Tax Benefits of Real Estate Investing: What You Can Claim and What Limits It

This guide explains the tax benefits of real estate investing under federal law for the 2025 and 2026 tax years, as the rules stood in October 2026, including the changes made by Public Law 119-21, the July 4, 2025 act commonly called the One Big Beautiful Bill Act (IRS pages now group its provisions under "Working Families Tax Cuts"). State taxes are covered near the end.

The benefits at a glance, and what limits each one

Each benefit comes with a limit that often decides what it is worth to you.

Deductions vs. credits, deferral vs. elimination, cash flow vs. taxable income

Three distinctions explain most of the confusion around real estate taxes.

Deductions are not credits

The IRS puts it simply: a deduction is subtracted from your income, while a credit is subtracted from the tax you owe. At a 24% tax rate, a $1,000 deduction saves $240; a $1,000 credit saves $1,000. Nearly everything in this guide is a deduction or a timing rule. Real estate credits are narrow and project-specific, such as the rehabilitation credit, equal to 20% of qualified rehabilitation expenditures on a certified historic structure, taken ratably over five years on Form 3468.

Deferral is not elimination

Depreciation lowers taxable income now but also lowers your basis, so more gain is taxed when you sell, and a 1031 exchange pushes the gain into the replacement property. Both postpone tax rather than forgive it, which still helps because money kept today can be reinvested. How much it helps depends on rates: straight-line building depreciation that saved tax at 32% and is taxed at no more than 25% on the sale (plus the 3.8% net investment income tax, if it applies) leaves a lasting saving, while a deduction that saved 12% can cost more if the sale pushes the gain into higher brackets. Suspended passive losses are the reverse case: the deduction, not the tax, is postponed (see the passive activity rules).

Permanent reductions are rarer: a credit, the qualified business income deduction, gains in the 0% capital gains bracket, the home sale exclusion, the 10-year Opportunity Zone exclusion, and the basis reset for heirs. Under IRS Publication 551, inherited property's basis is generally its fair market value at the owner's death, which can wipe out gain deferred for decades.

Cash flow is not taxable income

Your bank account and your tax return measure different things. Loan principal and capital improvements take cash but are not deductible when paid; Publication 527 notes that "you can't simply deduct your mortgage or principal payments." Depreciation is the reverse: a deduction with no cash leaving that year. Timing differs too: advance rent is income when you receive it, and a security deposit you plan to return is not income unless you keep it. So a rental can put money in your pocket and still report a tax loss, as the hypothetical example below shows.

Operating expenses and mortgage interest

A rental you own directly is usually reported on Schedule E, with depreciation on Form 4562 and the passive loss limits on Form 8582. A single-member LLC does not change that by default: the IRS treats it as a disregarded entity reported on the owner's Schedule E unless it elects corporate treatment, while an LLC with two or more members is taxed as a partnership by default.

Publication 527 (2025) lists the common deductible rental expenses, including mortgage interest, insurance, taxes, repairs, maintenance, management and other professional fees, advertising, utilities, depreciation, and travel to collect rent or manage the property (trips between your home and the rental are usually nondeductible commuting). Two details trip people up:

• Points on a rental loan are prepaid interest, generally deducted over the life of the loan.
• Repairs versus improvements. A repair that keeps the property in working order is deductible. An expense that results in a betterment, restores the property (such as replacing a substantial structural part) or adapts it to a new use must be capitalized and depreciated; Publication 527's examples include a new roof, kitchen modernization, flooring and wall-to-wall carpeting.

Safe harbors that let you deduct more right away

Three safe harbors can turn some would-be improvements into current deductions, according to the IRS tangible property regulations FAQ:

• De minimis safe harbor: taxpayers without an applicable financial statement (most individual investors) can deduct items costing up to $2,500 per invoice or item. It is an annual election, made by attaching a statement to a timely filed return.
• Safe harbor for small taxpayers: with average annual gross receipts of $10 million or less and a building whose unadjusted basis is $1 million or less, you can deduct the year's repairs, maintenance and improvements on that building if they total no more than the lesser of $10,000 or 2% of that basis.
• Routine maintenance safe harbor: recurring work you expect to do more than once in ten years to keep a building operating normally can be deducted.

