Real estate investors
Tax planning for real estate investors
Rental property is one of the few places a high earner can still create large deductions, but only if the depreciation, the passive loss rules and the records line up. We plan each property as part of your whole return.
We work remotely with real estate investors in every state, from one rental next to a full-time job to portfolios held in several LLCs, and with high-income professionals using short-term rentals as part of their planning. Every return is prepared or reviewed by an Enrolled Agent, enrolled to practice before the IRS.
Who this is for
- Owners of long-term and short-term rentals
- Investors holding property in LLCs or partnerships
- High-income professionals, including clinicians, investing in real estate
- Investors buying, selling or exchanging property this year
What we handle
- Rental returns. Schedule E for each property, partnership returns for multi-owner LLCs, and state returns where the property sits.
- Depreciation. Purchase price split between land and building, improvements tracked, and schedules kept accurate from year to year.
- Cost segregation. Whether a study is worth it for a property, and how to use the deduction it creates.
- Passive loss planning. Whether your losses can offset other income this year, or should be carried forward on purpose.
- Short-term rentals and professional status. The hours tests, and the logs that prove them.
- Sales and exchanges. Gain, depreciation recapture and released losses projected before you sell, and 1031 exchanges reported correctly.
- Bookkeeping by property. Income and costs tracked per property, so you know which ones earn their keep.
Common questions
How is rental property depreciated?
The building, not the land, is depreciated over 27.5 years for residential rentals and 39 years for commercial property. Improvements are depreciated separately, and items such as appliances, furniture and land improvements have shorter lives. Getting the land and building split right at purchase affects every year after.
What is cost segregation, and is it worth it?
A cost segregation study, usually done by an engineering firm, reclassifies parts of a building into 5-, 7- and 15-year property. Those parts can qualify for bonus depreciation, which can create a large deduction in the first year. It is worth it when the property is large enough to justify the study’s cost and you can actually use the deduction, which depends on the passive loss rules.
Can my rental losses offset my W-2 or 1099 income?
Usually not, because rental losses are passive. There are three main exceptions: up to $25,000 of losses for owners who actively participate, phasing out between $100,000 and $150,000 of modified adjusted gross income; real estate professional status; and short-term rentals you materially participate in. Losses you cannot use are carried forward and released when you sell the property.
How do short-term rentals reduce taxes for high earners?
If the average guest stay is seven days or less, the property is not treated as a rental activity under the passive loss rules. If you also materially participate, for example by spending more than 100 hours on it and at least as much time as anyone else, its losses, often enlarged by cost segregation, can offset your other income. It works only with careful records of your hours.
What does real estate professional status require?
More than 750 hours a year in real property businesses, and more than half of all your working time spent in them, plus material participation in the rentals. It is very hard to meet with a full-time job elsewhere, so in many households it is the spouse who qualifies.
Should I hold my rentals in an LLC?
That is mainly a liability decision. A single-member LLC is ignored for income tax and reported on your personal return, and an LLC with two or more owners files a partnership return. Moving a property you already own into an LLC can affect your mortgage and insurance, so we coordinate with your attorney and lender before you do it.
What happens to my taxes when I sell a rental?
You pay tax on the gain, and the depreciation you took is taxed at up to 25% as recapture. Passive losses carried forward from that property are released in the year of sale. A 1031 exchange can defer the gain if you identify the replacement property within 45 days and close within 180 days.
Do I need to file in the state where my rental property is?
Usually yes, if that state has an income tax, even when the property shows a loss, because filing preserves the loss for later years. Your home state then generally gives a credit for tax paid to the other state.
Become a client
Tell us about your properties: how many, what kind, how they are held, and what you are planning next. We read every inquiry ourselves and reply within two business days to set up a 30-minute intro call.
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This page is general information, not tax advice for your situation. Rules change, and the right answer depends on your numbers; that is what the intro call is for.