Guide to Real Estate Tax Deductions in California

Owning a home in California comes with its share of financial responsibilities, but it also opens the door to valuable tax deductions that can put money back in your pocket. From property tax write-offs to mortgage interest deductions, understanding how to navigate these opportunities can make a significant difference in your tax bill. With changing regulations and new legislative updates, staying informed is key to maximizing your savings and making the most of your real estate investment in California.

Understanding Property Tax Deductions

Property tax deductions allow homeowners to deduct state and local real estate taxes on their federal returns, reducing taxable income. However, the Tax Cuts and Jobs Act (TCJA) imposes a $10,000 cap on state and local tax (SALT) deductions, which significantly impacts California homeowners due to high property taxes. To claim this deduction, taxpayers must itemize instead of taking the standard deduction, and it applies to primary residences, vacation homes, and investment properties but not rental properties, where taxes are considered business expenses.

Key Points to note:

Deduction Limit: Maximum SALT deduction is $10,000 per tax return, regardless of filing status.
Itemization Required: Only beneficial if total itemized deductions exceed the standard deduction.
Eligible Properties: Applies to primary homes, vacation homes, and investment properties, but not rental properties.
Prepaid Taxes: Cannot deduct taxes paid in advance for future years.
Refunded Taxes: Any refunded property tax must be subtracted from the deductible amount.
Special Assessments: Maintenance fees may be deductible, but improvement-related assessments are not.

This deduction can provide significant tax savings for homeowners who qualify, but the SALT cap limits its effectiveness, especially in high-tax states like California.

Mortgage Interest Deduction

The mortgage interest deduction (MID) is one of the most valuable tax benefits for homeowners, allowing them to deduct interest paid on qualified home loans. For mortgages taken out after December 15, 2017, homeowners can deduct interest on loans up to $750,000 (for married couples filing jointly) or $375,000 (for married filing separately). However, for mortgages taken before this date, the previous limit of $1 million still applies.

This deduction helps reduce taxable income, making home ownership more affordable, especially in high-cost states like California. To qualify, homeowners must itemize deductions instead of taking the standard deduction.

Eligible Loans:

Primary and Secondary Residences: The loan must be secured by the taxpayer’s home.
Home Equity Loans & HELOCs: Deductible only if funds are used for home improvements (not for personal expenses like debt consolidation).
Rental Properties: Mortgage interest is deductible as a business expense on Schedule E, rather than as an itemized deduction.

For homeowners with multiple properties or refinanced loans, understanding MID rules is crucial for maximizing deductions. Consulting a tax professional can help ensure compliance with IRS regulations and optimize tax savings.

Federal SALT Deduction Cap and Its Impact

The State and Local Tax (SALT) deduction cap, launched under the Tax Cuts and Jobs Act (TCJA) of 2017, restricts state and local taxes including property, income, and sales taxes that taxpayers can deduct on their federal returns to $10,000. This cap applies to both single filers and married couples filing jointly, meaning even high-earning households cannot deduct more than this amount.

For homeowners in high-tax states like California, where property taxes and state income taxes are significantly higher, this cap has reduced the tax benefits of homeownership. A homeowner paying $15,000 in property taxes can only deduct $10,000, meaning they lose the benefit of $5,000 in tax deductions. While discussions about increasing or repealing the cap continue, as of 2025, the limit remains unchanged.

Impact of the SALT Deduction Cap:

Higher Tax Bills: Homeowners in high-tax states end up paying more in federal taxes due to the deduction limit.
Reduced Incentives for Homeownership: The cap diminishes the tax advantages of owning a home, particularly in expensive housing markets.
Itemization Less Beneficial: Many taxpayers find that the standard deduction provides greater savings than itemizing with a limited SALT deduction.
Workarounds Are Limited: While some states, including California, have introduced Pass-Through Entity Tax (PTET) workarounds for business owners, individual homeowners have fewer options to bypass the cap.

California's Stance on SALT Deduction Limits

The federal SALT deduction cap has significantly impacted California taxpayers, particularly homeowners in high-tax regions. Since the cap limits state and local tax deductions to $10,000, many California residents are unable to fully deduct their property taxes and state income taxes, leading to higher federal tax bills.

To counter this, California introduced the Pass-Through Entity Tax (PTET), a workaround primarily for business owners. This allows certain businesses such as partnerships, S corporations, and LLCs to pay state income taxes at the entity level, making them deductible on federal tax returns without being subject to the SALT cap. However, this does not help individual homeowners who still face limitations on deducting their property and income taxes.