None of these covers a large project: a $30,000 roof on a $250,000 rental is still a capital expense.

Depreciation, bonus depreciation and cost segregation

Depreciation lets you recover the cost of a building over time, even while the property rises in value. The core rules, from Publication 527 and Publication 946:

• Land is never depreciable. Split the purchase price between land and building by fair market value; if you are unsure of the values, the IRS allows the property tax assessment's ratio.
• Recovery periods: 27.5 years for residential rental buildings and 39 years for nonresidential buildings (offices, retail, industrial, self storage), straight-line, using a mid-month convention in the first and last years. A house rented mostly to short-stay guests may not count as residential rental property (see short-term rentals).
• It starts when the property is placed in service, meaning ready and available for rent, even if no tenant has moved in.
• "Allowed or allowable." Your basis drops by the depreciation you were entitled to take, even if you never claimed it, so skipping it does not avoid the tax later. Publication 946 describes fixes for missed years (an amended return or an accounting method change on Form 3115).

Shorter-lived property has faster schedules: Publication 527 places appliances, carpeting and furniture used in a residential rental in the 5-year class, and roads, fences and shrubbery (if depreciable) in the 15-year class.

Bonus depreciation after P.L. 119-21

This is the 2025 law's biggest change for investors. According to Publication 946 (2025), P.L. 119-21 reinstated a 100% special depreciation allowance (bonus depreciation) for qualified property acquired and placed in service after January 19, 2025. The IRS describes it as permanent, and its Notice 2026-11 (January 14, 2026) says taxpayers can generally rely on the existing bonus depreciation regulations until new ones are proposed. The details that matter:

• Which property qualifies: tangible property with a recovery period of 20 years or less, including the 5- and 15-year components above and qualifying used property you buy. Residential (27.5-year) and nonresidential (39-year) buildings do not qualify.
• Qualified improvement property (interior improvements to a nonresidential building after it was first placed in service, excluding enlargements, elevators, escalators and internal structural framework) is 15-year property and can qualify; it does not cover apartments or houses.
• Older acquisitions: property acquired before January 20, 2025, stays under the old phase-down; for most of it placed in service during 2025, the allowance is 40%.
• It is the default. Unless you elect out, you must take it, and for the first tax year ending after January 19, 2025, you can elect 40% instead of 100%. Some owners elect out when the extra deductions would only create losses they cannot use.
• Section 179 rarely fits a rental. Its limits rose under P.L. 119-21 ($2,500,000 for 2025 and $2,560,000 for 2026, per Rev. Proc. 2025-32), but Publication 946 excludes property acquired only to produce income (including rental property when renting is not your trade or business) and land improvements such as fences, generally bars noncorporate owners from claiming it for property they lease to others, and caps it at taxable income from actively conducted businesses.

What cost segregation does, and what it does not

A cost segregation study splits a purchase price between the building shell and components with shorter lives, such as appliances, carpeting, certain fixtures and site improvements like fencing and paving, which can then take bonus depreciation. The IRS Cost Segregation Audit Techniques Guide (February 2025) notes that the IRS has not set standards for preparing these studies and tells examiners to view "rule of thumb" studies, which apply a fixed percentage with little documentation, with caution.

Two limits. The extra deductions are only as useful as your ability to use the losses (see the passive rules below), and faster write-offs mean more of the eventual gain can be taxed as ordinary income (see what happens when you sell). In episode 489, investor and cost segregation expert Erik Oliver discusses how studies can benefit investors and the key considerations; it was published in July 2024, before the 2025 law restored 100% bonus depreciation.

Passive activity rules: who can actually use rental losses

This is where the promise that "real estate losses wipe out your W-2 taxes" breaks down for most people. The tax meaning of "passive" is stricter than the everyday one, a difference active vs. passive real estate investing explains. Under Publication 925 (2025), rentals are passive by default, "even if you materially participated," unless you qualify as a real estate professional, and passive losses offset only passive income. Unused losses are suspended and carry forward. In a later year they can offset passive income, fit under that year's $25,000 allowance if you actively participated both in the year the loss arose and in that year, or come back in full when you sell (see what happens when you sell). Three routes let rental losses offset wages or business income.

