Buying San Diego Real Estate for the Short-Term Rental Tax Strategy
If you have a W-2 job and you are looking at San Diego property partly for the tax treatment, there are two moving parts. The federal depreciation rules got more favorable in 2025. The City of San Diego short-term rental rules got tighter. Most of what circulates online covers the first and skips the second, which is how investors end up under contract on a property that cannot legally do what their spreadsheet assumed.
Last reviewed October 2026 by Twana Rasoul, DRE# 02026495
What this page is and is not. I am a real estate agent. I am not a CPA, a tax attorney, or a land use attorney, and nothing here is tax, legal, or accounting advice. This page summarizes publicly available IRS regulations and City of San Diego ordinances, with sources linked at the bottom so you can read them yourself. Every rule described here needs to be confirmed for your situation by a qualified tax professional, and confirmed for your specific address by the City of San Diego. What I do is help investors find and evaluate property. Whether a given strategy works for your return is a conversation for your CPA.
The strategy, in plain terms
Investors arrive at this from a pretty consistent chain of reasoning, and it goes like this.
A rental building is normally depreciated over 27.5 years. An engineering based study of the building, commonly called a cost segregation study and performed by specialist firms, separates out the components that are not really structure. Appliances, flooring, cabinetry, fixtures, and window coverings fall into 5-year property. Landscaping, fencing, paving, and site lighting fall into 15-year property. Those shorter-life components depreciate much faster than the walls and the roof.
Think of it like a grocery cart. The default rule treats everything in the cart as having the same shelf life, so you eat it over 27 and a half years. The study walks through the cart and points out that the milk and the produce spoil in five.
Those short-life components are also eligible for bonus depreciation, which allows them to be deducted in full in the first year. Bonus depreciation had been phasing down and was headed to 20% in 2026 and zero in 2027. The One Big Beautiful Bill Act, signed July 4, 2025, reversed the phase-down and set 100% bonus depreciation as permanent for qualifying property acquired and placed in service after January 19, 2025.
So the first-year deduction available on a San Diego fourplex today can be considerably larger than it would have been under the old schedule. That is the part that gets investors interested.
California does not follow the federal rule. California has never conformed to federal bonus depreciation under IRC Section 168(k), and the Franchise Tax Board has stated it is not conforming to the 2025 federal change either. The practical effect is a federal deduction and a California add-back, with separate depreciation schedules maintained for each. If you are modeling total tax savings, ask your CPA to show you the state side separately. It does not mirror the federal number.
Why the passive loss rules matter
A large first-year deduction often produces a paper loss on the property. Under IRC Section 469, rental activities are passive by default, and passive losses generally offset passive income rather than wages. The loss is not lost, it suspends and carries forward. But it is usually not the same-year reduction in W-2 tax that people picture.
There are a few recognized routes around that default. Real Estate Professional Status requires 750 hours and more than half of your working time in real property trades, which is difficult alongside a full-time job. A spouse who meets that test. Or the short-term rental exception.
The short-term rental exception
This is the route most W-2 investors are asking about. It is written into the regulations rather than being a loophole in the shady sense.
Treasury Regulation 1.469-1T(e)(3)(ii)(A) provides that an activity where the average period of customer use is seven days or less is not treated as a rental activity for passive loss purposes. Combined with material participation, the losses are treated as non-passive. Two conditions, both required:
- Average guest stay of seven days or less across the tax year, calculated as total rental days divided by number of bookings. Enough longer bookings and the average breaks, which affects the whole year.
- Material participation under one of the IRS tests. The commonly cited one for someone with a job is more than 100 hours and more than any other individual involved, including a property manager.
Both tests are fact specific and documentation driven. How they apply to you is a question for your CPA, and the material participation hour log is something they will want to set up before the year starts, not after.
Where the City of San Diego comes in
Everything above is federal and applies anywhere. This next part is specific to the City of San Diego, and it is the part that determines whether a property is even a candidate.
