Real Estate Investor Tax

Real estate has its own tax rules: depreciation that lowers income each year, limits on deducting rental losses, special treatment when you sell, and a way to defer tax by exchanging one property for another. Our real estate investor tax service keeps those pieces consistent from the day you buy a property until the day you sell it. It fits owners of one rental house and investors with a portfolio, a syndication interest or properties in several states, in Naperville, Aurora and beyond.

What the service includes

• Rental schedules property by property, including the split of purchase price between land and building.
• Depreciation schedules, with correction of years where depreciation was missed.
• Passive activity tracking, including suspended losses carried forward and the real estate professional analysis.
• Sales: gain, depreciation recapture and the related forms (Form 8949, Form 4797 and Schedule D).
• Like-kind exchanges, from planning with your qualified intermediary to Form 8824.
• Coordination with entity returns when properties sit in an LLC, partnership or S corporation, and with state returns where they are located.

Core rules in plain English

Depreciation

Residential rental property is depreciated using the straight-line method and a mid-month convention over 27.5 years. Depreciation starts when the property is ready and available for rent, and the land under it is never depreciated, so the purchase price must be split. For qualified property acquired after January 19, 2025, 100% first-year depreciation is available under current law. A building itself does not qualify, but separately identified components with shorter lives can, which is where a cost segregation study comes in. We coordinate with the engineers who prepare those studies.

Passive losses

Rental activity is generally passive, and passive losses can offset only passive income. The exception is the $25,000 allowance for people who actively participate in a rental. The allowance falls by 50 cents for each dollar of modified adjusted gross income above $100,000, reaching zero at $150,000. Disallowed losses are not lost; they carry forward on Form 8582 and are released when income arrives or the property is sold. Someone who qualifies as a real estate professional, by working more than 750 hours in real property businesses and spending more than half of their personal service time there, can treat rentals they materially participate in as non-passive. The tests are strict and the IRS looks at the records, so contemporaneous time logs matter.

Personal use and short-term rentals

If you rent out a home you also use, the rules change once your personal use exceeds the greater of 14 days or 10% of the days rented at a fair price. In that case the property is treated as a residence and deductions are capped at rental income. Renting for fewer than 15 days a year is not reported at all. Short-term rentals can also fall outside the usual passive rules depending on the average guest stay and the services provided, so we review the facts rather than apply a label.

Selling

Long-term gain is generally taxed at 0%, 15% or 20% depending on income, but the part of the gain that comes from depreciation previously taken (unrecaptured section 1250 gain) is taxed at up to 25% for 2025. The net investment income tax may also apply to rental income and gain. Sales deserve a projection before closing, not after.

1031 exchanges

Since 2018, section 1031 applies only to real property held for business or investment. You must identify replacement property in writing within 45 days after you transfer the property you give up, and receive it within 180 days or by the due date of your return, including extensions, whichever is earlier. A qualified intermediary generally holds the proceeds, and related parties and your own agents cannot serve in that role. Form 8824 reports the exchange. See our guide to like-kind exchanges.

How an engagement works

1. Consultation about the properties, ownership, and what is planned: buying, holding, refinancing or selling.
2. Written engagement agreement stating the scope, deliverables and how fees are determined, before work begins.
3. Document collection: closing statements, loan statements, leases or rent rolls, income and expense reports by property, receipts for improvements and records of personal-use days.
4. Preparation of property schedules and depreciation, tying rents to deposits, and the federal and state returns.
5. Review and delivery, showing the effect of passive limits and depreciation on each property.
6. Follow-up, including a pre-sale review and year-end estimates.

Common problems we fix

• No land allocation, which distorts depreciation.
• Depreciation never claimed. The IRS treats depreciation as allowed or allowable even if you skipped it, so missed years are usually corrected through an accounting method change on Form 3115 rather than by amending old returns.
• Improvements deducted as repairs, or repairs capitalized and depreciated for decades.
• Suspended passive losses not tracked, so they are lost on paper.
• Rentals in another state with no nonresident return. See multi-state and local tax.
• Mixed accounts, with personal and rental money together or mortgage principal deducted as an expense.

Nonresident and Indian-American investors

U.S. real estate held by a nonresident alien follows different rules from real estate held by a resident, including special withholding on a sale and choices about how rental income is taxed. Many Indian-American families also hold property in India. Our Indian CPA section covers NRIs investing in U.S. real estate, selling property in India and rental income from India.

How we can help

We prepare the returns, keep depreciation and passive-loss records so the numbers carry forward, and review a sale or exchange before you commit. We work with landlords in Naperville, Aurora and the rest of Chicagoland, and with investors elsewhere who own property in Illinois or other states. Tracking income and expenses through our bookkeeping service makes tax time faster. To start, contact us.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.