Path 1: the $25,000 special allowance

If you actively participate in a rental, meaning you own at least 10% and make management decisions (such as approving tenants and setting rent) or arrange for services in a significant and bona fide sense, you can deduct up to $25,000 of rental losses against other income. The allowance shrinks by 50% of modified adjusted gross income above $100,000 and is gone at $150,000. Married people filing separately get at most $12,500 (phasing out from $50,000) if they lived apart all year, and nothing if they lived together at any time that year, per Publication 925. Limited partners are generally not treated as actively participating, so passive investors in syndications usually cannot use this path.

Path 2: real estate professional status

You qualify for a year only if more than half of your personal services in all trades or businesses were in real property trades or businesses in which you materially participated, and those hours exceeded 750. Employee hours count only if you own more than 5% of the employer. On a joint return, one spouse must meet both tests alone, although a spouse's work does count toward material participation in a property. A full-time employee outside real estate rarely qualifies. Even after qualifying, you must materially participate in each rental, or elect to treat all your rental interests as one activity and materially participate in that.

Path 3: short-term rentals with material participation

Publication 925 says an activity is not a "rental activity" if the average customer stay is 7 days or less, or 30 days or less with significant personal services. Such a property is treated like a business: its losses are nonpassive if you materially participate, for example more than 500 hours, or more than 100 hours and at least as much as any other individual, including cleaners and managers. This is the short-term rental "loophole" investors talk about, and it is narrow: the $25,000 allowance does not apply, you need credible hour records, and Publication 527 adds that substantial services such as regular cleaning or changing linens put the income on Schedule C, where self-employment tax may apply.

One more ceiling for large losses

Even nonpassive losses are capped. After the at-risk and passive rules, the excess business loss limitation, made permanent by P.L. 119-21, disallows net business losses above $313,000 ($626,000 joint) for 2025, turning the excess into a net operating loss carryforward. The 2026 thresholds are lower, $256,000 and $512,000 under Rev. Proc. 2025-32, because the law now measures the inflation adjustment from 2024 instead of 2017 (26 U.S.C. § 461(l)).

The 20% qualified business income deduction

Section 199A lets eligible owners of pass-through businesses deduct up to 20% of qualified business income, plus 20% of qualified REIT dividends. P.L. 119-21 made it permanent at 20% (it was due to end after 2025) and widened the income range over which its limits phase in, according to an IRS briefing on the law's business provisions.

The catch for landlords: rental income counts only if the rental is a trade or business. The IRS safe harbor (Rev. Proc. 2019-38) requires separate books, 250 or more hours of rental services a year (by owners, employees or contractors; enterprises at least four years old need the hours in three of the last five years) backed by contemporaneous logs, and a statement attached to the return for each year you rely on it. The revenue procedure excludes triple-net leases and property you also use as a residence. Missing the safe harbor does not rule out the deduction, but you then have to show a trade or business on the facts.

Limits based on wages paid and property basis phase in above taxable income of $394,600 joint and $197,300 for all other returns in 2025 (Form 8995 instructions) and $403,500 and $201,750 ($201,775 if married filing separately) in 2026 (Rev. Proc. 2025-32). A rental with a tax loss produces no deduction; if it counts as a trade or business, its loss also reduces the qualified business income from your other businesses, with any net loss carried forward, per the same instructions.

Rentals, short-term rentals, flips, REITs and syndications are taxed differently

Long-term rentals

Rent from an ordinary long-term rental generally is not subject to self-employment tax: Publication 527 says rental real estate income "generally isn't included in net earnings from self-employment." Personal use for more than the greater of 14 days or 10% of the days rented at a fair price limits your deductions (Publication 527).

If you live in the property, as in house hacking, or move into a former rental, the home sale exclusion can shelter up to $250,000 of gain ($500,000 for a married couple filing jointly) if you owned and used it as your main home for at least two of the five years before the sale. Publication 523 sets the limits: the exclusion never covers depreciation claimed after May 6, 1997; years after 2008 when the property was rented before you moved in can reduce it; and a separately rented unit, such as the other side of a duplex, is generally figured separately.

