual landlords report rental income and expenses on Schedule E (Form 1040), Part I. This is separate from Schedule C, which is used for self-employment income. The distinction matters: Schedule E rental income generally avoids the 15.3% self-employment tax that applies to Schedule C income.
If you own rental property through an LLC or S-corp, the entity files its own return (Form 1065 or 1120-S), and your share of income flows through to your personal return via Schedule K-1.
Common Deductible Expenses
The IRS allows landlords to deduct "ordinary and necessary" expenses incurred in managing rental property. Here's what typically qualifies:
Schedule E Expense Categories
Property Management Fees
Fees paid to property managers or leasing agents are fully deductible. This includes percentage-based management fees (typically 8-12% of rent collected), leasing fees for finding new tenants, and fees for specific services like rent collection or maintenance coordination.
Travel Expenses
Travel to your rental property for management purposes is deductible. For 2026, the IRS standard mileage rate is 72.5 cents per mile for business use (up from 70 cents in 2025). Alternatively, you can track actual vehicle expenses. The standard mileage method is simpler; the actual expense method may yield a larger deduction depending on your vehicle costs.
If your rental property is out of state, airfare, lodging, and 50% of meals during property management trips may also be deductible—provided the primary purpose of the trip is business-related.
Home Office Deduction
If you use a dedicated space in your home exclusively for managing your rental properties, you may qualify for a home office deduction. The simplified method allows $5 per square foot (up to 300 square feet, or $1,500 maximum). The regular method requires calculating the percentage of your home used for business and applying it to actual expenses.
Repairs vs. Capital Improvements
This distinction trips up many landlords. Repairs maintain the property in its current condition and are deductible in the year incurred. Improvements add value, extend the property's life, or adapt it to new uses—and must be capitalized and depreciated over time.
Quick Reference: Repairs vs. Improvements
Generally Repairs (Deductible)
- • Fixing a leaky faucet
- • Patching drywall holes
- • Repainting walls
- • Replacing broken windows
- • Fixing appliances
- • Unclogging drains
Generally Improvements (Capitalize)
- • New roof
- • Adding a room or deck
- • Replacing entire HVAC system
- • Kitchen remodel
- • New flooring throughout
- • Upgrading electrical system
The IRS tangible property regulations (Treas. Reg. §1.263(a)-3) provide detailed guidance, but gray areas exist. When in doubt, document your reasoning and consult a tax professional.
Depreciation
Depreciation allows you to deduct the cost of your rental building over time, even though you haven't "spent" anything that year. The IRS requires you to depreciate rental property—you can't skip it and claim a larger deduction later when you sell.
Standard Depreciation Periods
- Residential rental property: 27.5 years (straight-line)
- Commercial property: 39 years (straight-line)
- Land: Not depreciable (land doesn't wear out)
2025-2026 Changes: Bonus Depreciation Restored
The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. This means certain improvements and personal property (appliances, flooring, HVAC components) can be fully deducted in year one instead of depreciated over multiple years.
The law also increased Section 179 expensing limits to $2.5 million (up from $1 million), with a phase-out threshold of $4 million. Section 179 is particularly useful for improvements like roofs, HVAC systems, and security systems that don't qualify for bonus depreciation.
Important: California does not conform to federal bonus depreciation rules. If you claim bonus depreciation on your federal return, you may need to make adjustments on your California return (Form 540, Schedule CA). Your CPA can help navigate these differences.
Depreciation Recapture
When you sell a rental property, you'll owe "depreciation recapture" tax on the depreciation you claimed (or should have claimed). This is taxed at a maximum rate of 25%, separate from capital gains. The more accelerated depreciation you claim through bonus depreciation, the more recapture you may face upon sale.
Passive Activity Rules
Rental income is generally considered "passive" under IRC §469, which limits your ability to use rental losses to offset other income like wages.
The $25,000 Exception
If you "actively participate" in managing your rental (making management decisions, approving tenants, arranging repairs), you can deduct up to $25,000 in passive rental losses against non-passive income. This allowance phases out between $100,000 and $150,000 of modified adjusted gross income (MAGI) and disappears entirely above $150,000.
Real Estate Professional Status
Landlords who spend more than 750 hours per year in real estate activities (and more time in real estate than any other occupation) may qualify as "real estate professionals." This allows rental losses to be treated as non-passive, potentially offsetting unlimited amounts of other income. The requirements are strict and documentation-intensive.
Qualified Business Income (QBI) Deduction
Under IRC §199A, landlords may deduct up to 20% of qualified rental income. The OBBBA made this deduction permanent and raised income thresholds, allowing more landlords to claim it in full.
The QBI deduction has complex rules around income limits, specified service trades, and W-2 wage limitations. It's calculated on Form 8995 or 8995-A and flows to your 1040.
California-Specific Considerations
SALT Cap Doesn't Apply to Rentals
The state and local tax (SALT) deduction cap ($40,000 for joint filers under OBBBA, up from the previous $10,000) applies to personal residence taxes, not rental property taxes. Property taxes on your rentals remain fully deductible as business expenses on Schedule E.
Proposition 13
California's Proposition 13 limits property tax increases to 2% annually based on the assessed value at purchase. When you acquire property, it's reassessed to market value. Understanding your property's Prop 13 base year value matters for projecting future tax obligations.
Record-Keeping Requirements
The IRS requires you to keep records supporting your income and deductions. For rental property, maintain:
- Receipts and invoices for all expenses
- Bank and credit card statements showing payments
- Mileage logs if claiming vehicle expenses
- Lease agreements and tenant correspondence
- Records of improvements (for depreciation and basis calculations)
- 1099s received from property managers or tenants
Keep records for at least three years after filing (the standard IRS audit window), though seven years is safer for property-related records due to basis calculations affecting future sales.
Landlords use various tools to organize this information—from spreadsheets to property management software like Buildium or AppFolio, to cash flow analyzers for understanding overall financial health.
When to Get Professional Help
Consider working with a CPA or tax professional if you:
- Own multiple properties across different states
- Are considering cost segregation studies to accelerate depreciation
- Have rental losses you want to use against other income
- Are planning a 1031 exchange or property sale
- Want to evaluate real estate professional status
- Need help navigating California's non-conformity to federal rules
The cost of professional tax advice is itself deductible as a rental expense.
Key Takeaways
- Most landlords report rental income on Schedule E, avoiding self-employment tax
- Common deductions include mortgage interest, property taxes, insurance, repairs, and depreciation
- Repairs are immediately deductible; improvements must be depreciated
- The 2025 OBBBA restored 100% bonus depreciation and increased Section 179 limits
- California doesn't conform to federal bonus depreciation—plan for state adjustments
- Passive loss rules limit deductions above $150,000 MAGI unless you qualify as a real estate professional
- Keep detailed records for at least seven years
Additional Resources
- IRS Publication 527 — Residential Rental Property
- Schedule E Instructions — Form 1040
- California FTB — Rental Income