Tax planning for real estate, from the first rental to the last sale.

A residential rental building depreciates over 27.5 years and a commercial one over 39, per IRS Publication 946. A cost segregation study moves parts of the building into 5, 7 and 15-year classes, and with 100% bonus depreciation back for property acquired after January 19, 2025, the first-year deduction can be large. Whether the study is worth its fee, and whether you can actually use the loss this year, are two separate questions. We answer both before you order it.

Every dollar of depreciation lowers your basis, so it comes back as gain when you sell. The part tied to the building is taxed federally at up to 25% (IRS Topic 409), and California taxes the whole gain as ordinary income. A sale that looks like a win on the closing statement can carry a tax bill nobody modeled. We run it before you list, not after escrow closes.

Rental losses are passive by default. If you actively participate, up to $25,000 can offset other income, but that allowance starts shrinking at $100,000 of modified adjusted gross income and is gone at $150,000 (IRS Publication 925). Above that, the loss waits unless you qualify as a real estate professional: more than 750 hours a year in real property businesses you materially participate in, and more than half of all your working time. If you qualify naturally over time, we use it. We do not force it.

When the average guest stay is 7 days or less, the property is not a rental activity under the passive rules (Publication 925), so with material participation the losses can offset your other income without professional status. It is also a real second job with cleaning, guests and platform fees. Before you buy one for the deduction, we compare the after-tax return with putting the same money into your own business.

Replace a roof and the old roof still has value on your books. Say $25,000 is left. That does not have to sit there for another 27.5 years: the tangible property regulations let you write off the retired portion now, as long as you can show what the old part cost. A single lump-sum invoice from the contractor is usually what kills the deduction, which is why we ask for split invoices before the work starts.

You have 45 days to identify the replacement property and 180 days to close (Form 8824 instructions). We recently modeled a client selling a rental to buy a $2M property. A straight sale meant about $80,000 of tax from earlier bonus depreciation, so the first reaction was "then we have to do a 1031." With the exchange, only a small slice of the new property qualified for fresh bonus depreciation: a net benefit of roughly $15,000 plus the timing rules and fees. Without it, they paid the $80,000, bought with a clean higher basis, and took bonus depreciation on a much larger amount, worth about $150,000. They were roughly $70,000 better off skipping the exchange. 1031s are tools, not automatic answers.

Sell a property with $1M of long-term gain in California and the combined federal and state bill can run near $368,000. The moves that change that number all have to be in place before the sale is binding: a charitable remainder trust, an installment sale, splitting the closing across two tax years, or, for a former home, the $250,000 or $500,000 exclusion if you lived there two of the last five years (IRS Topic 701). Once the contract is signed, most of the menu is gone.

Flipping is a trade. The profit is ordinary income with 15.3% self-employment tax on top (IRS), no long-term capital gain rate, and no 1031. Holding for rent is investing. The same person can be both, and the IRS reads intent, frequency, and how the property was marketed. We set the entities up so the two do not contaminate each other.

On a build or a flip, the land, construction, interest during construction and most carrying costs are capitalized into the project rather than deducted as you go. Cash leaves this year and the deduction lands when the unit sells. That mismatch drives your estimated payments and the cash reserve you need to carry the project.

Usually a single-purpose LLC per project for liability, an S corporation for the development business so the active profit is not all subject to self-employment tax, and a separate holding for anything you keep. California charges every LLC an $800 annual tax plus a fee once gross income tops $250,000 (FTB), so each entity has to earn its keep.

We have run our own money through flips. The number that matters is what is left after ordinary income tax, self-employment tax and California, set against what the same capital and hours would earn in your core business or a simpler long-term rental. Sometimes the flip wins. Often it does not.

Every 1099 dollar carries 15.3% self-employment tax before income tax starts. Once net commissions clear the point where an S corporation's payroll and filing costs are covered, the election starts paying for itself. Our S-corp screener gives you a first read in two minutes.

The regulations exclude real estate agents and brokers from the "brokerage services" category of specified service businesses (Form 8995-A instructions). Unlike lawyers and doctors, you keep the 20% qualified business income deduction at higher incomes, provided the return is built to claim it.

Three closings in one quarter and none the next. The safe harbor is 90% of this year's tax or 100% of last year's, with a higher bar for higher incomes (IRS Topic 306). One missed estimate creates a bigger penalty than most agents expect, so we recalculate from live numbers each quarter instead of dividing last year by four.

Mileage or actual costs, a home office reimbursed through an accountable plan, marketing, MLS dues, licensing and E&O insurance. On the car: buy the vehicle you need and let the deduction follow the business use, not the other way around. Most agents are overthinking it.

A solo 401(k) or SEP sized to the commissions you will actually book. The strong year is the year to fund it, and the contribution deadline is the reason it needs deciding before December.