Short-term rentals

Short-term rentals are depreciated too, and their shorter-lived components can take bonus depreciation, but the building's recovery period is less settled. Publication 946 excludes from residential rental property the units in a hotel, motel or other establishment where more than half the units are used on a transient basis, so a house rented mainly to short-stay guests may be 39-year nonresidential property. That test differs from the 7-day passive-loss rule, and we found no IRS guidance written specifically for short-term rentals on it, so settle it with your preparer before the first return. The 7-day rule (Path 3 above) can help a hands-on owner and hurt one whose full-service manager works more hours than the owner. If you are still choosing a market, see how to find profitable short-term rental markets before the tax angle drives the decision.

Flips

A house bought to resell is not a rental. Publication 946 says you cannot depreciate inventory, defined as property held primarily for sale to customers; Publication 544 says property held mainly for sale to customers is not a capital asset; and a 1031 exchange excludes real property held primarily for sale. A dealer, which Publication 334 describes as someone in the business of selling real estate to customers for profit, earns ordinary business income, and the Schedule SE instructions count gains on property held primarily for sale to customers as self-employment earnings. An occasional flipper who is not a dealer usually holds for a year or less, and short-term capital gains are taxed at ordinary rates; a loss is a capital loss, deductible against other income only up to $3,000 a year ($1,500 if married filing separately), with the rest carried forward. Dealer status depends on facts such as frequency and intent.

REITs

A REIT depreciates its own buildings, so you never see those deductions directly. Its distributions can mix ordinary dividends, capital gain distributions (reported as long-term regardless of how long you held the shares, per Publication 550) and nondividend distributions. Ordinary REIT dividends shown in box 5 of Form 1099-DIV can qualify for the 20% deduction if you held the shares for more than 45 days, according to the Form 8995 instructions. REIT income cannot absorb passive rental losses, because Publication 550 classifies dividends and capital gain distributions as portfolio income.

Private syndications and K-1s

As a limited partner in a syndication, you receive a Schedule K-1 showing your share of income, depreciation (including any cost segregation the sponsor performs) and, eventually, sale gain. Publication 925 says limited partners are generally not treated as materially participating except under the 500-hour test or prior-year tests, so K-1 losses are usually passive: they can offset passive income, such as income from your own rentals or another syndication, and otherwise wait until the deal is sold. Your basis and the at-risk rules also limit them. And because exchanges of partnership interests do not qualify as like-kind exchanges, you cannot 1031 your LP interest yourself. For non-tax pitfalls, see limited partner real estate investing mistakes.

What happens when you sell: basis, recapture and capital gains

Your taxable gain is the amount realized (sale price minus selling costs) minus your adjusted basis (purchase price plus capitalized costs and improvements, minus depreciation allowed or allowable). On a rental held more than one year, the gain is split into layers:

• Ordinary-income recapture on components written off faster than straight-line, often the result of cost segregation and bonus depreciation. For Section 1245 personal property it is the lesser of the depreciation taken and the gain on those items, so it depends on how much of the sale price is allocated to them; for real property components it is the gain up to the depreciation taken in excess of straight-line (Publication 544).
• Unrecaptured Section 1250 gain, the part of the gain on the building that comes from straight-line depreciation: taxed at a maximum of 25%, per IRS Topic 409 and Publication 544.
• The remaining long-term gain: 0%, 15% or 20%, depending on taxable income.

Above the 15% limit, 20% applies. Sources: IRS Topic 409 for 2025 and Rev. Proc. 2025-32 for 2026; other filing statuses have their own limits.

Net investment income tax. Under IRS Topic 559, a 3.8% tax applies to the lesser of your net investment income (which includes rents and gains on investment real estate) or the amount by which modified adjusted gross income exceeds $200,000 (single or head of household), $250,000 (married filing jointly) or $125,000 (married filing separately). These thresholds are not indexed for inflation. The Form 8960 instructions provide an exception for qualifying real estate professionals who spend more than 500 hours in each rental activity (or did so in 5 of the previous 10 years).

Suspended losses come back. Under Publication 925, passive losses you could not use are generally allowed in full in the year you dispose of your entire interest in a fully taxable transaction to an unrelated buyer, which can soften the tax bill on the gain. If the owner dies still holding the property, the losses are allowed only to the extent they exceed the heirs' basis step-up.

