Investing in real estate can offer numerous tax benefits that improve the overall return on investment. Whether you’re considering rental houses, apartments, vacant land, commercial buildings, or warehouses, understanding the available tax incentives can significantly impact your bottom line. Keep in mind that tax laws change frequently, so it’s crucial to consult with a tax adviser regarding your specific situation. This article provides an overview of some key tax benefits available to real estate investors in 2025.
In this Article
Types of Real Estate Investment
Investors can choose from various types of real estate:
- Residential rental properties (houses, apartments, condominiums)
- Commercial properties (office buildings, retail spaces, industrial complexes)
- Vacant land
- Shopping centers
- Warehouses
Each type of real estate offers distinct tax advantages, allowing investors to maximize their after-tax income.
Depreciation: A Major Tax Deduction
One of the most significant tax advantages in real estate investment is depreciation. The IRS allows real estate investors to deduct the depreciation of their investment properties over time, accounting for the property’s wear and tear, and its eventual obsolescence. This is considered a “paper loss” — it reduces taxable income without impacting your actual cash flow.
- Residential properties are depreciated over 27.5 years on a straight-line basis.
- Commercial properties are depreciated over 39 years.
It’s important to note that the value of the land itself is not depreciable. Depreciation only applies to the value of the building on the land. For condos, since there is no land component, the entire property value can be depreciated.
In 2024, bonus depreciation and Section 179 deductions also allow investors to accelerate deductions on qualifying property improvements and equipment used in rental operations. However, the rules surrounding these deductions are subject to change, so working with a CPA who specializes in real estate is advisable.
Real Estate Professional Status: Enhanced Tax Benefits
For those deeply involved in real estate activities, qualifying as a real estate professional can offer even greater tax advantages.
Time Requirement for Real Estate Professionals
To qualify as a real estate professional, you must:
• Spend at least 750 hours per year in real estate activities.
• Spend more than half of your total working time in real estate-related work.
Those who qualify are allowed to fully deduct losses from their real estate investments against other income, including wages and salaries. This differs from non-professional investors who are subject to the passive activity loss rules, which limit the amount of deductible real estate losses.
Non-Professionals and Passive Loss Restrictions
If you do not qualify as a real estate professional, you can still deduct up to $25,000 in real estate losses against your ordinary income. However, this deduction phases out if your adjusted gross income (AGI) exceeds $100,000, and it disappears entirely once AGI exceeds $150,000.
For non-professionals, any unused real estate losses are suspended and can be carried forward to future years or deducted upon the sale of the property.
Material Participation Requirement
Even if you hire a property manager, you can still qualify for tax benefits as long as you are involved in material decisions such as setting rents, approving expenses, and screening tenants. Material participation is crucial for reaping the full benefits available to real estate professionals.
Bonus Depreciation and Section 179 Deductions in 2025
Thanks to the 2017 Tax Cuts and Jobs Act (TCJA), investors can take advantage of 100% bonus depreciation for certain assets purchased through the end of 2022, but this percentage has begun to phase out and is expected to gradually reduce over the next few years. In 2024, the bonus depreciation percentage is expected to be 60%, and will continue to decline through 2026, when it will be eliminated.
Under Section 179, up to $1,160,000 can be deducted immediately for certain qualifying expenses (e.g., appliances, business vehicles). However, luxury vehicles, like personal cars, may have more restrictive rules.
Depreciation Recapture on Sale
One downside of using depreciation to reduce taxable income is that when you sell the property, you will face depreciation recapture taxes. This means that the portion of the property that was depreciated is taxed at a higher rate of 25%, while the remaining gain may be taxed at the long-term capital gains rate (typically 15% or 20%, depending on your income level).
Example of Depreciation Recapture:
• Suppose you purchased a rental property for $300,000, and over the years you deducted $80,000 in depreciation.
• Your adjusted cost basis is now $220,000.
• If you sell the property for $400,000, you will have a capital gain of $180,000.
• Of this, $80,000 will be subject to the 25% recapture tax, while the remaining $100,000 will be taxed at the long-term capital gains rate.
Other Tax Benefits:
1031 Exchange
Investors can defer capital gains taxes by using a 1031 exchange, which allows the reinvestment of the proceeds from the sale of one property into another like-kind property. This defers capital gains taxes until the new property is sold, potentially indefinitely.
Opportunity Zones
Investing in Opportunity Zones, designated by the government, can result in substantial tax benefits, including deferral of capital gains and elimination of taxes on gains after holding the investment for 10 years.
Personal Property Depreciation
Personal property used for rental operations, such as appliances and vehicles, can be depreciated over shorter periods. Appliances are typically depreciated over 5 to 7 years, while vehicles used in business are depreciated based on their useful life, often 5 years for most vehicles.
Conclusion
Real estate investment offers tax benefits, including depreciation, deductions for operating expenses, and special provisions for real estate professionals. The key to maximizing these benefits is understanding the rules and working closely with a tax professional to ensure you’re in compliance with current tax laws. As tax laws change, especially with changes from the TCJA phasing out, staying informed will help you make the most of your real estate investments.
Further Reading on Tax Benefits of Real Estate Investment:
- Article: How to use Seller Financing to Secure Tax Savings.
- Article: How to use Seller Financing to Maximize your Profit.
- IRS Article: Like-kind exchanges – Real estate tax tips.
- IRS PDF: How to Depreciate Property.
- IRS Article: Opportunity zones frequently asked questions.
DISCLAIMER: We are not attorneys and we cannot advise you regarding your particular circumstances. You must always obtain competent legal counsel and financial advice. We believe this information to be accurate, but please check with a qualified real estate attorney in your state before making any decision based on this information.