Skip To Content

Rental Property Deduction List for San Diego Landlords

Owning a short-term or a long-term rental property in San Diego is a fantastic way to supplement your income and have a long-term profit. Despite the fact that it is considered passive income, there are still various expenses that landlords incur, such as property marketing, operating costs, legal fees, wages for independent contractors, and so on. All of these expenditures can quickly add up over time. Fortunately, a lot of rental property expenses are tax-deductible, which can help minimize the amount of your taxable income at the end of the year.

Money-Saving Tax Deduction Checklist to Make the Most Out Of Your Return

The government and the Internal Revenue Service (IRS) allow you to claim tax deduction for certain expenses that are necessary for managing and maintaining a rental property. You may be eligible to claim tax deduction for things like mortgage payment, repairs, administrative costs, transportation, licenses, utilities, insurance premiums, and other business expenses.

For this reason, if you want to maximize your tax savings, it is essential to maintain accurate records of all your expenses. In addition, you can use these detailed records to both detect areas where you overspend but also to increase the cash flow. In this article, we will review main rental property deductions, including several that many landlords in San Diego overlook. We will also take a quick look at how deduction process works, how to claim expenses, and how to report your income. By understanding the basics of rental property tax deductibles and by creating a tax deduction checklist, you will be able to take full advantage of tax savings for landlords.

Swell Property Management: Helping Landlords in San Diego Realize the Full Potential Of Their Rental Property

What Is Rental Income?

According to IRS, rental income refers to any payment you receive for the occupation of your property. Today, most landlords operate on a cash basis. What this means is that rental income is counted when its actually received. Likewise, expenses are deducted when they are paid for. All amounts you receive as rent payment have to be reported in your gross income, even if you own a part interest. But keep in mind that your rental income includes more than just monthly rent checks. Besides normal rent amounts, there are other payments that qualify as rental income:  

Regular monthly rent payments – The rent you receive on a monthly basis as regular payment.

Advance rent – Advance rent is any amount received before the period it covers. This amount has to be included in the year you received it, regardless of which period it covers, or which accounting system you use. If you keep a security deposit as the final month’s rent, then it is considered an advance rent and should be reported as income when you receive it.

Security deposit – It is to be included in income if it is kept for the following reasons:

  • breaking the lease by vacating the property early
  • the tenant causes property damage that has to be repaired and you deduct the cost of repair as your expenses
  • The tenant breaks the terms of lease (certain conditions apply)

Payment for lease cancellation – If your tenant pays you because he or she canceled a lease, you should include this amount as your income.  

Tenant-paid expenses – If your tenant pays your expenses (water bill, sewage bill, utility bill), this amount also counts as your income. If they are deductible expenses, you can report them as write offs.

Trade for services – If you have accepted services from tenant instead of rent payment, you must also include it in your gross income.  

Lease with option to buy – These payments you receive are generally considered rental income.

Rental Property Tax Deduction Checklist For Landlords in San Diego

If you own a rental property, you will be happy to know that there are lots of business expenses you may claim on your tax return. Typically, you may be eligible for deductions on necessary and ordinary expenses for managing and maintaining a rental property. Necessary expenses are those that are considered appropriate for rental businesses, while ordinary expenses are those that are commonly accepted in rental industry.

Below, we have compiled a comprehensive tax deduction checklist that can help you significantly reduce the amount of your taxable income. This way you will be able to lower your taxable income and reduce your tax liability.

Advertising & Marketing

Any costs that are related to advertising your property to attract tenants are fully tax deductible. Examples include online listings, signage printing and installation, professional photography, launching a website, fees paid to advertise on other websites, and other marketing tools used for promotion.  

Auto & Travel Expenses

If you are a landlord who owns multiple properties in different locations or if your properties are far from your place of residence, you can write off your ordinary and necessary transportation expenses if you incurred them to manage, maintain, and conserve the property, or if you incurred them for the purpose of collecting the rent. These expenses encompass things like car mileage, airfare, hotels, and other trip costs. General commuting between your home and rental property cannot be deducted unless you use your primary residence as your principal business office. In general, if you use your personal vehicle for rental activities, you can deduct the expenses either by calculating the actual expenses or by the IRS standard mileage rate, which, for 2023 is 65.5 cents a mile.

Continuing Education

Any expenditures paid for educational courses or programs that maintain or improve skills needed in managing rental properties can be claimed. Common continuing education deductibles cover tuition, enrollment fees, books, supplies, equipment, paid subscriptions, seminars, etc.

