Jumping in here with some key clarifications on a few of the replies above. You all are fantastic and I love the energy - I want to just make sure all the info here is as useful as possible.
1. I am not positive about the exact statistics, but I do see individual investors using 1031x all the time. Just be mindful that the economics of a 1031 break down a bit with the smaller properties since the fixed costs of doing a 1031 are somewhat high. It's a couple grand for the qualified intermediary to facilitate the transaction and it usually adds 500-1,000 to the cost of your tax return. Many people simply opt out and instead maximize their depreciation on the newly acquired property to offset the gain from the sold property instead.
2. It is true that depreciation is just a deferral of taxes. However keep in mind that often the recapture of depreciation (I.e. the repayment of the loan) is often at a lower tax rate than the tax rate on the income it initially helped shield - therefore beyond just the time value of money, it does result in real tax savings.
3. Cost segregation studies allow you to take a building that you would normally need to depreciate over 27.5 years (or 39 years if it is a commercial property) and selectively convert percentage of the purchase price over 5 or 15 years instead. There is also an opportunity for some of that reclassified property in the 5/15 year buckets to receive bonus depreciation as well. Recently, I saw a building purchase of 3M with only 1M of equity that yielded a total depreciation amount of $530k after the cost segregation study was applied (which amounts to a first-year deduction of 53% of the invested equity to the owners).
4. "Cash Flow" is not taxable. Cash flow does not actually factor into your taxable income calculation at all. What matters is the net profit and loss is for your property. Common ways where cash flow and net profit and loss differ: (1) principal payments on loan reduce cash flow but not net profit, (2) depreciation expense reduces net profit but not cash flow, (3) capex may reduce cash flow but not net profit, (4) depreciation recapture may increase net profit but not cash flow. There are more examples of this but those are the main ones. This is why having a solid set of books that are reconciled monthly or quarterly are essential.
5. Real estate professional status does not alter the amount of deductions you are able to take. The only thing it alters is what other sources of income those deductions are available to offset. If you are not a real estate professional for tax purposes, your still able to take all the same deductions, your deduction may just not have anything to offset. In that case, they are not lost, they just carry forward to either a year where you can use them or they are freed up to offset any type of income if you sell or otherwise dispose of the investment that generated the losses. This is the part that is most commonly missed by DIY tax return filers - you desperately need a CPA if this applies to you and you are attempting to file your own taxes. I saw this cost a lady 67k in taxes one time - her reasoning was she wanted to use TurboTax to save ~$700 on her tax return... you can do the math on that.
6. Though I agree that de minimus and SHST are both great examples of ways to expense costs that may otherwise be capitalized, it is very risky to take an "all expense" approach to capex spending. You ultimately need to find a CPA that understands the finalized repair regs from 2014 and knows how to apply the betterment/restoration/adaptation of an economic unit of property test to maximize your repair expense and avoid capitalizing assets in a way that is supportable under the scrutiny of an audit.
7. TurboTax is the most sure fire way to miss deductions or mid-report income. Admittedly, one of my guilty pleasures is reviewing a prior return of a RE investor who used TurboTax to file and noting all the mistakes. I have done this about 2 dozen times and in all those reviews I have only found one return where all the real estate investing activity was reported correctly, and they had to contact TurboTax to override the software functionality to report it the way it was reported. Ironically, they also used a CPA in a consulting capacity to make sure they were filing correctly using TurboTax - at that point I feel like they should have just had the CPA do the return!
That is all for now - DM me if you want to ask more specific questions about any of the above!
