Owning a rental in San Francisco is expensive, which is why every deductible dollar matters. Between federal rules, California nonconformity, and San Francisco’s local taxes, it is easy to miss money you are entitled to keep. In this guide, you will find the top deductions most SF landlords overlook, where state and city rules differ, and the records you need to support your return. Let’s dive in.
Top deductions to claim
Ordinary operating expenses. You can generally deduct advertising, leasing commissions, property management fees, landlord-paid utilities, insurance, HOA dues, landscaping, pest control, repairs and routine maintenance, and professional fees. The IRS groups these as ordinary and necessary rental expenses on Schedule E. See the overview in IRS Publication 527.
San Francisco business registration and Gross Receipts. Registering as a business and filing the city’s Gross Receipts Tax does not change what you deduct federally, but it does add local filing duties. Review the city’s rules for real estate and rental services on the SF Treasurer Gross Receipts Tax page.
Mortgage interest and financing costs. Interest on loans used to buy or improve your rental is generally deductible. Some closing costs and points are amortized instead of deducted all at once. See the interest and expense sections in IRS Publication 527.
Property taxes and the SALT cap. Real property taxes are typically deductible, but the federal cap on state and local tax deductions changed in 2025. The cap was raised temporarily with phase rules for higher incomes. Check current-year guidance summarized by Congress.gov on the SALT rules in 2025 and beyond (CRS overview).
Repairs vs. improvements
Getting this line right can save you time and tax. Routine fixes that keep the property in good working order are current deductions. Projects that add value or extend the property’s life, like a new roof or a major HVAC replacement, are capital improvements and must be depreciated.
- Use the IRS tangible property regulations to apply the tests and elections. The de minimis safe harbor lets many landlords deduct items up to 2,500 dollars per invoice or item if elected. The small taxpayer safe harbor may also help with smaller buildings. See the IRS guide to the tangible property regulations and safe harbors.
- Keep invoices, before-and-after photos, and contractor notes so your treatment is easy to defend.
Depreciation and cost recovery
Depreciation is a major noncash deduction. Residential rental buildings are generally depreciated over 27.5 years using straight line. Land is not depreciable. See the basics in IRS Publication 527.
- Cost segregation can reclassify certain components into shorter lives, which accelerates deductions. If you accelerate depreciation for federal purposes, remember that California often requires different schedules.
- California nonconformity. California has historically not conformed to federal bonus depreciation and certain other federal changes. If you take bonus or accelerated methods federally, prepare a federal-to-California reconciliation and state add-backs. Review the FTB’s notes on California conformity differences.
QBI and passive loss rules
Some rental enterprises qualify for the federal Qualified Business Income deduction. The IRS created a safe harbor that allows certain rental real estate to be treated as a trade or business if you meet recordkeeping and time thresholds. Learn the details in the IRS announcement on the rental real estate QBI safe harbor.
- California typically does not conform to the federal QBI deduction. Even if you claim QBI federally, you usually add it back on your California return. See the FTB’s conformity overview.
- Rental activities are usually passive. Up to 25,000 dollars of passive loss may offset ordinary income if you actively participate and your income is within the limits. Review the tests in IRS Publication 925.
Short-term rentals in San Francisco
If you host short-term rentals, you must follow San Francisco’s Transient Occupancy Tax rules. Registration and regular remittance are required, even if a platform collects on your behalf.
- Check registration, filing, and Tourism Improvement District assessments on the city’s Transient Occupancy Tax page.
- TOT you remit is generally an ordinary business expense for federal tax if your activity is treated as a business.
Plan ahead if you may sell
When you sell, prior depreciation lowers your tax basis and can trigger depreciation recapture, taxed up to 25 percent, plus any capital gain. See the sale and recapture discussion in IRS Publication 527.
- A Section 1031 like-kind exchange can defer gain if you follow strict deadlines and identification rules. California requires a special filing when California gain is deferred. Review FTB Form 3840 instructions for exchanges with California property on the FTB 3840 page.
What to track and file
- Keep separate books for each rental. Save bank statements, invoices, leases, and all tax forms.
- Common federal forms include Schedule E and Form 4562 for depreciation. See the list in IRS Publication 527.
- If you rely on the QBI rental safe harbor or Real Estate Professional status, maintain contemporaneous time logs and attach required statements. The safe harbor documentation requirements are in the IRS guidance.
- For San Francisco filings, confirm whether you must register and file the city’s business taxes on the Gross Receipts Tax page and, for STRs, file returns on the TOT page.
Avoid these costly pitfalls
- Forgetting California add-backs. If you take federal bonus depreciation or certain federal deductions, California may require an adjustment. Start a federal-to-state reconciliation early using the FTB’s conformity guidance.
- Misclassifying improvements as repairs. Use the tangible property regulations and safe harbors and keep documentation. See the IRS safe harbor rules.
- Missing QBI or passive-loss records. Claims often fail without contemporaneous logs. Review the tests in IRS Publication 925 and the QBI safe harbor.
- Skipping SF short-term rental compliance. Late or missing TOT registration and filings can trigger penalties. Start with the city’s TOT guidance.
Quick checklist for SF landlords
- Organize income and expenses by property with separate books and bank records.
- Save purchase documents, closing statements, and all improvement invoices for depreciation.
- Elect de minimis and small taxpayer safe harbors when they fit your facts, and keep the election with your return.
- Track time for QBI safe harbor and Real Estate Professional tests.
- Confirm San Francisco business registration, Gross Receipts filings, and TOT, if applicable.
- If you plan a sale or 1031, model depreciation recapture and California reporting in advance.
Ready to keep more of what your rentals earn and fill your next vacancy faster? For pricing, tenant placement, and flexible management support tailored to your building and neighborhood, connect with Ray Amouzandeh.
FAQs
What rental expenses are deductible for San Francisco landlords?
- Typical deductions include advertising, leasing commissions, property management fees, landlord-paid utilities, insurance, HOA dues, landscaping, pest control, routine repairs, and professional fees, as outlined in IRS Publication 527.
How did the SALT cap change and does it affect my property tax deduction?
- Federal law in 2025 raised the SALT deduction cap with phase rules for higher incomes, which can affect how much California property tax you can deduct, so review current guidance summarized on Congress.gov before filing.
What is the de minimis safe harbor for rental repairs?
- The IRS allows an election to deduct items up to 2,500 dollars per invoice or item instead of capitalizing, subject to rules in the tangible property regulations.
Does California allow the federal QBI deduction for rentals?
- California has historically not conformed to the federal Section 199A QBI deduction, so you may add it back on your California return per the FTB’s conformity guidance.
What are San Francisco’s short-term rental tax requirements?
- Most hosts must register and remit Transient Occupancy Tax and related assessments, with rules and deadlines on the city’s TOT page.
What forms and records do I need for my rental depreciation?
- Keep closing statements, invoices, and cost details and report depreciation on Form 4562 with Schedule E, as described in IRS Publication 527; maintain separate schedules for California if methods differ per FTB conformity.
