Accounting for Real Estate in San Francisco

Presti & Naegele supports San Francisco real estate investors in selecting the right business entity for rental properties. While all investments carry some level of risk, forming a separate legal entity can provide important protection and benefits.

✔ A Limited Liability Company (LLC) combines the simplicity of a sole proprietorship with the liability safeguards of a corporation. It separates personal assets from business liabilities, reduces personal exposure, and provides tax flexibility for those utilizing real estate accounting in San Francisco.

With an LLC, rental income passes directly to your personal tax return, avoiding corporate-level taxes. It also allows you to deduct eligible property expenses, including mortgage interest and maintenance costs. In San Francisco’s competitive real estate market, an LLC signals professionalism to partners and tenants. Many investors choose LLCs for their liability protection, tax adaptability, and ease of management, though S Corps may be a good fit 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 San Francisco

For San Francisco property owners and investors, our Real Estate CPAs can help clarify how tax rules apply to your holdings. Accelerated depreciation is one approach that can improve your tax position while managing real estate assets.

Depreciation allows property owners to recover the cost basis of a building over time, accounting for physical wear, aging, and functional obsolescence. While residential rental properties typically depreciate over 27.5 years, accelerated depreciation enables San Francisco investors to claim larger deductions in the early years of ownership for greater near-term benefits.

How Does Accelerated Depreciation Work?

A passive activity is an investment or business where the taxpayer does not materially participate during the year. Passive activity losses (PALs) occur when total expenses exceed the income generated by these activities.

In San Francisco, owning rental property often qualifies as a passive activity. Expenses such as mortgage interest, insurance, repairs, and depreciation can contribute to passive losses. Likewise, investments in limited partnerships or other local real estate ventures with minimal active participation are considered passive activities.

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 a San Francisco property held for investment or business purposes and reinvest the proceeds into another qualifying property, you can defer capital gains tax. The funds from the sale must be held by a qualified intermediary and cannot be received directly. The IRS defines “like-kind” broadly, allowing exchanges such as an apartment building for commercial space or a retail storefront for undeveloped land.

You can complete multiple 1031 exchanges over time, letting your San Francisco property portfolio grow tax-deferred. Taxes are owed only when you eventually sell for cash, at the applicable long-term capital gains rate. While this strategy postpones taxes, it doesn’t eliminate them entirely. In some circumstances, even a former primary residence may qualify.

Strategic Advisory for Real Estate Growth in San Francisco

Thrive in the fast-paced San Francisco real estate market with our dedicated real estate accounting services and experienced Real Estate CPAs. We help track market trends, pinpoint promising investment opportunities, and provide guidance to make well-informed decisions. Presti & Naegele is your reliable partner in navigating San Francisco’s complex property market.

STREAMLINE FINANCIAL OPERATIONS WITH QUICKBOOKS EXPERTISE

Organized bookkeeping is key to success in San Francisco real estate. Our QuickBooks services are designed for property owners and investors, making accounting simpler and more efficient. With our assistance, you can focus on expanding your investments while knowing your financial records are precise and up to date.

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