Real Estate Tax Strategies
Depreciation
The IRS allows you to deduct the cost of a residential rental property over 27.5 years (commercial: 39 years). Only the building value (not land) is depreciable. On a $400,000 property with $100,000 land value, you deduct $300,000 ÷ 27.5 = $10,909/year.
Upon sale, depreciation is recaptured as ordinary income (up to 25%). However, a 1031 exchange defers both capital gains and depreciation recapture.
Cost Segregation
A cost segregation study breaks the building into components with shorter recovery periods: land improvements (15 years), personal property (5-7 years), and building (27.5 years). This front-loads depreciation. Typical results: 20-35% of the building cost can be reclassified to 5-7 year property. Bonus depreciation (80% in 2026, phasing down to 20% in 2027) can then be applied to these short-life assets, generating massive year-1 deductions.
Section 179 Deduction
You can immediately expense up to $1,220,000 (2026) of tangible personal property used in your real estate business — appliances, furniture, tools, vehicles (subject to business use %). Phases out above $3,050,000. Must be used more than 50% for business.
20% Pass-Through Deduction (Section 199A/QBI)
Rental real estate activities may qualify for the 20% Qualified Business Income deduction. For 2026: taxable income under $197,300 (single) / $394,600 (MFJ) gets the full deduction. Above that, limitations apply based on W-2 wages and property basis. The IRS safe harbor (Revenue Procedure 2019-38) requires: separate books, 250+ hours of rental services per year, and a contemporaneous log.
Real Estate Professional Status
If you spend more than 50% of your working hours and 750+ hours/year in real estate trades or businesses, your rental losses are treated as "non-passive" — they can offset your W-2 income. This is the holy grail for high-income real estate investors.
Short-Term Rental Tax Rules
Properties rented for an average of 7 days or less (or 30 days or less with substantial services) are considered a "trade or business" rather than a "passive activity" — making losses potentially active (non-passive) under a separate safe harbor. Average of 7+ days per guest: standard passive activity rules apply. Average of 7 days or fewer per guest: the IRS treats this as a business, not passive rental, if you materially participate.
1031 Exchange
Defer all capital gains and depreciation recapture by reinvesting sale proceeds into like-kind property. Strict timeline: identify replacement property within 45 days, close within 180 days. Qualified Intermediary (QI) required. Must be held for investment or business use — personal residences don't qualify.
Key Deductions
- Mortgage interest (Schedule E)
- Property taxes
- Insurance
- Repairs and maintenance (vs improvements — capitalized)
- Property management fees
- Travel (for property management — must be primarily for business)
- Home office (if dedicated space for rental activities)
- Legal and professional fees
- Marketing and advertising
- HOA fees
- Utilities (if landlord pays)
Net Investment Income Tax (NIIT)
3.8% surtax on the lesser of net investment income or MAGI over $200k (single) / $250k (MFJ). Rental real estate income is generally subject to NIIT unless you're a real estate professional. Strategy: use the rental real estate safe harbor to exclude from NIIT.
Vacation Homes (Personal + Rental Use)
| Personal Use | Tax Treatment |
|---|---|
| ≤14 days or ≤10% of rental days | Standard rental. All expenses deductible (up to rental income). |
| >14 days and >10% of rental days | Personal/rental allocation. Deductions limited based on ratio. No loss allowed. |
| Rented <15 days/year | No income to report. No deductions allowed (except mortgage interest and property taxes on Schedule A). |