Section 1031 exchanges: deferral with strict rules

A 1031 exchange lets you sell investment or business real property and buy replacement real property without recognizing the gain that year. The rules, from the Form 8824 instructions (2025) and the IRS like-kind exchange page:

• Since 2018, only real property held for productive use in a business or for investment qualifies. Real property held primarily for sale (flips) does not, and U.S. real property is not like-kind to foreign real property.
• In a deferred exchange, you must identify replacement property within 45 days after transferring the old property and receive it within 180 days or by your return's due date (including extensions), whichever is earlier.
• Exchanges normally run through a qualified intermediary. Related parties and your own agents cannot serve as one.
• Cash you receive, and debt relief not offset by new debt or cash you put in, is taxable to the extent of your gain.
• The deferred gain reduces the replacement property's basis, so later depreciation is smaller and the gain is still there at a later taxable sale.
• In an exchange with a related party, if either side disposes of the property within two years, the deferred gain generally becomes taxable in that year, with limited exceptions.

Vacation homes and other dwellings used partly for personal purposes have extra requirements (Publication 544 points to Rev. Proc. 2008-16). Episode 110, with investor Christopher Mills, focuses on using 1031 exchanges to grow a real estate portfolio.

Opportunity Zone funds: a program in transition

A Qualified Opportunity Fund has been another way to defer a capital gain, but the program is in transition. Under the original rules (IRS Opportunity Zones FAQ), you invest an amount equal to an eligible gain, including one from selling stock, in a fund, generally within 180 days. Only gains that would be recognized before January 1, 2027 are eligible, and all deferred gain must be included in income by December 31, 2026 at the latest. So a 2026 gain invested now is generally still taxed on your 2026 return, and gains deferred in earlier years are reported on 2026 returns too.

A new investment under the original rules still gets the 10-year benefit: hold the fund interest at least 10 years and its basis can be stepped up to fair market value when you sell, so the investment's own appreciation is not taxed. Unlike a 1031 exchange, only an amount equal to the gain must be invested, and you own a fund interest rather than a property.

P.L. 119-21 made the program permanent and added rural funds (IRS briefing); the first new zone designations take effect January 1, 2027, with new rounds every 10 years (IR-2026-45). For amounts invested after December 31, 2026, the amended statute (26 U.S.C. § 1400Z-2) defers the gain until the earlier of selling the investment or five years after making it, and a 5-year hold raises basis by 10% of the deferred gain (30% for a qualified rural fund). These terms are new, so confirm how they apply before investing; the tax break does not make a weak deal good.

Hypothetical example: one rental from purchase to sale

Every number below is an assumption chosen to show the mechanics, not a forecast or a typical result. Federal tax only; state tax is ignored.

Assumptions

• A single-family rental is bought and placed in service in January 2026 for $300,000, including capitalized closing costs. The county assessment supports allocating $60,000 to land, leaving a $240,000 depreciable building.
• A $225,000 loan (75%) at a 6.5% fixed rate for 30 years: payments of $17,066 a year.
• Collected rent of $30,000 a year and operating expenses (taxes, insurance, management, repairs, other) of $10,500, held flat for simplicity: net operating income of $19,500.
• No capital improvements during the hold and no reserve set aside for them (a reserve would reduce cash flow but is not a deduction), so cash flow here is net operating income minus loan payments.
• The owner owns 100% and actively participates, but is not a real estate professional, and files as single or married filing jointly (not separately).
• Twelve full monthly loan payments in each calendar year, starting January 2026, and the 2035 sale taxed under 2026 rates and thresholds.

We start with a typical later year, then go back to year 1 to show what a cost segregation study changes.

A typical year (2027): positive cash flow, tax loss

The $6,043 gap between the two columns is depreciation ($8,726) minus principal ($2,683). Whether the $3,609 loss lowers this owner's tax depends on income. With modified adjusted gross income of $90,000, the full $25,000 allowance is available, so the loss offsets wages. At $120,000 the allowance is $15,000 ($25,000 minus half of the $20,000 above $100,000), still enough. At $160,000 the allowance is zero: the loss is suspended and carried forward.

