Your rental properties in Los Angeles will help you save money on your taxes.
That’s a pretty huge benefit to investing in real estate, and it’s important for investors and landlords to optimize their deductions and savings, even as they cringe over having to report their rent as income.
We are approaching this topic as experienced LA property managers, not as accounting experts or tax attorneys. Make sure you talk to your CPA or other financial planners before you take any deductions or file any tax returns. We’re here to make sure you have all the information you need and the documentation that supports your deductions.
Don’t leave money on the table at tax time. Here are some strategies that aren’t to be missed.
Stay Informed about Tax Benefits and Requirements
Los Angeles offers some irresistible real estate opportunities, as you know, but this is also an expensive market, and maintenance costs, insurance premiums, and property taxes can add up quickly, cutting into your earnings and ROI.
If you know how to work your best tax benefits, you’ll find a clear pathway to reducing financial stress. With the right tax strategies in place there’s also greater profitability and a real estate portfolio that’s positioned for long-term growth.
Take Advantage of Depreciation
Depreciation is one of the most impactful deductions available to landlords. This deduction will lead to immediate savings. The IRS allows rental property owners to deduct the cost of wear and tear on their LA rental properties over time. This applies to the building itself, not the land, and can provide significant tax savings.
For example, residential rental properties are generally depreciated over 27.5 years. This means that if you own a rental unit worth $550,000 (with $400,000 allocated to the building), you can claim approximately $14,500 annually in depreciation deductions.
To stay compliant, ensure depreciation is accurately calculated and documented.
Deduct Operating Expenses
Operating expenses are an essential part of managing your rental property and keeping it profitable. Many of these costs are tax-deductible. Examples include:
- Property management fees
- Utilities paid by the landlord
- Legal and professional services (accounting, legal consultations, etc.)
- Advertising costs for finding tenants
- Insurance premiums
It’s essential to track and document all expenses associated with operating your rental property. With proper record-keeping, these deductions can reduce your taxable income significantly.
Leverage the Qualified Business Income (QBI) Deduction
The Qualified Business Income (QBI) deduction, introduced under the Tax Cuts and Jobs Act, allows eligible landlords to deduct up to 20% of their net rental income. However, whether your rental activities qualify as a “trade or business” for QBI purposes depends on factors such as the number of properties you own and rent out, the time spent on leasing and managing those properties, and your intent to profit.
This can be a tricky deduction, so be sure to consult a tax professional to determine if you qualify. When you can maximize its benefits, you’re well-positioned to save some money.
Use 1031 Exchanges to Defer Capital Gains Taxes
One of the best tax benefits for real estate investors and landlords is also one of the most under-utilized benefits.
If you’re thinking of selling an investment property, a 1031 exchange allows you to defer capital gains taxes by reinvesting the proceeds into a similar “like-kind” property. This is a powerful strategy for landlords looking to upgrade their portfolios or diversify their assets without facing immediate tax burdens.
For example, a landlord selling a duplex in downtown LA can reinvest the profits into an apartment building in Hollywood—deferring taxes and enhancing the size and scope of an investment portfolio.
Be aware that 1031 exchanges have strict timelines and specific requirements, so it’s critical to work with an experienced Qualified Intermediary to guide you through the process.
Consider Setting Up a Real Estate LLC
Is your portfolio structured in a way that saves you the most money?
Forming a Limited Liability Company (LLC) for your rental properties can provide tax benefits, liability protection, and organizational advantages. While the LLC itself doesn’t pay federal taxes, it allows rental income and deductions to flow through to your personal tax return.
Additionally, certain tax strategies—such as deducting business expenses or taking advantage of self-employed retirement plans—can become more accessible when operating under an LLC.
Understand Local & State Tax Incentives
One of the best reasons to surround yourself with professionals is that mistakes are easy to make. Los Angeles landlords should be mindful of California’s specific tax regulations and incentives. For example, if your property is assessed at a value that seems higher than it should be, you have the right to challenge that assessment and reduce your property taxes.
Many landlords don’t know that they can also take advantage of green energy tax credits. If you’ve installed solar panels or made other energy-efficient upgrades, you may qualify for tax credits or deductions. Keeping up with state and local rules ensures you don’t miss opportunities to save.
Stay Organized and Compliant with Record-Keeping
Efficient record-keeping is the foundation of any tax optimization strategy. You don’t want to invite an audit, and if you do ask for specifics from the IRS or state tax agencies, you’ll want to have the documentation they’re asking for. Keep detailed records of income, expenses, maintenance, and other property-related activities to ensure compliance and maximize deductions.
When you work with LA property management experts like Earnest Homes, you can count on accurate financial reports, careful documentation, and complete transparency.
While the strategies above can help save you money, tax laws surrounding real estate investment can be complex. A trusted tax advisor who specializes in real estate can ensure you’re taking full advantage of available deductions, credits, and planning opportunities. They can also help you develop a long-term strategy that aligns with your financial goals.
If you don’t already have a great tax advisor, start with us. We can make referrals and introductions.
Tax optimization is an essential part of successful real estate investment. By leveraging the strategies above, you can reduce your tax liability, reinvest savings into your rental properties, and achieve greater financial success.
Let’s talk about where you stand. Contact our team of Los Angeles property management professionals at Earnest Homes.
