As a real estate investor, you have access to a number of expense deductions that can be used to
reduce taxable income. For example, you may expense 80% of new and used qualified tangible
business property acquired and placed in service during 2023 under the Bonus Depreciation
provisions. In addition, the Section 179 election allows for the expensing of $1,160,000
relating to the cost of certain depreciable tangible personal property used in a rental
business, as well as certain nonresidential real property improvements. The maximum amount that
may be spent on such property before the Section 179 deduction begins to phase out is $2.89
Real estate investors may utilize Section 1031 exchanges to defer any gain realized on the sale
of real estate used in a trade or business by purchasing replacement like-kind real estate.
Section 1031 cannot be used for personal property or real property held primarily for sale.
There are special risks associated with an investment in real estate, including the possible
illiquidity of the underlying properties, credit risk, interest rate fluctuations and the
impact of varied economic conditions.
Useful real estate tax treatment information
Generally, income from real estate activities is considered a passive activity. As such, if a
property operates at a loss, the loss is only deductible against other passive income or may be
used if you dispose of your entire interest in the activity during the year. Only real estate
professionals who provide greater than 750 hours of personal services in real property trades
and spend more than half of their time in real estate trade or business can fully deduct losses
from real property activities, including the use of those losses against other sources of
taxable income. As the rules often are based on specific facts and circumstances, you should
consult your tax advisor to confirm the proper deductibility of these activities.
Maximize real estate deductions
Taxpayers should consider whether certain real estate properties should be used as business or
personal assets. If the taxpayer uses the property in a real estate trade or business (for
example, renting the property), the operating expenses, real estate tax, and mortgage interest
are fully deductible.
If the property is for strictly personal use, the deduction for real estate taxes is currently
limited to $10,000. This $10,000 limitation also includes amounts paid for state and local
income taxes. The mortgage interest deduction is limited to interest paid on the first $750,000
of mortgage indebtedness secured by a primary or secondary residence. However, for mortgages
originating before December 16, 2017, a deduction is available for interest paid on the first $1
million of mortgage indebtedness. Interest on home equity loans and home equity lines of credit
that are not used to either buy, build, or substantially improve a primary or secondary
residence is not deductible. The debt must also be secured by the home.
If property is being used for both personal and business, consult your tax advisor to see how the
rules may apply to you.
Owners of real estate entities established as pass-through businesses, such as sole
proprietorships, LLCs taxed as partnerships, partnerships, or S corporations, may be
able to take advantage of the 20% qualified business income deduction against the
owner’s share of taxable rental income, subject to certain limitations. Regulations
indicate that real estate operated in a trade or business could qualify for the deduction.