Key Considerations for California Taxpayers:

No State-Level SALT Deduction: California does not offer relief at the state tax level, meaning taxpayers must plan strategically to minimize their tax burden.
PTET Helps Business Owners Only: This workaround benefits business owners, but not employees or retirees who cannot shift income through a pass-through entity.
Limited Options for Homeowners: Homeowners must explore alternative tax planning strategies, such as maximizing other deductions or utilizing tax-advantaged accounts.

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Other Deductible Expenses for Homeowners

Beyond mortgage interest and property taxes, homeowners can take advantage of additional deductions that help lower their taxable income. These deductions cover home improvements, insurance costs, and necessary modifications, making homeownership more financially manageable. However, eligibility often depends on income limits, itemization, and specific IRS guidelines. Some Common Deductions for Homeowners include:

Energy-Efficient Home Improvements: Homeowners can claim a tax credit equal to 30% of the costs for eligible energy-efficient improvements, up to a maximum annual credit of $3,200. This includes up to $2,000 for heat pump technology and up to $1,200 for other qualified upgrades.
Home Office Deduction: Available for homeowners who use a portion of their home exclusively for business, covering expenses like utilities, maintenance, and depreciation.
Medical Home Improvements: Modifications for medical needs (e.g., wheelchair ramps, handrails) may be deducted if they exceed 7.5% of adjusted gross income (AGI).

Tax Deductions for Rental Property Owners

Owning rental property comes with several tax advantages, as landlords can deduct various expenses related to the upkeep and management of their properties. These deductions help reduce taxable rental income, ultimately lowering the amount of tax owed. Unlike homeowners, rental property owners can claim many of these expenses as business deductions, making real estate investment more tax-efficient. Some Common Deductions for Rental Property Owners include:

Depreciation: Residential rental properties depreciate over 27.5 years, allowing landlords to deduct a portion of the property's value each year.
Property Management Fees: Fees paid to property managers or leasing agents are fully deductible as business expenses.
Repairs and Maintenance: Costs for plumbing repairs, painting, landscaping, and routine maintenance qualify for immediate deductions.
Travel Expenses: Expenses such as mileage, airfare, lodging, and meals for property inspections and management are deductible.
Insurance Premiums: Includes homeowners, liability, flood, and rental property insurance to protect against financial losses.

Recent Legislative Changes Affecting Deductions

Tax laws continue to evolve, and as of 2025, several updates may impact real estate tax deductions. Homeowners and rental property owners should stay informed about these changes to maximize their tax benefits while ensuring compliance. Here are some key updates:

Extended Energy Tax Credits: The federal government has extended tax credits for energy-efficient home improvements through 2032, allowing homeowners to claim up to $3,200 annually for qualifying upgrades, such as solar panels, energy-efficient appliances, and home insulation.
Potential Adjustment to SALT Cap: The $10,000 SALT deduction cap is set to expire at the end of 2025, and Congress is considering increasing the cap to $15,000 for individuals and $30,000 for married couples, though no final legislation has been passed.
Increased IRS Scrutiny on Deductions: The IRS is tightening regulations on home office deductions and rental property losses, requiring stricter documentation to prevent fraudulent claims.

Conclusion

Real estate tax deductions can be a powerful tool to reduce your tax burden, but navigating the ever-changing tax laws, especially in a high-tax state like California can be challenging. From maximizing mortgage interest deductions to working around the SALT cap, the right strategies can turn homeownership and property investment into tax-saving opportunities. Staying informed and making smart financial decisions can help you keep more money in your pocket while building long-term wealth.

However, tax laws are complex, and missing out on key deductions could mean leaving money on the table. NSKT Global provides personalized tax planning, compliance guidance, and strategic solutions to ensure you take full advantage of every deduction available. Whether you're a homeowner, investor, or business owner, we make tax savings simple, stress-free, and effective.

FAQs About Real Estate Tax Deductions in California

What property taxes are deductible in California?

Homeowners can deduct state and local real estate taxes on their federal return, but the SALT deduction is capped at $10,000.

How does the federal SALT cap affect my deductions?

The $10,000 limit on state and local tax deductions reduces the amount California homeowners can write off, especially in high-tax areas.

Can I deduct mortgage interest on my California state taxes?

Yes, California allows mortgage interest deductions, following federal rules but without the SALT cap limitations.

Are there specific deductions for rental property owners?

Yes, landlords can deduct depreciation, mortgage interest, property management fees, repairs, travel expenses, and insurance premiums as business expenses.

Have there been recent changes to real estate tax deductions in California?

As of 2025, extended energy tax credits, possible SALT cap adjustments, and increased IRS scrutiny on deductions may impact tax benefits.

Guide to Real Estate Tax Deductions in California

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