Taxes on a Coronado Rental: Deductions, Depreciation and Selling Later

When you rent out your Coronado home, the rent and the costs of running the rental go on Schedule E of your federal return, and you depreciate the building (not the land) over 27.5 years. Losses may offset other income up to $25,000 if your income is low enough, and the home sale exclusion you had as a resident can survive a period of renting, but not forever and not for the depreciation you took. If you leave California, the state still taxes your Coronado rent, and a property manager generally has to withhold 7% of it.

This is general information, not legal or tax advice. Confirm the details for your situation with a California attorney or tax professional. The rules below are stated as of October 2026, from IRS, Franchise Tax Board and county sources, and they interact in ways that depend on your own facts. This guide is part of the Coronado Rental Guide series.

Key takeaways

• Rental income and expenses are reported on Schedule E (Form 1040), per IRS Publication 527.
• Residential rental buildings are depreciated over 27.5 years. Land is never depreciated. A converted home starts from the lower of your adjusted basis or its fair market value on the day it became a rental.
• An owner who actively participates can deduct up to $25,000 of rental losses against other income. The allowance shrinks above $100,000 of modified adjusted gross income and is gone at $150,000.
• You can still use the home sale exclusion after renting if you meet the 2-of-5-year test, but gain equal to depreciation is taxable, and military owners have a special suspension rule.
• Renting does not by itself trigger a Prop 13 reassessment, but you must end your homeowners' exemption.
• Out-of-state owners: California taxes Coronado rent, and rent paid through a property manager is generally subject to 7% withholding.

How rental income is reported

Your Coronado rental is reported on Schedule E: rent is income, and the costs of operating the rental are reported against it as expenses. Ask your preparer which costs are deductible in the year you pay them and which must be capitalized and depreciated, because that line decides how much of a large repair shows up as a deduction this year.

What makes the return easy is a clean record. Keep these from day one:

• Every rent payment and deposit received, with dates.
• Invoices and receipts for repairs, cleaning and supplies.
• Insurance, property tax, HOA and mortgage statements.
• Management statements, if you use a manager.
• The date the home was first available for rent.

That last item matters more than it looks. The date of conversion sets your depreciation basis, and it starts the clock on several of the sale rules below. For the other costs worth tracking, see what it really costs to rent out a Coronado home.

Depreciation: 27.5 years, building only

Under the general depreciation system, residential rental property is recovered over 27.5 years (IRS Publication 527 (opens in a new tab)). Two rules shape the number:

• Land is not depreciable. Only the building portion of your basis is, so how your basis is split between land and building directly changes the annual deduction. Agree on a defensible allocation with your preparer.
• A converted home uses the lower figure. If you lived in the home and then rented it, the depreciation basis is the lesser of your adjusted basis or the fair market value on the date of conversion. You cannot depreciate a value higher than what the home was worth when it became a rental.

Depreciation lowers taxable rental income each year, and it comes back at sale, as explained below.

Rental losses and the $25,000 allowance

Rental activity is generally passive. Under the special allowance in IRC § 469(i), as described in Publication 527:

Active participation means you own at least 10% and make management decisions, such as approving tenants and setting the rent. You can do that while a property manager handles the day-to-day work. Ask your preparer how any loss you cannot use this year is treated in later years.

Selling later: the home sale exclusion after renting

The exclusion under IRC § 121 still applies if you owned and used the home as your principal residence for a total of 2 years during the 5 years ending on the sale date. The 24 months do not have to be consecutive. The limit is $250,000 of gain, or $500,000 for joint filers who meet the conditions (IRS Publication 523 (opens in a new tab)).

Three rules decide how much survives a rental period:

1. Time after you move out is not "nonqualified use." Gain is generally prorated away for periods after 2008 when neither spouse lived in the home. But any part of the 5-year window that falls after your last day living there does not count against you. So moving out, renting, and selling while you still pass the 2-of-5 test generally keeps the exclusion intact, apart from point 2.
2. Depreciation is never excluded. Gain equal to depreciation allowed or allowable after May 6, 1997 is taxable even when the rest of the gain is excluded.
3. Military owners can stop the clock. You may suspend the 5-year period while you or your spouse is on qualified official extended duty: a duty station at least 50 miles from the home, or living in government quarters under orders, on orders for more than 90 days or an indefinite period. The suspension cannot extend the window by more than 10 years. Those periods also do not count as nonqualified use.

If you are weighing whether to sell now or rent for a few years, the rent or sell guide walks through the decision, and the PCS orders guide covers the military timing in more detail.