Going back to year 1 (2026): adding a cost segregation study

Now assume a study classifies $36,000 of the $240,000 as 5-year property (appliances, carpeting) and 15-year land improvements, leaving $204,000 of building. Because the property was acquired after January 19, 2025, the $36,000 takes 100% bonus depreciation. Year-1 interest is $14,551.

• Without the study: depreciation of $8,364 ($240,000 × 3.485%, the January first-year rate), for a tax loss of $3,415 ($19,500 − $14,551 − $8,364).
• With the study: depreciation of $43,109 ($36,000 + $204,000 × 3.485%), for a tax loss of $38,160.

Pre-tax cash flow is the same $2,434 either way, before the study's fee (ignored here); only the deduction changes. At $90,000 of income, the owner deducts $25,000 this year instead of $3,415 and suspends the other $13,160. Because the 2027 loss with the study is only about $2,300 ($19,500 − $14,383 − $204,000 × 3.636%), the $13,160 carryforward fits under the next year's $25,000 allowance, so this owner uses all of the study's deductions within two years. At $160,000 the entire loss is suspended, so the study mostly creates carryforwards. It pays off in full in year 1 only for an owner who can use the whole loss now: one with enough passive income from other investments, a real estate professional who materially participates, or, if the property were a short-term rental instead, an owner who materially participates in it.

The sale in December 2035

Back to the version without cost segregation. Depreciation over ten tax years totals $86,540: $8,364 for 2026, 8 × $8,726.40 for 2027 through 2034, and $8,365.10 for 2035 ($240,000 × 3.637%, that year's IRS table rate, prorated 11.5/12 for a December sale). The house sells for $420,000 with 6% selling costs.

For illustration, apply the 25% maximum to the depreciation layer and 15% to the rest: $21,635 + $14,220 = $35,855 of federal tax; actual rates depend on the owner's total taxable income. Net investment income tax could add up to $6,891 (3.8% × $181,340) for an owner already above the threshold before the sale, but only about $2,711 for a single owner whose modified adjusted gross income would otherwise be $90,000, because the tax then applies only to the $71,340 by which the gain lifts income above $200,000.

These figures ignore suspended losses. The owners at $90,000 and $120,000 used each year's loss as it arose, but the owner at $160,000 would deduct the accumulated suspended total (about $27,900 here, including the sale year's own loss) in the sale year, lowering the tax. On the cash side, after paying off the remaining loan balance of about $190,746, the owner nets roughly $204,054 before tax. An earlier cash-out refinance would have made the payoff larger without changing the gain or the tax.

The 1031 alternative

If the owner instead exchanges into a $600,000 replacement property through a qualified intermediary, receives no cash and takes on at least as much debt as was paid off, the $181,340 gain is deferred. The replacement's basis is $418,660 ($600,000 − $181,340), not $600,000, so its future depreciation is smaller and the deferred gain stays in the new property until a taxable sale. If the owner holds it until death, the heirs' basis generally resets to fair market value.

State taxes are a separate layer

Each state with an income tax decides whether and when to adopt federal changes, so state depreciation, loss limits and gains can differ from the federal numbers. California is a clear example. Its 2025 instructions for Form FTB 3885A say California generally conforms to the Internal Revenue Code as of January 1, 2025, which is before P.L. 119-21 was enacted, and the Franchise Tax Board's Publication 1001 (2025) spells out the gaps that matter most for investors:

• No bonus depreciation. Publication 1001 says California did not adopt earlier versions of federal bonus depreciation, and of the 2025 law's permanent 100% rate it says "California does not conform to this provision." So the example's $36,000 first-year write-off would be recovered through regular depreciation on a California return. Publication 1001 covers the 2025 taxable year; confirm the 2026 rules before relying on it for a 2026 purchase.
• No real estate professional exception. California never adopted it, and "these activities are still considered passive under California law."
• A much smaller Section 179 limit: $25,000, reduced once qualifying purchases exceed $200,000, according to the FTB 3885A instructions.

California also requires an annual information return (Form FTB 3840) while gain from exchanging California property for out-of-state property remains deferred. Other states make their own choices, so check your state's current conformity rules, including any 2026 legislation, before relying on a federal projection.

