Accounting for Real Estate in Los Angeles

Presti & Naegele assists real estate investors in Los Angeles with choosing the best business structure for rental properties. While rental property investments carry certain risks, forming the right legal entity can offer important protections and benefits.

✔ A Limited Liability Company (LLC) merges the flexibility of a sole proprietorship with the formal protections of a corporation. It separates personal assets from business liabilities, reduces personal exposure, and offers tax flexibility to those engaged in real estate accounting in Los Angeles.

By operating as an LLC, rental income flows directly to your personal tax return, avoiding corporate-level taxation. You can also deduct qualifying property-related expenses, such as mortgage interest and maintenance costs. In Los Angeles, where competition is high, having an LLC signals professionalism to partners and tenants. Many investors choose LLCs for their liability protection, tax flexibility, and ease of administration, though S Corps can also be an option for certain active real estate professionals seeking additional shareholder protections.

Legal Structure: How real estate owners pay taxes depends on the structure of their business.  At P&N, we can evaluate your situation and recommend the right entity for your business.

Sole Proprietorship – A sole proprietorship is the simplest form of business, where the owner and the business are one.

Limited Liability Company (LLC) – An LLC combines the liability protection of a corporation with the flexibility of a partnership.

Partnership – A partnership involves two or more individuals or entities sharing ownership and responsibilities.

S-Corporation – An S-Corporation is a pass-through entity that combines features of

corporations and partnerships.

UNDERSTANDING ACCELERATED DEPRECIATION in Los Angeles

If you own or invest in property in Los Angeles, our Real Estate CPAs can help you understand how tax regulations impact your holdings. Accelerated depreciation is one key method to optimize your tax position while managing real estate assets.

Depreciation allows property owners to recover the cost basis of a building over time, accounting for wear, deterioration, or outdated features. While most residential rental properties depreciate over 27.5 years, accelerated depreciation enables Los Angeles investors to take larger deductions in the early years of ownership, creating potential near-term tax advantages.

How Does Accelerated Depreciation Work?

A passive activity is a business or investment where you do not actively participate during the year. Passive activity losses (PALs) occur when expenses and losses from such activities surpass the income generated.

In Los Angeles, owning rental property often counts as a passive activity. Common expenses—mortgage interest, insurance, repairs, and depreciation—can lead to passive losses. Likewise, investments in limited partnerships or other real estate ventures in LA where you play a minimal role are also considered passive.

Exceptions to the passive loss rules include:

• $25,000 Allowance: If you actively manage the real estate and earn less than $100,000 during the year, you can deduct up to $25,000 in passive losses against ordinary income.



• Real Estate Professionals: Real estate professionals who materially participate in their real estate activities are not subject to the same passive loss rules. They can use real estate losses to offset income from other active sources.
  

Material participation is a key factor. If you actively manage the real estate (e.g., handle day-to-day operations), your losses may not be strictly passive. Real estate professionals who meet specific qualifications can also avoid the passive loss treatment.

When you sell an LA property held for business or investment and reinvest the proceeds in another qualifying property, you may defer capital gains tax. The proceeds must be held in escrow by a qualified intermediary and cannot be received directly. The IRS defines “like-kind” broadly, meaning properties don’t have to be identical—such as swapping a retail plaza for vacant land or exchanging an industrial site for an apartment complex.

A 1031 exchange can be used repeatedly, letting you roll over gains from property to property and continue building your Los Angeles real estate portfolio without immediate tax liability. When you eventually sell for cash, you’ll pay capital gains tax just once at the long-term rate. While this approach defers taxes, it does not erase them entirely. In some situations, even a former primary residence may qualify.

Strategic Advisory for Real Estate Growth in Los Angeles

Get an edge in the dynamic Los Angeles real estate market with our real estate accounting services and skilled Real Estate CPAs. We provide data-driven insights, pinpoint emerging opportunities, and help you make confident decisions to strengthen your property portfolio. Presti & Naegele is your trusted partner in navigating LA’s competitive property landscape.

STREAMLINE FINANCIAL OPERATIONS WITH QUICKBOOKS EXPERTISE

Smooth, accurate bookkeeping is essential for success in Los Angeles real estate. Our QuickBooks services are specifically customized for property owners and investors, making accounting simple and efficient. With our support, you can focus on growing your investments while knowing your books are managed with precision.

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