If even talking about taxes makes you cringe, you’re not alone. A Pew Research Center study in 2024 revealed that more than half of Americans not only believe that they pay too much in taxes but also that the complexity of the tax system itself is wholly unnecessary.
So, let’s put a positive spin on the topic of taxes if we can.
Let’s focus on the tax deductions that are available to Santa Rosa rental property owners. Because they do exist, they are pretty generous, and they can be leveraged to reduce your overall tax liability when you know what you’re doing.
We’re not tax experts. We’re Santa Rosa property managers. But we work with owners and investors all the time on finances, accounting, bookkeeping, and ,yes, taxes. This is our professional advice, and we always tell our clients to seek tax help from specific tax experts. Like your CPA. Or a tax attorney.
Here’s what we can tell you about maximizing your Santa Rosa rental property tax deductions.
The Depreciation Deduction
Depreciation is the loss in value of your rental property over time caused by factors such as wear and tear or obsolescence. For tax purposes, the IRS allows you to deduct this loss to account for property deterioration—even if your property’s actual market value has increased.
To simplify it even further, depreciation is basically an amount that looks like a loss on paper which reduces your taxable rental income without impacting your cash flow.
The depreciation deduction is one of the most valuable tax benefits of being a rental property owner.
Here’s why:
- Lower Taxable Income. By claiming depreciation, you reduce the amount of income the IRS can tax, which could significantly lower your overall tax burden.
- Improved Cash Flow. Because depreciation reduces your taxes, you get to keep more of your rental income—giving you extra funds for property maintenance or additional investments.
- Long-Term Benefits. Depreciation deductions add up year after year, making them a key factor in maximizing your investment’s profitability over time.
Not everything related to your rental property qualifies for depreciation. The building can be depreciated, but not the land it’s on. Residential rental properties typically depreciate over 27.5 years, while non-residential properties are depreciate over 39 years.
Here’s a step-by-step guide to calculating depreciation on your rental property:
1. Determine the Property’s Basis
This is typically the purchase price of your property, including settlement costs (but excluding the cost of land).
2. Allocate Value Between Building and Land
Use the tax assessor’s valuation or an appraisal to determine the proportion of your purchase that applies to the building vs. the land. Only the building’s value can be depreciated.
3. Divide by Depreciation Period
For residential properties, divide the building’s value by 27.5 years.
4. Prorate in the Year of Purchase
If you purchased the property mid-year, you’ll need to prorate your depreciation for the number of months the property was in service.
5. Use IRS Form 4562
Report your depreciation deduction on IRS Form 4562 and include it when filing your taxes.
Depreciation begins when the property is available for rent. The depreciation clock starts ticking not when you buy the property but when you make it available for rent (even if it’s vacant). To avoid errors or audits, maintain detailed records of purchase costs, depreciation schedules, and any improvements made to the property.
Local Property Taxes are Federal Deductions
Local property taxes are assessed by municipalities or counties based on the value of your property. For rental property owners, these taxes are considered an operating expense. The good news is that the IRS allows property owners to deduct these taxes from their rental income when calculating taxable income.
Every dollar saved on taxes is a dollar you can reinvest into your property or portfolio. By properly deducting local property taxes, you reduce your taxable rental income and, in turn, your overall tax liability. Combine this with other deductions, like maintenance costs or a depreciation deduction, and you could significantly improve your rental property’s profitability.
However, improperly claiming deductions—or failing to claim them at all—could leave money on the table. Filing accurately is essential not only for saving money but also for complying with the IRS.
The IRS allows you to deduct property taxes imposed on real estate used for rental purposes. However, these taxes must meet the following criteria:
1.Legally Assessed Taxes
The taxes must be assessed by the appropriate taxing authority, such as a local government. Voluntary payments, like special assessments for improvements (maybe adding a sidewalk), are generally not deductible.
2.Taxes on the Rental Period
The deduction applies only during the period when the property is being used as a rental. If you lived in the property for part of the year, you may only deduct property taxes corresponding to the rental period.