Questions to ask a tax professional

1. At this income, can rental losses be used this year through the $25,000 allowance, real estate professional status or the short-term rental exception, or will they be suspended? What records of hours should be kept?
2. How should the purchase price be split between land and building, and what support is needed?
3. If this is a short-term rental, is the building 27.5-year or 39-year property?
4. Is a cost segregation study worth its fee, given whether the losses can be used now and the extra ordinary-income recapture later?
5. Should the return take 100% bonus depreciation, elect 40% for the 2025 transition year, or elect out for some property classes?
6. Which of this year's projects are deductible repairs, and should the de minimis or small taxpayer safe harbor be elected?
7. Does the rental qualify for the qualified business income deduction, and is the 250-hour safe harbor worth documenting?
8. How does your state treat bonus depreciation, passive losses and 1031 exchanges, and which state returns will out-of-state K-1s require?
9. On a sale, what will recapture, capital gains and net investment income tax look like, and is an exchange or different timing worth planning?
10. Could any property bought to resell be treated as dealer property?

The tax, legal and insurance topic page collects podcast conversations on cost segregation and 1031 exchanges, and you can browse every episode of The Real Estate Investing Club Podcast. To compare notes with other investors, the free community on Skool is open to join.

This article is general education about U.S. federal tax rules for the 2025 and 2026 tax years as of October 2026, with California as one state example; it is not tax, legal or investment advice. Tax law, IRS guidance and state conformity change, and the right treatment depends on your facts, so consult a qualified tax professional before acting.

Sources

• IRS, Publication 527 (2025), Residential Rental Property, for 2025 returns
• IRS, Publication 925 (2025), Passive Activity and At-Risk Rules, for 2025 returns
• IRS, Instructions for Form 8582 (2025), Passive Activity Loss Limitations, for 2025 returns
• IRS, Publication 946 (2025), How To Depreciate Property, for 2025 returns
• IRS, Publication 544 (2025), Sales and Other Dispositions of Assets, for 2025 returns
• IRS, Publication 523 (2025), Selling Your Home, for 2025 returns
• IRS, IR-2026-06, guidance on the additional first year depreciation deduction (January 14, 2026), and Notice 2026-11
• IRS, Rev. Proc. 2025-32, 2026 inflation adjustments (October 2025)
• IRS, Working Families Tax Cuts (page updated October 2, 2026) and Understanding the Working Families Tax Cuts: Business Tax Provisions (webinar script, page updated July 14, 2026)
• IRS, Tangible Property Final Regulations FAQ (page updated August 4, 2026)
• IRS, Publication 5653, Cost Segregation Audit Techniques Guide (February 2025)
• IRS, Instructions for Form 461 (2025), Limitation on Business Losses
• IRS, Instructions for Form 8995 (2025); Qualified business income deduction (page updated September 22, 2026); Rev. Proc. 2019-38 and IR-2019-158 (September 24, 2019)
• IRS, Topic 409, Capital gains and losses (page updated September 24, 2026)
• IRS, Topic 559, Net investment income tax (page updated September 24, 2026); NIIT questions and answers (page updated September 14, 2026); Instructions for Form 8960 (2025)
• IRS, Instructions for Form 8824 (2025), Like-Kind Exchanges; Like-kind exchanges: real estate tax tips (page updated May 1, 2026)
• IRS, Opportunity Zones frequently asked questions (page updated September 14, 2026); IR-2026-45, guidance to states for nominating qualified opportunity zones (April 6, 2026)
• Legal Information Institute, Cornell Law School, U.S. Code text of 26 U.S.C. § 461 (excess business loss limitation) and 26 U.S.C. § 1400Z-2 (qualified opportunity funds), as amended by P.L. 119-21 (viewed October 2026)
• IRS, Publication 550 (2025), Publication 551 (12/2025) and Publication 334 (2025); Instructions for Schedule SE (2025)
• IRS, Credits and deductions for individuals (page updated June 28, 2026); Rehabilitation credit FAQs (page updated July 23, 2026)
• IRS, Single member limited liability companies (page updated July 27, 2026)
• California Franchise Tax Board, Publication 1001 (2025), Supplemental Guidelines to California Adjustments, 2025 Instructions for Form FTB 3885A and 2025 Instructions for Form FTB 3840