Depreciation

In order to recover the costs of your revenue-producing property, you have to claim some of the costs every year through tax deductions. Depreciation can be deducted only on the part of your property that is used for renting. In order to depreciate it, your rental property has to meet 4 requirements:

  • You must be the owner
  • You must use it to generate revenue
  • The property is estimated to last more than one year
  • It has a measurable useful life

Depreciating begins when you place the property to produce the income, and it stops either when you fully recover your cost or when you stop renting it out, whichever happens first. Items and equipment that can be depreciated involve appliances, carpeting, computers, office machinery, automobiles, desks, file cabinets, fences, shrubbery, roads, rental building, etc.

Fees for Legal & Other Professional Services

You may also be eligible for deduction of specific fees you have paid for professional services used for your rental business, such as:

  • real estate agent who was hired to find new tenants
  • tax advisor, CPA, or computer software to prepare tax return
  • professional accounting & bookkeeping
  • independent contractors & consultants
  • marketing agency services
  • advisor services
  • lawyer fees
  • property manager services
  • leasing agent costs

Homeowners Association (HOA) Fees

Consult with a tax professional to determine whether you are eligible for HOA deductions. Under certain circumstances, you may be able to write off a portion of your HOA fees as a business expense.

Home Office Space

If you work from home office you may qualify for this tax break. If your office is located in a spare room in your house, you can claim the accompanying costs. Standard home office deduction is $5 per square foot (maximum 300 square feet). Other home office deductions include computer software or printer for example. Make sure you keep purchase receipts and record the time you spend managing your property.

Insurance Premiums

Almost any insurance premium you pay on your rental property is deemed an ordinary and necessary expense and therefore, it is deductible. For instance, you can claim homeowners insurance, landlord insurance, special peril insurance (flood, theft, hurricanes, earthquakes), liability insurance, employee’s health insurance, workers’ compensation insurance, etc.

Landscaping & Lawn Care

Recurring expenses paid for landscaping and lawn care also count as business expenditure, which is why they are tax deductible. Other seasonal services that can also be written off are gutter cleaning or debris removal for instance.

Licenses Fees

Additional costs that qualify for tax break include cost for the following: sales and use tax license, local business license, annual LLC registration, etc.  

Maintenance

Regular maintenance expenses that can be written off include heating and air conditioning service, smoke alarm inspection, air filter replacement, and similar annual or semi-annual maintenance services.

Mortgage Interest

The majority of homeowners and rental owners purchase their properties using mortgage. Thankfully for landlords, mortgage interest is one of the largest deductible expenses. It is important to clarify that the mortgage payment that goes toward the principal is not deductible, but the interest on the loan is. To get the total annual amount, simply multiply your monthly interest by 12. You can deduct interest on business credit cards used to purchase materials, supplies, and services for the property. Additionally, all origination fees, points, or interest on unsecured loans that are in relation to purchasing or refinancing a rental property can also be written off.

Office Supplies

Office supplies such as lease forms, legal forms, pens, paper, printer ink, record-keeping supplies, and stationery are fully tax deductible.

Property Management

A lot of costs that are associated with managing a rental unit are typically considered deductible. The same applies if you hire a professional property management company. Property managers help you with running day-to-day operations such as advertising, tenant screening, lease signing, rent collection, tenant communication, vendor coordination, and property maintenance. Property management experts strive to maximize your revenue and save your valuable time. With their assistance you will have peace of mind knowing that your investment is well taken care of. Property management fees are typically priced at about 8% of the monthly rent and can be deducted in full.

Property Tax

Depending on the location and size of your rental unit, property tax varies from a few hundred dollars to several thousands. Although this expense is deductible, the IRS limits the deduction of state taxes, local taxes, sales taxes, and property taxes to a combined amount of $10,000 ($5,000 for married individuals who are filing returns separately). What this means is that anything paid above this limit cannot be considered as tax exemption.

The Qualified Business Income (QBI) Pass-Through Deduction

Certain rentals, qualified as trades, businesses, or enterprises, may be eligible for the QBI deduction. Also known as pass-through deduction, it allows landlords to deduct 20% of the rental income from the total taxable amount. Claiming QBI for real estate tends to be complicated, so it would be a good idea to pay for the services of a tax professional.

Repairs

Firstly, you have to distinguish home improvements from repairs and maintenance. While home improvements are included in depreciation deductibles, you can write off certain repairs separately. In order to be deduced, repairs should keep the property in optimal, rentable condition, but should not add substantial value to the property. Examples of deductible repairs include fixing plumbing leak, repairing a light socket, unclogging the drain, etc.

