How San Francisco Families Use Tax Law to Make High-Priced Real Estate Work

By Scott Conway, San Francisco / Bay Area Realtor ®

San Francisco real estate is expensive, there’s no way around that.

But what many buyers and families don’t realize is that the U.S. tax code is intentionally designed to make long-term ownership of rental housing financially viable, even in high-cost cities like San Francisco.

When used correctly, tools like accelerated depreciation and cost segregation can save San Francisco property owners tens of thousands of dollars in taxes over the first five years of ownership, helping offset high purchase prices, high interest rates, and high operating costs.

Let’s walk through how that works — in plain English.

Why This Matters More in San Francisco

Because property prices are so high here, the dollar value of depreciation is also much higher.

That means:

• Larger buildings = larger depreciation deductions

• Larger deductions = more tax savings

• More tax savings = better after-tax cash flow

In other words, the same tax rules that apply everywhere become far more powerful when applied to San Francisco real estate.

How Depreciation Normally Works

When you buy a rental property, the IRS lets you depreciate the building (not the land) over 27.5 years.

So if you buy a small multifamily or rental condo in San Francisco:

• Purchase price: $1,500,000

• Land value: $500,000

• Building value: $1,000,000

Normal depreciation:

• $1,000,000 ÷ 27.5 years ≈ $36,360 per year

That alone reduces taxable income significantly, but accelerated depreciation can amplify this effect.

Accelerated Depreciation in High-Cost Markets

San Francisco buildings often contain large amounts of components that qualify for faster depreciation, including:

• High-end finishes

• Custom millwork and cabinetry

• Complex electrical and plumbing systems

• Extensive site and exterior improvements

A cost segregation study can reclassify a substantial portion of the building into 5-, 7-, or 15-year property.

That means instead of waiting 27.5 years to receive the full benefit, owners can take much of it in the first few years.

A San Francisco Example

Let’s use a realistic local scenario:

• Duplex or small multifamily purchase: $1,600,000

• Building value: $1,100,000

With cost segregation:

• 30% ($330,000) qualifies for accelerated depreciation

Over the first five years, that might result in an additional $200,000+ of deductions versus standard depreciation.

At a combined federal + California marginal tax rate of ~40%, that’s roughly:

• $200,000 × 40% = $80,000 in tax savings

That’s not theoretical — it’s real cash that stays in the owner’s pocket.

Why This Helps Families

In San Francisco, the first years of ownership are the hardest:

• Mortgage payments are high

• Insurance, maintenance, and property taxes are high

• Vacancies and renovations can happen

Accelerated depreciation helps reduce the financial pressure during this period by lowering taxes and improving after-tax returns.

This can mean:

• Better cash flow

• Less stress

• More flexibility to hold the property long-term

Which is exactly how most families actually build wealth in real estate — by holding quality assets for a long time.

Not a Gimmick — A Design Feature

These incentives exist because governments want people to:

• Maintain and improve housing stock

• Build and preserve rental housing

• Commit to long-term ownership

It’s not a loophole. It’s a policy tool.

But it should always be implemented with guidance from a CPA or cost segregation specialist who understands both federal and California tax law.

Why This Changes the Conversation About Buying in San Francisco

When people look only at sticker price and rent, San Francisco real estate can look intimidating.

But when you look at after-tax returns, the picture changes.

Real estate becomes:

• More predictable

• More tax-efficient

• More competitive with other investments

And far more accessible for families who want stability, long-term growth, and inflation protection.

Final Thought

The families who succeed with San Francisco real estate aren’t the ones trying to “time the market.”

They’re the ones who:

• Buy thoughtfully

• Understand the full financial picture

• Use the tools the system provides

• And hold for the long term

Accelerated depreciation is one of those tools — and when used wisely, it can quietly save San Francisco families tens of thousands of dollars while building lasting wealth.

Thinking about buying an investment property in San Francisco?

If you’d like help evaluating a specific opportunity — including rental potential, neighborhood dynamics, and how the tax advantages may impact your after-tax return — I’m happy to help you think it through. Just reach out anytime.

Working with Scott Conway, Top Investment Multi-Family Home Realtor 

I worked with Scott on a commerical transaction in San Francisco. From the outset, he was on the ball, very responsiveness to me and his client, and was integral in the successful completion of the transaction. Great job Scott! 

Scott was incredibly patient with us in helping us close on a dream property for us. We had very specific parameters, and over the span of nearly year, we went through many viewings of specific properties, endured some trials and tribulations with bidding on properties and was very helpful with steps during escrow. We had bonded over the experience, and I couldn't have been happier with the result at the end. I put my faith and trust with Scott, and I whole heartedly recommend his work to you.

We worked with Scott during our search for a home in San Francisco. I cannot emphasize enough how helpful, friendly, and knowledgeable he was throughout the process. Scott demonstrated a deep understanding of the San Francisco market, providing us with valuable insights and guiding us in making informed decisions. His professionalism, patience, and willingness to go the extra mile made our experience enjoyable and stress-free. We highly recommend Scott to anyone seeking a real estate agent in the Bay Area.

Scott Conway is fantastic! My husband and I had very specific needs for our first home (neighborhood, garage, backyard, multifamily property, etc) and Scott was up for the challenge! He answered our endless questions and stuck with us for many months as we navigated the Covid real estate market to find our “Goldilocks” property. Through his perseverance, we found our dream home and he continued to help us through the purchasing/escrow process. Scott is an all-around great guy, very easy going, hardworking and extremely knowledgeable. He made what can be a stressful process very smooth and we felt at ease the entire time. We are lucky to have him as our agent and now as our friend.

FURTHER READING

• Read Additional Client Reviews of Scott Conway
  https://www.zillow.com/profile/ScottConwayRealtor#reviews

• Meet Scott Conway – San Francisco & Bay Area Realtor®
  https://legacysfhomes.com/blog/meet-scott-conway-real-estate-agent-at-legacy-real-estate

• Multifamily Homes 101: A Strategy Guide for SF Buyers and Investors
  https://legacysfhomes.com/blog/multifamily-homes-101-a-strategy-guide-for-sf-buyers-and-investors

• Is Real Estate Your Best Hedge Against Stocks and ETFs?
  https://legacysfhomes.com/blog/is-real-estate-your-best-hedge-against-stocks-and-etfs

• When an LLC Is a Good Idea for Real Estate Ownership
  https://legacysfhomes.com/blog/when-an-llc-is-a-good-idea