Depreciation drives the return
Residential property depreciates over 27.5 years and commercial over 39, with components that can go much faster.
Industry tax guide
Real estate tax and accounting
Tax planning for the life of a property, from purchase to exchange or sale.
Real estate investors, owners and operators earn returns from rent and appreciation, and most of their tax benefit comes from depreciation and the timing of sales.
Getting full value means classifying each property correctly at purchase, deducting what qualifies as repairs, using losses where the passive rules allow, and planning exchanges before a sale closes.
Compared with a general business
What makes taxes different for real estate
Passive activity rules
Rental losses are passive unless you qualify as a real estate professional or use the short-term rental exception.
Like-kind exchanges
Real property can be exchanged for other real property with gain deferred under Section 1031.
Depreciation recapture at sale
Unrecaptured Section 1250 gain is taxed at up to 25% when property is sold.
The rules in detail
Tax rules for real estate
Cost segregation and 100% bonus depreciation
Splitting a building into 5-, 7- and 15-year components lets owners deduct those parts in the first year, with bonus depreciation at 100% for property acquired after January 19, 2025. A study can also be done for properties bought in earlier years, with a catch-up deduction on Form 3115.
Passive losses and professional status
Rental losses are passive unless the owner qualifies as a real estate professional and materially participates, or uses the short-term rental exception. Otherwise losses offset only passive income, with a $25,000 allowance for active participants with moderate income.
Like-kind exchanges under Section 1031
Gain on investment or business real property can be deferred by exchanging into like-kind real property, identifying replacements within 45 days and closing within 180 days through a qualified intermediary.
Planning moves
Ways to save tax in real estate
Cost segregation on every acquisition
With 100% bonus depreciation for property acquired after January 19, 2025.
Catch up missed depreciation
Form 3115 claims past depreciation in the current year.
Qualify as a real estate professional
Material participation lets losses offset other income.
Exchange instead of selling
A 1031 exchange defers gain and recapture.
Deduct repairs, not improvements
The safe harbors for small taxpayers and routine maintenance keep upkeep deductible.
Plan estate transfers
Holding property until death resets basis for heirs.
Working with OICPA
How we help
Cost segregation on each acquisition
Studies ordered at purchase, or for past purchases with a catch-up deduction.
Cost Segregation CoordinationPlan exchanges before you sell
Replacement timelines, debt replacement and boot reviewed before the relinquished property closes.
1031 Exchange & Opportunity Zone Planning1031 tax and deadline calculator
See the tax a sale would trigger and your 45-day and 180-day dates.
1031 Exchange Tax & Deadline CalculatorProperty-level books
Rent rolls, reserves and capital work tracked by property, ready for the return.
Property-Level AccountingBookkeeping and reporting
The accounting behind the tax work
Real estate rewards patience, but the tax code rewards precision. We help investors connect acquisition structure, financing, repairs vs. improvements, and exit timing so depreciation strategy and cash flow tell the same story.
Entity and liability stacking
Multiple LLCs, joint ventures, and management fees create allocation questions. Without clear books and intercompany discipline, partners lose confidence in K-1 timing and passive loss planning.
Capital vs. expense judgment
Repair regulations and improvement capitalization affect basis and future depreciation. Inconsistent treatment invites IRS scrutiny and weakens resale diligence.
Accelerated depreciation timing
Cost segregation and bonus depreciation can be high-impact, but they interact with recapture, passive activity rules, and future exit scenarios. A study fitted to the property, not a one-size-fits-all report, is what protects after-tax returns.
What you can expect
- Rent roll and entity-level P&L views that tie to tax reporting categories
- Depreciation strategy memo when acquisitions, improvements, or dispositions occur
- Year-end filing package with passive activity and at-risk documentation where relevant
Frequently asked questions
Can I do cost segregation on a property I bought years ago?
Yes. The missed depreciation is claimed in the current year through an accounting method change on Form 3115, without amending past returns.
Will cost segregation losses offset my W-2 income?
Only if you qualify as a real estate professional and materially participate, or the property qualifies under the short-term rental rules. Otherwise the losses carry forward against passive income.
What if I miss the 45-day deadline?
The exchange fails and the sale is taxable. The deadline cannot be extended except in federally declared disasters, so we calendar it the day the sale closes.
Related articles
References
- Publication 946 (2025), How To Depreciate PropertyInternal Revenue Service
- Publication 527 (2025), Residential Rental PropertyInternal Revenue Service
- Publication 925 (2025), Passive Activity and At-Risk RulesInternal Revenue Service
- Like-kind exchanges: real estate tax tipsInternal Revenue Service
Rules reflect federal tax law as of November 2026.