Owning rental property in Los Angeles can be a powerful wealth-building strategy.
But if you are not thinking strategically about taxes, record keeping, and long-term planning, you could be leaving serious money on the table. We recently sat down with CPA Andrea Rashke to talk through the most common tax questions rental property owners ask, and the biggest mistakes to avoid.
Here is what every LA rental property owner should know.
Meet the Experts
Kyle Crown, President of Los Angeles Property Management Group, previously worked as an investment analyst and brings nearly a decade of property management experience to the table.
Andrea Roschke, President of Roschke & Wall, is a CPA and has been in practice for more than 40 years. She works with individuals and businesses on strategic planning, tax reduction strategies, and long-term financial growth.
Together, they discuss tax and accounting strategies specifically for rental property owners in and around Los Angeles.
Keep Good Records
If there is one piece of advice Andrea leads with, it is this: Keep accurate records of your income and expenses.
Many rental property owners do not properly track income and expenses throughout the year. When tax season arrives, they scramble to reconstruct everything. That creates stress, confusion, and often missed deductions.
You need your income and expenses accumulated and organized properly before filing your tax return.
What Should You Use for Record Keeping?
You do not need anything overly complicated.
- For one or two rental properties, a well-organized spreadsheet may be sufficient.
- Many owners use QuickBooks Online.
- ome use Quicken for personal finances and rentals.
If you own a large portfolio, professional property management software may make sense. But for smaller portfolios, simple and consistent tracking is what matters most.
Understanding Cost Segregation and Depreciation
When you purchase a rental property, you depreciate the building over 27.5 years for residential real estate.
That means you deduct a portion of the building’s value each year as an expense.
What Is a Cost Segregation Study?
A cost segregation study breaks the building into components. Instead of depreciating everything over 27.5 years, certain parts of the property may qualify for:
- 5-year depreciation
- 10-year depreciation
- 15-year depreciation
This allows you to accelerate deductions and potentially reduce taxable income sooner.
Cost segregation studies are often more common and more impactful for commercial properties, but they can also be beneficial for residential rentals.
It is worth discussing with a specialist before assuming it is not for you.
What Is a 1031 Exchange?
A Internal Revenue Code Section 1031 exchange, commonly called a 1031 exchange or like-kind exchange, allows you to defer capital gains taxes when selling an investment property.
How It Works
When you sell an investment property:
- You calculate your capital gain.
- Normally, you would pay taxes on that gain.
With a 1031 exchange:
- You use a qualified intermediary.
- You reinvest the proceeds into a like-kind investment property.
- The funds cannot touch your hands.
- You defer the capital gains tax.
Important notes:
- This does not apply to your personal residence.
- The replacement property must be like-kind.
- You can exchange into one or multiple properties, as long as value requirements are met.
You can continue rolling gains forward, potentially deferring taxes for years.
Because the reporting requirements are strict, working with experienced professionals is essential.
Repairs vs. Capital Improvements
This is one of the most common areas of confusion.
Repairs
Repairs maintain the property.
Example: Patching a hole in the roof.
These are typically deductible in the year incurred.
Capital Improvements
Improvements add value, extend useful life, or materially enhance the property.
Example: Replacing the entire roof.
These must be capitalized and depreciated over time.
The $2,500 Safe Harbor Rule
Thanks to IRS repair regulations, there is now a safe harbor:
If an item costs $2,500 or less, you can generally expense it rather than capitalize it.
That means:
- A $1,500 water heater can typically be expensed.
- No need to depreciate small items like faucets or minor fixtures.
This simplifies life significantly for rental owners.
That said, if your tax return shows unusually high repair expenses, expect your accountant to ask questions.
The IRS pays attention to this category during audits.
Common Rental Property Deductions
Most owners know about the obvious deductions:
- Property taxes
- Mortgage interest
- Utilities
- Repairs
- Property management fees
- Insurance
But here are deductions many owners forget:
Mileage and Travel
If you drive to your rental property, you can deduct mileage.
If you fly to another state to manage or repair a property, travel expenses may be deductible.
Documentation matters.
HOA Fees
Homeowners association dues are deductible for rental properties, but many owners forget to include them.
Home Office-Related Expenses
If you manage your rental property yourself, you may be able to deduct a portion of:
- Cell phone bills
- Internet service
If 25 percent of your usage relates to managing rental properties, you may deduct that percentage.
Understanding Passive Loss Rules
Rental properties generally generate passive income or passive losses.
Here is where it gets tricky.
What Is a Passive Loss?
If your rental property shows a loss, you cannot always deduct the entire loss in the current year.
Passive losses:
- First offset passive income.
- May be limited depending on your total income
For example:
- If your income is above $150,000, you may not be able to deduct passive losses at all in that year.
- If your income is under $100,000, you may be able to deduct up to $25,000 of passive losses.
Unused passive losses carry forward to future years.
If you sell the property, accumulated passive losses can generally be deducted at that time.
Because the passive loss rules are complex, this is an area where professional guidance is critical.
Final Thoughts for LA Rental Owners
Rental property ownership can be incredibly rewarding, but tax strategy matters.
The biggest takeaways:
- Keep excellent records.
- Understand depreciation and cost segregation.
- Learn when repairs must be capitalized.
- Take advantage of legitimate deductions.
- Do not ignore passive loss limitations.
- Work with professionals who understand real estate taxation.
With the right planning, rental property ownership in Los Angeles can be both profitable and tax-efficient.
If you have questions about managing your rental property portfolio, the team at Los Angeles Property Management Group can help guide you in coordination with experienced tax professionals.
Smart management and smart tax planning go hand in hand.
