The real estate investor tax strategy library

Cost segregation studies

An engineering-based study divides the purchase price among land, the building structure, and shorter-lived components such as appliances, carpeting, cabinetry, dedicated electrical, parking lots, and landscaping. Bonus depreciation is permanently back at 100% for property acquired after January 19, 2025, with acquisition judged by the date you signed a binding purchase contract. Everything in the 5-, 7-, and 15-year classes can therefore be deducted in the year the property is placed in service, as long as you didn't buy it from a related party or use it before.

For property you already own, a look-back study filed with Form 3115 lets you claim missed depreciation in a single year through a §481(a) adjustment, without amending prior returns.

The short-term rental loophole

Under the passive activity regulations, a property with an average customer stay of seven days or less is not a "rental activity" at all. When you also materially participate, most commonly with more than 100 hours and at least as many as anyone else, or with more than 500 hours, the losses are nonpassive. Combined with a cost segregation study, the resulting first-year loss can offset wages or business income.

Real estate professional status (REPS)

REPS removes the per-se passive treatment of long-term rentals. You still need material participation in the rentals, which is why most qualifying taxpayers file the election to treat all rental interests as one activity. Contemporaneous time logs aren't strictly required, but they are the strongest evidence you can bring to an exam.

1031 like-kind exchanges

Engage a qualified intermediary before closing, identify replacement property within 45 days, and close within 180 days. To avoid taxable boot, buy property of equal or greater value and replace the debt. If you used cost segregation, the short-life components need separate planning. Furniture and other personal property can't be exchanged, and §1245 recapture on the rest is deferred only if the replacement property has enough §1245 property of its own. Investors who keep exchanging until death set up a basis step-up for their heirs.

Harvesting suspended passive losses

A fully taxable disposition of your entire interest to an unrelated party frees up all suspended passive losses for that activity. Timing a sale for a high-income year, or a year with a large passive gain, can make those losses worth more.

LLC structure and liability layering

Partnership taxation lets debt create basis for losses and generally allows property to be distributed without triggering gain, though there are exceptions, such as for contributed property distributed within seven years. Appreciated property inside an S corp is hard to get out without tax, which is why most advisors avoid S corps for rental real estate.

Planning for Connecticut's add-backs and transfer taxes

Connecticut adds back 100% of federal bonus depreciation and returns it at 25% a year over the next four years, so the state benefit of a cost segregation study arrives in years two through five. When you sell, you pay a conveyance tax of 0.75% to 2.25% to the state plus 0.25% to 0.50% to the town. Multi-unit housing pays the flat 0.75% state rate, and a 1031 exchange doesn't remove the tax. Budget for both before you buy, and check the mill rate for the property's town or, in Stamford and Norwalk, its taxing district.