A second home in San Diego carries a heavier tax load than a primary residence at almost every stage of ownership. San Diego second home taxes include the full county property tax with no homeowners’ exemption, a layered Transient Occupancy Tax and licensing scheme if you rent to short-term guests, federal and California income tax on any rental profit, and capital gains tax on the full appreciation when you sell. If the property is eventually inherited, Proposition 19 usually resets the assessed value to market, which can multiply the annual bill overnight.
Property Tax While You Own It
The baseline property tax in San Diego County is capped at 1% of assessed value under Article XIII A of the California Constitution, better known as Proposition 13.1Justia Law. California Constitution Article XIII A Section 1 Voter-approved bonds for schools and local infrastructure add to that base, so most San Diego tax areas run roughly 1.1% to 1.25% of assessed value. The assessor sets the initial assessed value at your purchase price, and annual increases are capped at 2% as long as ownership doesn’t change.
Expect a supplemental bill shortly after closing. The assessor recalculates the value from the prior owner’s assessed figure to your purchase price, and the difference generates a supplemental tax covering the remainder of the fiscal year that runs July 1 through June 30.2California Board of Equalization. Supplemental Assessment Purchases that close between January and May produce two supplemental bills: one for the current fiscal year and another for the full following year. These arrive separately from the regular annual bill and routinely catch new owners off guard.
No Homeowners’ Exemption
California reduces the assessed value of a qualifying owner-occupied primary residence by $7,000, worth roughly $70 in annual tax savings at the base rate.3California Board of Equalization. Homeowners’ Exemption A second home does not qualify. The dollar savings are small, but losing the exemption also means the county treats the property as a non-primary residence for other purposes, which matters for the Proposition 19 rules discussed below.
California determines principal residence by domicile rather than days in the home. The assessor weighs where you file income taxes, register vehicles, vote, and hold your driver’s license.4California Department of Tax and Fee Administration. Property Tax Annotations – 350.0019 If those factors point elsewhere, the San Diego property is classified as non-primary regardless of how much time you actually spend there.
Mello-Roos in Newer Communities
Many of San Diego’s newer master-planned neighborhoods sit inside Community Facilities Districts created under the Mello-Roos Community Facilities Act of 1982, which lets developers finance public infrastructure through special tax liens on the properties in the development.5California Legislative Information. California Government Code 53321 Mello-Roos charges are not based on assessed value. The district resolution usually ties the tax to factors like lot size, square footage, or property category, so two homes worth very different amounts can owe the same amount. The charges appear as separate line items on the annual bill, generally run 20 to 40 years until the underlying bonds are paid off, and can add thousands per year. Read the preliminary title report before you buy.
Taxes If You Rent It Out Short-Term
Renting your San Diego second home to guests for less than a month triggers the city’s heaviest layer of taxes and licensing requirements, and enforcement has tightened.
Transient Occupancy Tax
San Diego’s Transient Occupancy Tax (TOT) applies to all rentals of 30 consecutive days or less. As of May 2025, the city uses a three-zone rate structure:6City of San Diego. Transient Occupancy Tax (TOT)/Tourism Marketing District (TMD)
- Zone 1: 11.75%
- Zone 2: 12.75%
- Zone 3: 13.75%
You collect the TOT from the guest, but legal responsibility for reporting and remitting falls on you. The city publishes an interactive map to confirm your zone. Late payments trigger a 1% penalty on the first delinquent day plus an additional one-third of 1% per day after, capped at 25%. The city audits booking platforms to find hosts who aren’t remitting.
Short-Term Residential Occupancy License
You also need a Short-Term Residential Occupancy (STRO) license before advertising or renting. The city uses a four-tier system, and a host can hold only one license at a time:7City of San Diego. Short-Term Residential Occupancy
- Tier 1 (Part-Time): limited rental days per year.
- Tier 2 (Home Sharing): host must be present during the guest’s stay.
- Tier 3 (Whole Home, excluding Mission Beach): full-time whole-home rental, capped so issued licenses cannot exceed 1% of San Diego’s total housing units outside Mission Beach. As of early 2026, roughly 895 licenses remain available under the cap.
- Tier 4 (Mission Beach Whole Home): capped at 30% of the Mission Beach Community Planning Area and fully subscribed, with zero licenses available.
Annual fees range from about $226 for Tier 1 to about $1,170 for Tiers 3 and 4, including the application fee. Licenses are not transferable between owners or locations, so a buyer must obtain their own.
Rental Unit Business Tax
Separately from the TOT and STRO license, the city imposes a Rental Unit Business Tax on anyone who owns or manages residential rental property within city limits, requiring an annual certificate and payment.8City of San Diego. Business Tax/Rental Unit Business Tax It applies whether you rent short-term or long-term, so switching to a traditional lease doesn’t eliminate it.
