Real Estate Tax Strategies for Tax Year 2025
With potential tax legislation on the horizon, real estate investors have a prime opportunity to implement key strategies that could lead to significant tax savings.
Will the new administration revitalize existing strategies, or will new ones emerge?
Real Estate Professional Status (REPS)
As discussed in previous articles, REPS is a powerful designation for investors who meet the qualifications.
The Trump administration is unlikely to introduce changes in this area, but if 100% bonus depreciation returns or surpasses 40%, reassessing your or your spouse’s eligibility could be a game-changing move.
Why is 100% bonus depreciation so compelling? Because bonus-depreciable property can be immediately expensed rather than partially deducted over multiple years.
Short-Term Rental Strategy
One of the most impactful potential changes in 2025 is the possible reinstatement of 100% bonus depreciation.
If this comes to fruition, real estate investors can secure substantial tax benefits by leveraging cost segregation studies to accelerate depreciation deductions.
While 40% bonus depreciation still presents valuable tax savings and enhances investment efficiency, a full 100% would be even more attractive.
However, investors must also consider how short-term rental strategies align with guest stays and material participation requirements.
Lazy 1031 Exchanges
If 100% bonus depreciation returns, Lazy 1031 exchanges become an even more effective tool.
A 1031 Exchange allows you to sell a property and reinvest the proceeds into a similar asset through a qualified intermediary, deferring capital gains taxes.
A Lazy 1031, however, enables you to sell a property, realize the tax gains, and purchase a new property within the same tax year. To maximize the tax benefits, investors conduct a cost segregation study on the newly acquired asset.
This approach lets you take advantage of a 1031 exchange without the immediate pressure of identifying a replacement property.
By coupling this strategy with 100% bonus depreciation, investors can optimize their cost segregation studies and significantly reduce taxable gains.
Exit strategies remain a crucial yet intricate aspect of tax planning for real estate investors aiming to maximize their savings.
Qualified Opportunity Zones (QOZs)
Qualified Opportunity Zones (QOZs) are designated federal areas across various states where local governments seek to encourage new investments.
While QOZs are slated to phase out in 2026, strong indications suggest that Congress may extend the program, possibly with even more favorable terms.
Currently, if you invest in a QOZ, you can defer capital gain recognition (stemming from asset sales like cryptocurrency, Nvidia stock, short-term capital gains, or business sales, among others) until 2026.
This offers both deferral and strategic planning opportunities for managing capital gains. However, the real advantage of QOZs lies in their long-term potential.
If held for at least ten years, a QOZ investment benefits from a step-up in basis to fair market value upon sale (for example, a $5 million purchase appreciating to $15 million).
The result? The entire $10 million gain is tax-free, eliminating both depreciation recapture and capital gains tax liability.
Given the Trump administration's priorities and legislative outlook, QOZs are poised to remain a valuable tool, offering both tax deferral and potential tax elimination. Stay tuned for legislative updates.
Maximizing Section 199A Deductions
Section 199A, or the Qualified Business Income Deduction, provides a 20% deduction on the net income of rental properties or businesses. However, the calculation can be complex.
Because of its intricate nature, this strategy often goes underutilized. Yet, every real estate investor should evaluate their eligibility, particularly those generating strong rental cash flow.
While the base deduction is a flat 20% of net income, a thorough analysis ensures investors maximize their allowable deduction. Once income reaches certain thresholds, the formula shifts into a complicated system of variables involving wages paid, property and equipment basis, and net income.
Reviewing these factors is essential for minimizing taxable income.
Section 179 Deductions
Beyond bonus depreciation, Section 179 deductions—often referred to as its counterpart—also play a crucial role in tax planning for equipment and real estate acquisitions.
Short-term and mid-term rental properties may qualify for this deduction, but investors should be mindful of factors like ownership structure and the total amount being expensed.
Expectations suggest that deduction limits could increase, allowing for immediate expensing of a larger portion of qualifying asset investments. If you’re considering an equipment upgrade, 2025 may be an opportune time—pending final details of the new tax legislation.
Section 1202 Qualified Small Business Stock (QSBS)
Although not directly tied to real estate, business owners planning an exit strategy should consider this valuable tax incentive.
Qualified Small Business Stock (QSBS) offers significant tax advantages, potentially allowing up to $10 million in tax-free capital gains.
To qualify, a business must:
- - Be structured as a C-Corp
- - Maintain assets under $50 million at inception
- - Have the original stockholder as the seller
- - Operate as a qualifying business (a distinction that is more nuanced than it appears) and Section 1244 stock to explore potential tax loss mitigation opportunities.
As 2025 unfolds, staying informed and proactive will be key to leveraging these strategies effectively.
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