Real estate has some of the best tax breaks available, and many investors and agents miss out.
Start with depreciation. The IRS lets you deduct the cost of a residential rental building over 27.5 years and commercial rental property over 39 years, even while the property is gaining value. A cost segregation study can pull part of that cost into shorter-lived property, and with bonus depreciation at 100% for qualifying property acquired after January 19, 2025, that can mean a large deduction in year one. It comes with rules. Passive loss limits can keep the deduction from offsetting your other income unless you qualify as a real estate professional or run short-term rentals, and some depreciation can be added back as recapture depreciation when the property is sold. A 1031 exchange can defer that tax, but only if you plan before the sale.
Agents have different problems. Majority of agents are paid on commission-based income. Commission-based income arrives on 1099-NEC (nonemployee compensation) with zero withholding taxes and taxed as self-employment income. Taxable income with minimum deductions, lack of planning, and paying incorrect quarterly estimated taxes equates to a surprised tax bill. Common mistakes:
• Mileage, MLS and association fees, marketing and home office costs that never get tracked.
• Everything running through a sole proprietorship long after an S corporation would have saved real money.
• No retirement plan, which leaves a large deduction untouched. A SEP IRA or Solo 401(k) can shelter a meaningful amount.
• Missing the 20% qualified business income deduction because the return was not set up to claim it.
Done right and documented, none of these oversights are complicated to implement. It just takes planning with an experience Tax advisor, ideally before year-end, not in April.
If you own rentals, flip properties or sell real estate for a living, we would love to look over your numbers with you.
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Written By
Dwayne Ailey, EA, Top Notch Accounting Svs, LLC
“This article is for general purpose use only; not legal tax advice please contact us for more information to your situation."