Income Tax on Rental Earnings
If you rent the home for fewer than 15 days in the year, you don’t report the rental income at all, and mortgage interest and property taxes remain deductible on Schedule A as if the property were purely personal. Cross 15 days and all rental income becomes reportable. Expenses like repairs, insurance, utilities, and depreciation become deductible, but only in proportion to rental versus personal use. If the IRS treats the home as a personal residence (personal use above 14 days or 10% of rental days, whichever is greater), your deductible rental expenses generally cannot exceed rental income.9Internal Revenue Service. Publication 527 – Residential Rental Property
Mortgage Interest and SALT Limits
Mortgage interest on a second home is deductible, but combined acquisition debt on your primary and secondary residence cannot exceed $750,000 (or $375,000 if married filing separately) for mortgages taken out after December 15, 2017.10Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction Mortgages originated before that date retain a $1 million ceiling. Given San Diego prices, many buyers hit the $750,000 cap on the primary mortgage alone, leaving nothing to deduct on the second home.
The combined state and local tax deduction cap was raised from $10,000 to $40,000 for tax years 2025 through 2029 by the One Big Beautiful Bill Act, with a 1% annual increase and phasedown back to $10,000 for single filers above $250,000 and joint filers above $500,000.11Congress.gov. Selected Issues in Tax Policy: The Mortgage Interest Deduction California’s property tax and income tax bills still exhaust the cap for many second-home owners.
Passive Loss Cap and the 3.8% Surtax
Rental real estate is generally a passive activity, meaning losses can’t offset wages or business income. Owners who actively participate in managing the rental can deduct up to $25,000 in losses against non-passive income, but the allowance phases out between $100,000 and $150,000 of modified adjusted gross income.12Internal Revenue Service. Instructions for Form 8582 Most buyers in San Diego’s price range sit above $150,000, so losses are suspended and carried forward until the property is sold or passive income absorbs them.
A 3.8% Net Investment Income Tax applies to rental income and capital gains once modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), calculated on the lesser of net investment income or the amount above the threshold.13Internal Revenue Service. Net Investment Income Tax
California’s Share
California generally conforms to federal rules on rental income, but depreciation schedules can diverge, requiring separate California-specific calculations.14Franchise Tax Board. California Form 3885L – Depreciation and Amortization The top marginal state rate reaches 13.3% with the Mental Health Services surcharge on income above $1 million, and the state does not offer a preferential rate for long-term capital gains. All gains are taxed as ordinary income.
Taxes When You Sell
Selling a second home is where the gap with primary-residence tax treatment hurts most. The federal exclusion of up to $250,000 in capital gains ($500,000 for married couples filing jointly) is available only when you’ve owned and lived in the home for at least two of the five years before sale.15Internal Revenue Service. Topic No. 701, Sale of Your Home A second home fails the principal-residence use requirement and does not qualify.16Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain from Sale of Principal Residence Every dollar of appreciation is taxable. On a property that has appreciated significantly, the federal long-term capital gains rate (up to 20%), the 3.8% net investment income tax, and California’s rate up to 13.3% can push the combined effective rate above 30%.
Withholding If You’ve Moved Out of State
If you live outside California when you sell, the buyer or escrow company must withhold 3⅓% of the gross sales price at closing and remit it to the Franchise Tax Board as a prepayment on your California tax.17Legal Information Institute. Cal Code Regs Title 18 Section 18662-3 – Real Estate Withholding You can elect to calculate withholding on the actual gain rather than the sales price by filing FTB Form 593, which often lowers the amount held.18Franchise Tax Board. FTB Publication 1016 Real Estate Withholding Guidelines Any overpayment comes back as a refund when you file.
1031 Exchange to Defer the Gain
A Section 1031 like-kind exchange defers capital gains tax when you reinvest the proceeds into another investment property. To qualify a second home under the IRS safe harbor in Revenue Procedure 2008-16, you must have owned it for at least 24 months, rented it at fair market rates for 14 or more days in each of the two years before the exchange, and limited personal use to no more than 14 days or 10% of rental days (whichever is greater) in each of those years. The replacement property must meet the same standards for the two years after. Falling short of the safe harbor doesn’t automatically disqualify the exchange, but it invites closer IRS scrutiny.
What Happens If the Home Is Inherited
Before February 2021, California parents could transfer a primary residence plus up to $1 million in assessed value of other property to their children without reassessment. Proposition 19 eliminated the second category. An inherited second home is now reassessed to current fair market value, which in San Diego often means a dramatic jump in annual property tax.19California Board of Equalization. Proposition 19 Fact Sheet
The parent-child exclusion survives only for a family home the heir uses as their own principal residence within one year of transfer. Even then, if fair market value exceeds the parent’s taxable value by more than a set threshold (currently $1,044,586 for transfers between February 16, 2025, and February 15, 2027), the property is partially reassessed, and the heir must file for the homeowners’ exemption within a year to lock in the exclusion. A long-held San Diego vacation property assessed at $300,000 that resets to $2 million at transfer carries roughly $20,000 more in annual tax for the heir, which has forced many families to sell.