Occupancy Tax (short-term rentals)

The current rate for the Transient occupancy tax (TOT) in the city of San Diego for short-term rental property that is leased for less than one calendar month is 10,50% of the monthly rent. This amount has to be collected and remitted every month to the City Treasurer. For more information and exemptions, visit the Office of the City Treasurer.

Telephone & Internet Service

The majority of landlords have a cell phone that is used strictly for business. In this case, the telephone bill is considered tax exemption.

Tenant Screening

Fees that you, as a landlord, pay for the professional services of tenant screening can be used to reduce the gross amount on which the tax is calculated.

Trash Collection

As a landlord, you can also deduct garbage and waste removal service expenses for your rental property.

Utilities

If you decide to pay for your rental unit’s utilities (electricity, water, gas, heating, AC, internet, cable, and satellite), they will be considered a tax break. Landlords usually include the cost in the monthly rent and later deduct utility costs as a business expense.

Rental Property Expenses That Are Not Deductible

Although there are many exemptions, IRS does not allow certain expenses to be written off. In general, these are the costs that are not deductible:

  1. Personal expenses unrelated to the rental property (food, clothing, travel, etc.)
  2. Repairs & upgrades (deduction may need to be spread out over time)
  3. Expenses accumulated during vacancy (such as mortgage interest or advertising)
  4. Travel expenses (unless for upkeep or management of the property)
  5. Fines and penalties (as a result of not complying with laws, rules, or HOA guidelines)

How Is Rental Income Taxed?

Along with rent collected, landlords must keep track of all other income they have received from renters, as well as business expenses that can later be written off as tax benefits. In order to determine the amount of income that will be taxable at the end of the year, you should subtract the total of all deductibles from the total income received. This calculation will provide insight into the overall income amount that should be filed.

Commonly Asked Questions

1. Can I write off my own labor on rental property?

You are not allowed to deduct personal labor, since you cannot be paid with after-tax money. However, expenses for professional services (maintenance, repairs, insurance, etc.) are considered tax breaks.

2. How do I properly document my rental property tax deductibles?

First and foremost, you must separate your business (rental) expenses from your personal expenditures. Make sure you keep detailed records, invoices, and receipts of which services, materials, or supplies you have purchased. This way, you can take advantage of all available IRS deductions for the landlords and can show proof in case you are selected for an audit. To ensure you are always up-to-date with all new tax laws and regulations, consult with tax advisors.

3. What amount is considered advance rent in a 10-year lease contract?

For instance, if you have a 10-year lease, the payment may be as follows: $6,000 for the first year and $6,000 for the last year of the lease. What this means is that you have to report a total of $12,000 as your income in the first year, as advanced payments are always reported as income in the year you actually receive them.

4. How do I report rental property income/expenses?

To report income or loss from rental estate such as apartments, rooms, or buildings, you should file Schedule E (Form 1040) or Form 1040-SR. If you own four or more rental units, you should fill out and attach a Schedule E form for each of the properties. By keeping detailed records of all your purchases, it will be significantly easier to fill out the form at the end of the year.

Disclosure

The content and materials of this article, except otherwise stated on this website, have been prepared by and are the property of Swell Property. This material is intended for informational purposes only and should not be used for any other purposes. It is meant solely to inform, and not to give advice or instructions on how to move forward. The information presented here does not constitute legal advice, it does not represent professional advice and is not guaranteed to be accurate, complete, current, or error-free. The content is subject to change without notice. Laws, rules, and regulations may vary by location, city, or state. If you have legal questions regarding your rental property, consult your legal advisor directly.

Disclaimer

All information, material, and content presented in this article is intended to inform and not to be relied upon to make decisions; it is not to be considered as tax advice or legal advice. For advice on rental property business procedures or tax obligations, consult your tax advisor or attorney.

About the Author

David Miller is Real Estate Advisor at Swell Property. Whether you’re eyeing a new home, an investment property, securing the best mortgage, or aiming to enhance your property’s value, my focus is on providing personalized guidance and strategy for your success. I listen to your needs attentively, ensuring that my expertise aligns perfectly with your real estate goals. My clients’ satisfaction and referrals are the true measure of my success in San Diego’s dynamic real estate market. If you’re searching for a real estate professional who’s deeply committed to your success, I’m eager to demonstrate my expertise and win your trust. Let’s connect and start this journey together.

David Miller Real Estate Advisor

Trackback from your site.

Leave a Reply

*
*