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Tax Planning for Real Estate Investors

  • Writer: Miranda Kishel
    Miranda Kishel
  • Jul 7
  • 3 min read
Real Estate Investors Tax

If you're a real estate investor, tax planning and strategy isn't optional—it’s a critical part of maximizing your returns. From depreciation to 1031 exchanges, real estate tax planning offers powerful tools to legally reduce your tax burden and improve cash flow. Without a smart plan, investors often miss out on deductions worth thousands of dollars annually.


Step-by-Step Guide to Tax Planning for Real Estate Investors


1. Understand Depreciation and Use It Strategically


Depreciation allows you to deduct the cost of your property over time—even as the asset likely increases in value.


  • Residential property: depreciated over 27.5 years

  • Commercial property: depreciated over 39 years

  • Don’t forget improvements (e.g., a new roof) may be depreciated separately.


2. Consider a Cost Segregation Study


A cost segregation study breaks down property components (like HVAC, lighting, and flooring) into shorter depreciation timelines.


3. Maximize Expense Deductions


Common deductible expenses include:


  • Mortgage interest

  • Property taxes

  • Repairs and maintenance

  • Travel to and from the property

  • Legal and professional services


4. Use the Real Estate Professional Status (REPS)If you or your spouse qualifies as a real estate professional, you can deduct real estate losses against ordinary income—a major tax advantage.


  • Must spend >750 hours and >50% of working time in real estate activities

  • Must materially participate in the rental activity


5. Leverage the 1031 Exchange


A 1031 exchange lets you defer capital gains taxes by reinvesting proceeds from a sale into another like-kind property.


  • Requires strict timing rules (45 days to identify, 180 days to close)

  • Must use a qualified intermediary

  • Avoid triggering depreciation recapture


6. Track Passive Loss Limits


Most rental income is considered passive. Losses may be limited unless you qualify for exceptions (such as REPS or earning < $150K).


  • Up to $25,000 of passive losses may be deductible if income is below thresholds

  • Unused losses may carry forward


7. Plan for Capital Gains and Depreciation Recapture


When you sell, you may owe:


  • Capital gains tax (up to 20%) on appreciation

  • Depreciation recapture tax (typically 25%) on previous depreciation

  • Plan in advance to reduce this impact through 1031 or installment sales


Real-World Example


A client who purchased a $1 million commercial building completed a cost segregation study that accelerated $300,000 in depreciation into the first year. This created a $120,000 deduction (based on their tax rate) and significantly offset their rental income—saving real dollars, fast.


Common Mistakes to Avoid


❌ Not claiming depreciation (you’ll still owe recapture even if you didn’t claim it)

❌ Failing to keep receipts for deductions

❌ Missing the deadlines on 1031 exchanges

❌ Not separating personal vs. business expenses properly

❌ Assuming rental income is always passive (REPS is complex—talk to an advisor)


Summary of Best Practices


✅ Use depreciation and cost segregation to your advantage

✅ Stay compliant with documentation and IRS rules

✅ Track every expense tied to your rental property

✅ Evaluate advanced strategies like 1031 exchanges and REPS

✅ Work with a knowledgeable tax advisor familiar with real estate


Tax planning isn’t just about saving money this year—it’s about building long-term wealth. If you’re a real estate investor and want to keep more of your hard-earned income, we can help.


Explore our Tax Advising Services to build a tax strategy designed for property owners like you.

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