The City requires a Short-Term Residential Occupancy license for any rental of less than one month. Unlicensed operation has been prohibited since May 1, 2023. There are four tiers.
| Tier | What the City says it covers | Reported availability |
|---|---|---|
| Tier 1 | Part-time, up to 20 days per year. Home share or whole home. | Open, no cap |
| Tier 2 | Home sharing in a primary residence the host occupies. | Open, no cap |
| Tier 3 | Whole home, not the host's primary residence, outside Mission Beach. Capped at roughly 1% of citywide housing units. | Roughly 799 remaining |
| Tier 4 | Whole home in Mission Beach. | Cap reached, waitlist |
Three provisions that reshape most plans
1. ADUs. San Diego Municipal Code 141.0302(a)(8) states that an accessory dwelling unit shall not be used for a rental term of less than 31 consecutive days, and the City's own STRO FAQ states that the Municipal Code prohibits using ADUs for short-term rental. The City describes a narrow exception for companion units permitted before October 15, 2017. If your plan involves short-term renting a newer ADU, read the City's FAQ before you go further, because this is the single most common assumption I see that does not survive contact with the ordinance.
2. One license, one unit, one person. Per the City, a host may hold only one license and may not operate more than one dwelling unit for short-term residential occupancy at a time within the City. The City also states the host must be a natural person, so an entity cannot hold the license. Worth understanding before you model a fourplex as four separate short-term rentals.
3. Tier 3 and Tier 4 use requirements. The City requires those license holders to use the license a minimum of 90 days each year and to submit quarterly utilization reports. A license held but not used is not a parked asset.
What investors in this position tend to look at
Four patterns I see. Which one fits depends entirely on your income picture, your household, and your own time, all of which are questions for your CPA rather than for me.
One whole-home short-term rental inside the city
The limit of one license per host means one. Investors pursuing this generally want to understand Tier 3 availability early, since the cap is finite and the remaining count has been declining. Furnishings are 5-year property, which is relevant to how a study on a furnished rental comes out.
Property outside City of San Diego limits
The STRO ordinance is a City of San Diego ordinance. Unincorporated San Diego County and the other incorporated cities, including Chula Vista, La Mesa, Encinitas, Carlsbad, and Oceanside, each set their own short-term rental rules. Some are more permissive, some are more restrictive, and coastal jurisdictions tend toward the restrictive end. This varies address by address, and identifying which jurisdiction a property falls in is squarely a real estate question I can help with.
Long-term multifamily with losses carried forward
This one gets dismissed too fast. Accelerated depreciation on a long-term 2-4 unit can produce suspended passive losses that carry forward, offset passive income as a portfolio grows, and release on sale. For an investor planning to own several units over a decade, that is a coherent plan rather than a consolation prize, and it sidesteps the STRO question entirely. Your CPA can model whether the carryforward is worth more to you than the complexity of the short-term route.
A spouse who qualifies for Real Estate Professional Status
For couples filing jointly where one spouse can meet the 750-hour test, REPS changes the analysis significantly and does not carry a seven-day requirement, which means long-term rentals come back into play. If one spouse is already considering leaving a job, this is worth raising with a CPA specifically, because it can change which properties make sense.
Rough numbers on a San Diego fourplex
Illustrative only, to show the shape of it. Your land allocation, your study, and your bracket will all differ.
- Purchase price
- $1,400,000 fourplex
- Land allocation
- Roughly $450,000. San Diego land values are high relative to improvements, so the depreciable share of the purchase price is smaller here than in most markets. Investors comparing San Diego to Texas or Florida consistently overestimate this.
- Depreciable building basis
- $950,000
- Reclassification range cited by study providers
- Commonly 20% to 30% into 5, 7, and 15-year property, so roughly $190,000 to $285,000 on these numbers
- Federal first-year treatment at 100% bonus
- The reclassified amount deducted in year one, plus standard depreciation on the remaining basis
- California treatment
- Added back. State depreciation runs on the standard schedule.
- Typical study cost
- Commonly quoted at $2,000 to $5,000 for residential income property
Whether that math works for you depends on whether the deduction is usable in your situation, which depends on the passive loss questions above, which depends on what the property can legally do. That last link in the chain is the one I can actually help you nail down.
Common questions
Can I buy a duplex and short-term rent one side while living in the other?
The City's Tier 2 license covers home sharing in a primary residence the host occupies. How that applies to a separate unit of a duplex is a question for the City Treasurer for your specific address and unit configuration, and I would get that answer in writing before writing an offer. The underlying purchase is a house hacking question, which is the part I work in every week.
