Advanced Tax Planning Strategies for Real Estate Investors

By D. Christopher Winans, EA 

No matter your situation, careful tax planning is almost always financially advantageous. However, if you invest in real estate, finding the right tax strategy is an essential part of building wealth over time. Let’s explore some of the most common advanced tax strategies for real estate investors.

Cost Segregation, Bonus Depreciation, and 1031 Exchanges

Although cost segregation, bonus depreciation, and 1031 exchanges are separate concepts, when they work together, they can save you a considerable amount of money in taxes. Here’s a look at how these tax planning strategies work:

Cost Segregation

Ordinarily, the tax code allows residential rental properties to be depreciated over 27.5 years. Commercial rental properties are typically depreciated after 39 years, but a strategy called cost segregation may help you increase your total tax deductions (and make those deductions sooner).

To take advantage of this tax planning strategy, you would need to start with a cost segregation study. This assessment of the property identifies specific features and fixtures (like flooring, plumbing, and electrical systems) that depreciate faster. Typically, items identified in a cost segregation study can be depreciated over 5, 7, or 15 years.

Bonus Depreciation

Thanks to bonus depreciation, you can immediately deduct any property that can be depreciated in 20 years or less.

1031 Exchanges

If you’ve been involved in real estate investment for any length of time, you might already be familiar with 1031 exchanges. A 1031 exchange (also called a like-kind exchange) lets you defer capital gains taxes on the sale of an investment property if you reinvest the proceeds into a similar property.

When you carefully time your investments, you could potentially benefit from substantial deductions. Here’s an example:

• You buy a $1 million property, do a cost segregation study, and claim bonus depreciation on $200,000 worth of improvements.

• Next, you do a 1031 exchange for another $1 million property.

• Because of the bonus appreciation deduction, the basis carries over at $800,000.

• You can then do a cost segregation study of the new property.

• After the study, you can claim another bonus depreciation deduction.

This can be a complex tax planning strategy to execute, but if done right, it can lead to a series of deductions.

Passive Activity Rules and Grouping Elections

If you’re like many real estate investors, you likely have multiple sources of income. Unfortunately, passive activity rules disallow you from using losses from “passive” activities (like renting out real estate) to offset gains from other income sources.

If you make a grouping election on your taxes, you may use real estate losses to lower your taxable income from other income streams. This may seem like a simple tax planning step, but in many cases, it can significantly reduce tax liability.

Structuring Ownership for Estate and Tax Advantages

Depending on the way your real estate entity is structured, you could save a significant amount in taxes. For example, if your business is a C corporation that owns real estate, the sale of that real estate is taxed twice: once at the corporate level and again at the individual level.

However, if a tax planning professional helps you restructure so that the real estate belongs to a pass-through entity, sales are taxed only once.

The Right Tax Planning Strategy Makes All the Difference

Though the logistics of tax planning can quickly become complicated for real estate investors, it’s well worth taking the time to understand different strategies. When your tax planning is thoughtful and intentional, you can potentially save thousands when tax day rolls around.

Fidelis Tax & Accounting can help you make the most of your real estate investments. Interested in discussing your tax planning strategy? We are here to assist. Contact us by calling (443) 760-4001, emailing info@fidelistaxandaccounting.com, or via our social media channels.

About Christopher

D. Christopher Winans is the President and Founder of Fidelis Tax & Accounting, a proactive, advisory-driven accounting firm based in Annapolis, Maryland, serving clients across 45 states. A licensed Enrolled Agent, Chris is authorized to represent clients before the IRS and state tax authorities nationwide. His career path (from the medical and law enforcement fields to financial planning and taxation) gave him a unique perspective on problem-solving and the importance of planning ahead. When he discovered the need for more proactive, strategy-based tax support, he pursued his EA designation and launched Fidelis to fill that gap.

Since founding Fidelis in 2016, Chris and his team have built a national practice rooted in integrity, open communication, and personalized service. The firm offers a full suite of tax and accounting services, with a strong emphasis on customized tax strategy, ongoing planning, and client education.

Outside the office, Chris enjoys spending time with his wife, Courtney, and their daughter, Parker. The family is actively involved in Bay Area Community Church and Arnold Christian Academy, where they value community, faith, and service. To learn more about Christopher, connect with him on LinkedIn.