Important Tax Updates for California Landlords: How the One Big Beautiful Bill Act Affects You
Important Tax Updates for California Landlords: How the One Big Beautiful Bill Act Affects You
Dear Fellow Landlords,
As real estate owners in California, staying on top of tax changes is key to maximizing your investments. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, makes several TCJA provisions permanent and introduces new benefits that could impact your bottom line. While these are federal changes, remember that California doesn't always fully conform (e.g., it typically doesn't follow federal bonus depreciation rules but does align more closely with Section 179 expensing, subject to state limits). Always consult your tax advisor for personalized advice, especially regarding state conformity.
Here's a brief overview of the key effects on real estate owners like us:
Bonus Depreciation: The bill permanently restores 100% bonus depreciation for qualified property placed in service after January 19, 2025. This includes tangible assets like machinery, equipment, and certain building improvements (e.g., HVAC systems or land enhancements via cost segregation studies). For landlords, this means you can immediately expense eligible renovation costs on investment properties, accelerating deductions and improving cash flow. However, whole buildings don't qualify, and California generally doesn't conform to this federal rule, so state tax benefits may be limited.
Section 179 Expensing Limits: The maximum deduction jumps to $2.5 million (with a $4 million phase-out threshold, both inflation-indexed) starting in 2025. This allows immediate expensing of qualifying items like equipment, vehicles, and specific nonresidential property improvements (e.g., roofs or security systems). It's a great tool for smaller-scale upgrades on rental properties, and California often conforms to Section 179 (though with its own $25,000 limit historically—check for updates post-OBBBA).
Mortgage Insurance Premium Deduction: This deduction is reinstated and made permanent, allowing you to treat qualified mortgage insurance premiums as deductible interest. While more relevant for personal residences or buyers with low down payments, it could benefit landlords financing investment properties with MI. The bill also permanentizes the $750,000 cap on mortgage interest deductions for acquisition debt.
Other Key Effects for Landlords:
Qualified Business Income (QBI) Deduction: Made permanent at 20% (with potential increases to 23% and adjusted phase-outs), benefiting pass-through entities common in real estate. This could reduce your effective tax rate on rental income.
State and Local Tax (SALT) Deduction: Cap raised to $40,000, a big win in high-tax California, helping offset property taxes on your rentals. Pass-Through Entity Tax (PTET) strategies remain viable for bypassing the cap.
Opportunity Zones and LIHTC Enhancements: Opportunity Zones are now permanent with rural incentives, and Low-Income Housing Tax Credits are boosted (e.g., restored 9% rate, increased state allocations). Ideal if you're investing in affordable housing or designated zones.
Business Interest and Estate Tax Relief: Reinstates a more favorable EBITDA-based interest deduction limit, allowing greater deductions for leveraged properties. Estate tax exemption rises to $15 million per person (permanent), easing wealth transfers for family-owned real estate.
1031 Exchanges and Capital Gains: No changes—exchanges remain intact, and lower capital gains rates are preserved, supporting property swaps and sales.
These changes could lower your tax burden and encourage investments, but with California's selective conformity, impacts vary. For example, bonus depreciation savings might only apply federally, requiring state add-backs. Reach out to a CPA familiar with CA taxes to strategize for 2025 filings.
If you have questions or want to discuss how this affects your portfolio, feel free to reply.
Best regards,
Luca Jacoli
Disclaimer: This information is provided for general guidance and does not constitute legal advice. Please consult with a qualified accountant, CPA and attorney.