1031 exchanges in brief

A like-kind exchange under IRC § 1031 lets you defer gain when you exchange real property held for investment or business use for other like-kind real property. The basics as of October 2026:

• Since January 1, 2018, only real property qualifies.
• A primary residence does not qualify. A former home that has been converted to a rental may be eligible; talk to a tax professional and a qualified intermediary before you list.
• You must identify replacement property within 45 days of transferring the old one, and receive it by the earlier of 180 days or your return's due date, including extensions.
• Taking control of the sale proceeds before the exchange is complete may disqualify it, and you, or an agent such as your attorney or accountant, cannot act as the intermediary.
• The exchange is reported on Form 8824.

Property tax: what renting changes and what it doesn't

Renting your home out does not, by itself, trigger a Prop 13 reassessment. Reassessment follows a change in ownership or completed new construction, and between those events the base value rises by no more than 2% a year. An ordinary residential lease is not a change in ownership.

Two things do change:

• The homeowners' exemption ends. In San Diego County it takes $7,000 off assessed value, worth about $70 a year. It applies only if the home was your principal residence on the January 1 lien date, and the county says it is the owner's responsibility to end it when you no longer qualify. The Board of Equalization lists December 10 as the last day to end it without penalty.
• Inherited homes are different. If you inherited the home under Prop 19 and rent it instead of living in it, the parent-child exclusion is lost and the home takes a new market value. See renting out an inherited Coronado home.

The City of Coronado also has a business certificate rule, but owners renting two or fewer residential units are exempt from it (CMC § 13.10.080).

If you move out of California

California taxes nonresidents on California-source income, including rent from, and the sale of, California real property.

Rent withholding. Under FTB Publication 1017, rent paid to a nonresident owner in the course of the payer's business is subject to 7% withholding. Tenants paying you directly are not required to withhold, but payments from a property management company are. Withholding is optional on the first $1,500 paid in a calendar year, and a California manager may deduct its management fee before computing the 7%. An FTB withholding waiver (Form 588) or an approved reduced-withholding amount can avoid or reduce it; Form 590 is for California residents only (FTB Publication 1017 (opens in a new tab)).

Sale withholding. On California real property sales, escrow generally withholds 3⅓% of the sales price (or an elected amount based on estimated gain), for sellers in general, not only nonresidents. Form 593 exempts a home last used as your principal residence, but the FTB says that if the last use was as a rental, you do not qualify for that exemption. Ask your preparer about other exemptions before escrow opens.

More from the Rental Property Tax Guide

• Schedule E for Rental Property: A Line-by-Line Walkthrough
• Rental Property Depreciation: 27.5 Years, Basis and Land
• Passive Loss Rules for Rental Property: The $25,000 Allowance
• Selling a Former Home You Rented Out: The Section 121 Rules
• Out-of-State Owners: California's 7% Withholding on Rent
• All Rental Property Tax Guide pages

Frequently asked questions

Do I have to depreciate my Coronado rental?

Depreciation is how the IRS lets you recover the cost of the building over 27.5 years, and at sale the gain attributable to depreciation "allowed or allowable" is not covered by the home sale exclusion. In plain terms, skipping the deduction does not protect you from the tax on it later, so talk to your preparer about claiming it from the first year the home is available for rent.

Can I still avoid capital gains tax if I rent my house before selling?

Possibly. The exclusion of up to $250,000, or $500,000 for qualifying joint filers, applies if you owned and lived in the home for 2 of the 5 years before the sale, and time after you move out is not nonqualified use. Gain equal to depreciation is still taxable, and military owners on qualified official extended duty can suspend the 5-year window for up to 10 years.

Will renting my Coronado home raise my property taxes?

Renting does not, by itself, trigger a Prop 13 reassessment, because reassessment follows a change in ownership or new construction. You do lose the homeowners' exemption, worth about $70 a year in San Diego County, and you are responsible for ending it. Inherited homes rented out instead of lived in lose the Prop 19 exclusion and are reassessed.

Does my property manager withhold California tax if I live out of state?

Generally yes. FTB Publication 1017 says rent paid to nonresident owners by property management companies is subject to 7% withholding, while tenants paying the owner directly are not required to withhold. Withholding is optional on the first $1,500 in a calendar year, and an FTB withholding waiver (Form 588) or an approved reduced amount can avoid or reduce it (Form 590 is for California residents only).

Next step: run the numbers with real rent

Tax planning starts with a realistic rent figure. When you want a rent estimate to bring to your tax preparer, request a free Coronado rental analysis. McKee Properties has managed rentals from its Coronado office since 1989 and offers the analysis with no obligation.