I am looking at a house with a new ADU. Does the ADU restriction apply?
The City's STRO FAQ states the Municipal Code prohibits using ADUs for short-term rental, with a narrow exception for companion units permitted before October 15, 2017. Permit history is verifiable, and pulling it is part of normal due diligence I can help with. Whether a particular unit falls inside the exception is a determination for the City, not for me.
What about mid-term rentals of 31 days or more?
Rentals of 31 or more consecutive nights fall outside the STRO ordinance, which removes the licensing question. But a 31-plus day average stay does not meet the seven-day test in the regulation above, so the activity remains a passive rental for those purposes. Mid-term rentals are a solid cash flow approach in San Diego, particularly near the hospital corridors. They are a different strategy, not a workaround.
Can a study be done on a property I already own?
Study providers and CPAs describe handling prior-year property through a Form 3115 change in accounting method with a catch-up adjustment, rather than amending prior returns. One detail worth asking about: the catch-up reportedly uses the bonus depreciation rate in effect when the property was placed in service, not today's rate, so a 2024 acquisition is not treated the same as a 2026 one. Your CPA handles this.
Does this increase audit risk?
The IRS publishes a Cost Segregation Audit Techniques Guide, so the practice itself is well established. Practitioners generally report that scrutiny lands on the material participation claim and the average-stay calculation rather than on the study. Documentation is the theme. Ask your CPA what they want you to keep.
What happens to the depreciation when I sell?
It is recaptured on sale, and short-life property is recaptured at ordinary income rates rather than the 25% rate that applies to real property. Accelerated depreciation is a timing benefit rather than a permanent one. A 1031 exchange defers gain and recapture, and California conforms to Section 1031 for real property. Worth planning the exit before the entry, which is a conversation I have with clients regularly.
Should I buy a San Diego property primarily for the tax treatment?
My honest view, and it costs me deals to say it: no. Tax treatment changes how you structure a good purchase. It does not rescue a bad one. If a property only works because of the depreciation, you are buying a tax strategy with a building attached, and the building is the part you own for the next ten years.
Looking at a specific property?
Send me the address. I will tell you which jurisdiction it sits in, pull the permit history on any ADU, break down the unit mix and what the units realistically rent for, and give you the list of questions to put in front of the City and your CPA before you commit. The real estate side is what I do. The tax and compliance side is what I help you go ask the right people about.
Talk multifamily with meSources
- City of San Diego, Short-Term Residential Occupancy (STRO), including tier definitions, one-license-per-host rule, ADU prohibition, and Tier 3 and 4 utilization requirements
- City of San Diego STRO Ordinance Frequently Asked Questions (PDF)
- San Diego Municipal Code 141.0302(a)(8), accessory dwelling unit rental term
- IRC Section 469 and Treasury Regulation 1.469-1T(e)(3)(ii)(A), passive activity and rental activity definitions
- IRC Section 168(k) as amended by the One Big Beautiful Bill Act, Public Law 119-21, July 4, 2025
- California Franchise Tax Board guidance on non-conformity to IRC Section 168(k)
- IRS Cost Segregation Audit Techniques Guide
About the author
🏆 RealTrends Verified 2025 - #4 in San Diego by transactions | #7 by volume
🏆 SDAR Platinum Award 2021-2025 - top 1% of San Diego Realtors
🏆 Real Producers Top 200 Agent - San Diego 2021-2025
🏆 SDBJ Leaders of Influence 2025
200+ families served | 350+ units closed | $250M+ in transactions | DRE# 02026495
San Diego native, duplex and ADU specialist, and a house hacker myself. I own and operate here, which is why this page spends as much time on the City's rules as on the tax code.
Twana Rasoul, DRE# 02026495 | Compass | 619.792.8295 | twana.rasoul@compass.com
8889 Rio San Diego Dr., Ste #200, San Diego, CA 92108
This page is general information for San Diego real estate investors. It is not tax, legal, or accounting advice, and no agent-client or advisor relationship is created by reading it. I do not perform cost segregation studies, provide tax advice, or make determinations about permit eligibility or code compliance. Tax law and local ordinances change, and short-term rental license availability changes frequently. Verify all current requirements with the City of San Diego and consult a qualified CPA, tax attorney, or land use professional before acting on anything described here.