Real estate investing has more tax advantages than virtually any other investment class. Between depreciation, deductions, and 1031 exchanges, a well-structured real estate portfolio can generate significant income while showing minimal taxable income. Here's every deduction to know.
Depreciation — The Most Powerful Real Estate Tax Tool
The IRS allows you to depreciate residential rental properties over 27.5 years. On a $200,000 rental (with $40,000 attributed to land, which isn't depreciable), you can deduct $5,818/year ($160,000 ÷ 27.5) — even though the property is likely appreciating in value.
On a $1 million portfolio with $800,000 depreciable basis, that's $29,091/year in depreciation deductions. This is a paper loss that offsets real income — the core of real estate's tax advantage.
Bonus depreciation and cost segregation: A cost segregation study can accelerate depreciation by reclassifying components (flooring, fixtures, landscaping) into 5, 7, or 15-year property instead of 27.5 years — dramatically front-loading your depreciation deductions. Worth it on properties valued at $500K+. Consult a real estate CPA.
Operating Expense Deductions
Every operating expense is deductible: mortgage interest, property taxes, insurance, property management fees, maintenance and repairs, advertising for tenants, travel to your properties, home office (if you manage properties from home), professional fees (accountant, attorney), and dues to real estate associations.
The Pass-Through Deduction (Section 199A)
Rental income that qualifies as a "trade or business" under IRS guidelines can qualify for the 20% pass-through deduction under Section 199A. This means you only pay tax on 80% of your qualified rental income. The rules are complex — work with a real estate CPA to structure your portfolio to qualify.
1031 Exchange — Defer Capital Gains Indefinitely
When you sell a rental property for a gain, a 1031 exchange allows you to defer ALL capital gains taxes by rolling the proceeds into a "like-kind" replacement property within 180 days. Properly executed, you can sell and upgrade your portfolio indefinitely without ever paying capital gains tax — only paying when you ultimately cash out (and even then, your heirs can inherit at stepped-up basis with zero capital gains). Full 1031 exchange guide →
Real Estate Professional Status
If you spend more than 750 hours/year actively managing real estate (and it's your primary activity), you qualify as a "Real Estate Professional" under IRS rules. This allows you to deduct real estate losses against ordinary income with no passive loss limitation — potentially eliminating significant tax liability on W2 income.
