Rental Property Taxes in California (2026 Guide)

1. Proposition 13 and Property Tax Reassessment

California's Proposition 13 (1978) caps the property tax rate at 1% of the assessed value at the time of purchase, with annual increases limited to no more than 2% per year. This means a property purchased in 2010 may have a significantly lower tax basis than its current market value.

For landlords, this is a double-edged sword. Your existing properties benefit from low assessments, but any new purchase will be assessed at full market value. Key reassessment triggers include:

• Change of ownership — full reassessment to market value at time of sale
• New construction — the improvement portion gets assessed at current value
• Prop 19 (2021) — eliminated the parent-to-child exclusion for non-primary residences, meaning inherited rental properties now get reassessed

2. California State Income Tax on Rental Income

California taxes rental income at your marginal state rate, which ranges from 1% to 13.3% — the highest in the nation. Rental income flows through your federal Schedule E and then onto California Form 540 (Schedule CA adjustments).

Important California-specific considerations:

• No capital gains preference — California taxes capital gains as ordinary income (unlike the federal 0/15/20% rates)
• Mental Health Services Tax — additional 1% surcharge on taxable income over $1 million (applies to large portfolio landlords)
• Depreciation conformity — California generally conforms to federal depreciation rules, but has its own modifications for bonus depreciation
• No 1031 exchange deferral for CA — if you exchange a CA property for an out-of-state property, California may still tax the deferred gain when you eventually sell (use Form 3840 to report)

3. LLC Franchise Tax ($800 Minimum)

Every LLC registered in California owes a minimum $800 annual franchise tax to the Franchise Tax Board (FTB), regardless of whether the LLC earned any income. This tax is due by the 15th day of the 4th month after the LLC's tax year begins (typically April 15 for calendar-year filers).

For higher-revenue LLCs, an additional fee applies based on gross revenue:

• $250,000 – $499,999 gross revenue: $900 fee
• $500,000 – $999,999: $2,500 fee
• $1,000,000 – $4,999,999: $6,000 fee
• $5,000,000+: $11,790 fee

Note: California's first-year franchise tax exemption (AB 85) expired. New LLCs formed in 2024+ owe the full $800 in their first year.

4. Rent Control: Costa-Hawkins and AB 1482

California has two layers of rent regulation that affect landlord income and therefore taxable revenue:

AB 1482 (Tenant Protection Act): Statewide rent cap of 5% + CPI (max 10%) per year for most residential properties built before 2005. Also requires "just cause" eviction. Exempt: single-family homes (if notice given), properties less than 15 years old, ADUs with owner-occupied main unit.

Costa-Hawkins (1995): Limits local rent control ordinances — prevents cities from applying rent control to single-family homes, condos, and properties built after certain dates (varies by city). Guarantees vacancy decontrol (reset to market rate between tenants).

Cities with their own stronger rent control include Los Angeles, San Francisco, Oakland, Berkeley, San Jose, and West Hollywood. These typically cap annual increases at 3-8% and have additional tenant protections.

5. California Schedule E Differences

While California generally follows federal Schedule E rules, there are important differences for state filing:

• Bonus depreciation — California does not conform to federal 100% bonus depreciation. You must add back the bonus amount on Schedule CA and use regular MACRS for state purposes
• Section 179 — California's Section 179 limit is lower than federal ($25,000 vs. $1,220,000 federal limit for 2026)
• Passive loss rules — California conforms to the $25,000 rental loss allowance and MAGI phase-out, but state-specific income modifications may change your MAGI for CA purposes
• SALT deduction — state taxes paid are deductible on federal (subject to $10K SALT cap) but NOT on your California return

6. Security Deposit Rules

California Civil Code Section 1950.5 sets strict security deposit limits that affect your cash flow management:

• Maximum deposit — 1 month's rent (effective July 1, 2024, under AB 12). Previously 2x for unfurnished, 3x for furnished.
• Return deadline — 21 days after move-out
• Itemized statement — required for any deductions from the deposit
• Tax treatment — security deposits are NOT income when received. Only include in income if retained for damages (in the year retained)

7. California-Specific Deductions

Beyond standard federal deductions, California landlords should be aware of:

• Seismic retrofit costs — required in many CA cities, fully deductible as a repair expense (not capitalized) if mandated by local ordinance
• Local business license fees — many CA cities require rental business licenses ($50-$500+/year), deductible on Schedule E line 9
• Rent control compliance costs — fees for rent board registration, attorney costs for compliance, and required relocation payments are deductible
• Wildfire mitigation — brush clearing, fire-resistant roofing, and defensible space costs are deductible as maintenance in high-fire zones
• ADU (Accessory Dwelling Unit) costs — if renting the ADU, construction costs are depreciated over 27.5 years, but permits and impact fee waivers (common in CA) reduce your basis

8. How SheltrIQ Helps CA Landlords

SheltrIQ is built for the complexity of California rental property taxes:

• Automatic bonus depreciation adjustment — flags the CA add-back so you (or your CPA) don't miss it on Schedule CA
• Franchise tax tracking — reminds you of the $800 FTB payment due date and includes it in your expense projections
• Prop 13 basis tracking — tracks your assessed value vs. market value for each property, alerts you to reassessment risks
• Rent control compliance — tracks allowable annual increases by city so you never exceed the cap
• AI classification — automatically categorizes CA-specific expenses (seismic retrofit, wildfire mitigation, rent board fees) to the correct Schedule E line