As 2026 approaches, California landlords face a shifting tax landscape that could significantly impact their rental income and investment strategies. With the expiration of key provisions from the Tax Cuts and Jobs Act (TCJA) and new state-level legislation, understanding how to maximize deductions and depreciation is more critical than ever. Whether you manage a single rental in Merced or a portfolio across the Central Valley, strategic tax planning can make the difference between saving thousands and paying more than you should.
At Chosen Property Management, we’re dedicated to helping Merced landlords make informed financial decisions that protect their investments. Let’s explore the deductions, depreciation opportunities, and smart moves you should consider heading into 2026.
Key Takeaways
Bonus depreciation is set to phase out by 2026, reducing the upfront tax benefits for property owners.
Cost segregation studies can help landlords maximize remaining depreciation deductions.
California’s high tax rates make strategic deductions even more valuable, particularly for maintenance, management, and mortgage interest.
Short-term rental owners may still qualify for unique loopholes if they actively manage their properties.
Planning ahead for post-2025 tax changes can help California landlords stay compliant and minimize liability.
Understanding the 2026 Tax Shift
The Tax Cuts and Jobs Act (TCJA) brought a wave of tax incentives for property owners, including bonus depreciation and qualified business income (QBI) deductions. However, these benefits are set to expire or phase out by the end of 2025, meaning 2026 will usher in a “tax cliff” for many investors.
Under the TCJA, landlords could deduct up to 100% of qualifying property improvements through bonus depreciation. That percentage drops to 40% in 2024, 20% in 2025, and 0% in 2026. This change means you’ll no longer be able to fully write off the cost of upgrades like new HVAC systems, roofs, or appliances immediately.
Additionally, individual tax brackets are expected to rise as TCJA cuts expire, increasing the effective tax rate for many Californians. For landlords, that could translate to higher taxes on rental income and capital gains.
How Depreciation Works for California Rental Properties
Depreciation allows property owners to deduct a portion of the cost of their rental property each year to account for wear and tear. For residential real estate, the IRS typically allows depreciation over 27.5 years.
For example, if you bought a rental home in Merced for $400,000 (excluding land value), you can depreciate approximately $14,500 per year. However, many landlords miss out on accelerated deductions available through cost segregation.
Cost Segregation: The Hidden Advantage
A cost segregation study breaks down your property into components (like lighting, flooring, and plumbing) that depreciate faster, often over 5, 7, or 15 years. This allows for larger upfront deductions, improving your short-term cash flow.
Even with the phase-out of bonus depreciation, cost segregation remains a valuable tool for 2026 and beyond. If you’ve made major renovations or purchased a new property recently, now’s the time to consult a qualified tax professional to perform a study.
Top Rental Property Deductions Every Landlord Should Track
California landlords can significantly reduce their taxable income by taking advantage of the right deductions. Here are the most common and impactful ones:
1. Mortgage Interest
Interest on loans for rental properties remains one of the largest deductions. Even as bonus depreciation fades, this deduction continues to provide meaningful relief.
2. Property Management Fees
Working with Chosen Property Management means your professional management fees are fully deductible. This includes services like tenant screening, rent collection, maintenance coordination, and financial reporting.
3. Repairs and Maintenance
Routine repairs, such as fixing leaks, repainting walls, or replacing broken fixtures, are immediately deductible. However, capital improvements (like adding a new deck or roof) must be depreciated over time.
4. Property Taxes and Insurance
California property taxes can be substantial, especially in growing areas like Merced. Be sure to include your annual property taxes and insurance premiums in your expense tracking.
5. Travel and Utilities
If you travel to your rental property for inspections, maintenance, or tenant meetings, you can deduct mileage and travel costs. Landlords who pay utilities for their tenants can also claim those expenses.
The Short-Term Rental Loophole: Still an Option?
Short-term rental owners (such as those managing Airbnb or VRBO listings) may still qualify for unique tax loopholes, especially if they materially participate in the business. In certain cases, short-term rentals can be classified as active income, allowing for larger deductions and even the use of losses against other types of income.
However, California’s tax laws and local regulations vary by city. Merced property owners should carefully review local ordinances and consult with a tax professional before leveraging this strategy.
How California’s “Big Beautiful Bill” Impacts Landlords
California’s “One Big Beautiful Bill Act” (OBBBA) aims to simplify and encourage housing investment, but also introduces reporting requirements that affect how landlords claim deductions. While the bill has positive aspects, such as streamlined compliance, it may also tighten oversight on real estate tax reporting.
For Merced landlords, it’s essential to maintain accurate, detailed records of all income and expenses. Digital bookkeeping tools and professional property management can help ensure you’re ready if tax documentation is ever requested.
Preparing for the 2026 Tax Environment
With bonus depreciation ending and potential increases to federal and state rates, landlords should act now to maximize 2025 opportunities. Here are some proactive steps:
Complete major renovations before 2025 ends to take advantage of the final bonus depreciation phase.
Schedule a cost segregation study to accelerate deductions while they’re still available.
Review your entity structure—operating under an LLC or S-Corp can offer additional flexibility and liability protection.
Work with a local tax advisor familiar with California’s specific property tax and income laws.
Partner with a professional management company like Chosen Property Management to ensure all deductible expenses are tracked accurately.
FAQs About Landlord Tax Deductions in 2026
1. Will I still be able to deduct property management fees after 2025?
Yes. Property management fees are considered an ordinary and necessary business expense, and they remain fully deductible regardless of tax law changes.
2. Can I still claim depreciation if my property is paid off?
Absolutely. Depreciation is based on the property’s value and use as a rental, not on whether you have a mortgage.
3. What happens if I sell my property after claiming depreciation?
When you sell, the IRS may require you to recapture depreciation, taxing that portion at a rate up to 25%. Strategic planning with a CPA can help minimize this impact, such as through a 1031 exchange.
Make Smarter Tax Moves with Chosen Property Management
Tax law changes can feel overwhelming, especially in California’s complex real estate environment. But you don’t have to navigate them alone. At Chosen Property Management, we help Merced property owners stay compliant while maximizing every deduction available. From tracking expenses to coordinating improvements and providing year-end reports, our team makes it easier to manage your rentals and your taxes.
If you’re ready to plan ahead for 2026, contact us today to learn how we can help safeguard your investments and optimize your returns.