3.Property-Specific Taxes
The taxes must be specifically applied to the property—not broader charges like homeowner association fees or unrelated fines.
Use Schedule E (Supplemental Income and Loss) of your IRS Form 1040 to report property taxes. Look for line 16, where you’ll enter the amount of property taxes you paid as part of your rental expenses.
Always Deduct Your Santa Rosa Rental Property Operating Expenses
Operating expenses are the ongoing costs required to manage and maintain your Santa Rosa rental property. These expenses are necessary for the day-to-day operation of your property and are an essential part of any landlord’s financial plan. For tax purposes, many operating expenses are fully deductible, helping you reduce your taxable rental income.
Common examples of operating expenses include:
- Property Maintenance (think repairs, landscaping, pest control)
- Utilities (if paid by you, the property owner, rather than the tenant)
- Property Management Fees
- Insurance Premiums
- Advertising and Marketing Costs (such as listing and ads to attract tenants or commissions paid to agents when renting your home)
- Legal, Accounting, and Professional Fees
- Office Supplies and Equipment
Critically, not all expenses are created equal. Improvements, which add long-term value to your property (like upgrading a roof or adding a new structure), are not considered deductible operating expenses. Instead, they must be capitalized and depreciated over several years.
Here’s how to effectively gather up your operating expenses and deduct them from your taxes.
- Keep Accurate Records
Documentation is key when deducting maintenance and other operating expenses. From receipts for lawn care to invoices for emergency plumbing repairs, keep a record of every cost related to the day-to-day operations of your property. You’ll also want to maintain detailed records of payment methods, dates, and vendors.
- Identify Qualifying Expenses
Not all expenses are deductible. Make sure your claimed costs meet the qualifications for “ordinary and necessary” operating expenses under IRS rules. For example, if you hire a contractor to repaint your rental unit between tenants, this is a deductible maintenance expense. However, if you decide to renovate with high-end appliances and custom cabinetry, that would be considered a property improvement, which requires different treatment on your taxes.
- Separate Personal and Business Use
If you own a property that doubles as personal and rental use (for example, a vacation property that you rent part of the year), you must track expenses accordingly. Only the costs related to the rental portion of the property are deductible. For instance, if your rental property is available to tenants 75% of the year and personally used by you for the remaining 25%, you can only deduct 75% of the operating expenses like maintenance, insurance, and utilities.
- Understand Depreciation vs. Deduction
While operating expenses like maintenance, utilities, and property management fees are immediately deductible, more considerable expenses, like a new HVAC system or a roof replacement, must be depreciated. This requires allocating the cost of the improvement over its useful life as determined by the IRS. Knowing the difference helps you maximize allowable deductions while staying compliant with tax laws.
- File the Correct Tax Form
Operating expenses are typically reported on Schedule E (Supplemental Income and Loss) of your tax return. This form allows you to itemize your property’s income, expenses, and depreciation
- Stay Updated on Tax Code Changes
Tax laws are constantly changing, and deductions for rental properties are no exception. Staying informed about updates to the tax code can help you identify new opportunities to save. Consider subscribing to tax newsletters or working with a CPA knowledgeable about real estate.
Common Mistakes to Avoid While Maximizing Tax Deductions
The opportunities to leverage tax deductions with your rental property in Santa Rosa are abundant, but there are also mistakes that are easily made. Here are a few common pitfalls to watch out for:
- Failing to Document Expenses. Deduction claims without supporting records may be disallowed during an audit.
- Improperly Categorizing Improvements. Treating property improvements as deductible expenses instead of capital expenditures is a frequent mistake.
- Overlooking Shared Costs. If you own a property for both personal and rental use, forgetting to prorate expenses can lead to inaccuracies.
- Missing Deadlines. Late or incomplete tax filings can result in penalties and missed deductions.
Avoiding these errors ensures your deductions are accurate and compliant.
If you have questions about tax deductions or managing your Santa Rosa rental property, we’d love to talk with you. Please contact us at Prestige Real Estate & Property Management. We manage homes in Sonoma County, including Santa Rosa, Windsor, Sebastopol, Petaluma, and Rohnert Park.
