Real Estate Tax Filing California

Real Estate Tax Filing Overview

Real estate investors face some of the most complex tax filing requirements of any taxpayer category. Rental income, depreciation, passive activity rules, at-risk rules, California non-conformity, and 1031 exchange tracking all require careful attention. KDA specializes in real estate tax preparation for California investors — from single-family rentals to large commercial portfolios.

Schedule E: Rental Income & Expenses

Rental income and expenses are reported on Schedule E (Supplemental Income and Loss). Each rental property is reported separately. Deductible expenses include: mortgage interest, property taxes, insurance, repairs and maintenance, property management fees, advertising, utilities paid by the landlord, and depreciation. Capital improvements (not repairs) must be depreciated over time rather than deducted in full. KDA distinguishes between repairs (immediately deductible) and improvements (must be capitalized) for every rental property client.

Depreciation of Rental Property

Residential rental property is depreciated over 27.5 years using the straight-line method. Commercial property is depreciated over 39 years. Land is not depreciable. For a California rental property purchased for $800,000 with $200,000 allocated to land, the annual depreciation deduction is approximately $21,818 ($600,000 ÷ 27.5). This non-cash deduction can significantly reduce taxable rental income. KDA performs cost segregation analysis for larger properties to accelerate depreciation on components with shorter recovery periods.

Passive Activity Rules

Rental activities are generally classified as passive activities. Passive losses can only offset passive income — they cannot offset wages, business income, or other active income. There is an exception: if your adjusted gross income is under $100,000 and you actively participate in rental activities, you can deduct up to $25,000 in rental losses against non-passive income. This $25,000 allowance phases out between $100,000 and $150,000 AGI. Real estate professionals (750+ hours in real estate activities, more than half of working time) can deduct rental losses without limitation.

California Real Estate Tax Rules

California generally follows federal rules for rental income and depreciation, with key differences: California does not allow bonus depreciation or accelerated Section 179 expensing beyond $25,000. California has its own Proposition 19 rules for property tax reassessment on inherited property. California requires Form 3840 annual reporting for 1031 exchanges involving out-of-state replacement property. KDA tracks California-specific basis and depreciation schedules separately from federal for every rental property.

1031 Exchange Reporting

A 1031 exchange defers capital gains tax on the sale of investment property by reinvesting the proceeds into a like-kind replacement property. The exchange is reported on Form 8824. The deferred gain reduces the basis of the replacement property, creating a lower depreciation deduction going forward. California requires Form 3840 annual reporting for exchanges where the replacement property is located outside California — California will tax the deferred gain when the replacement property is eventually sold, even if the taxpayer has moved out of California.