Real Estate Tax Strategies for 2025: What's Changing and How to Adapt

The tax landscape for real estate investors continues to evolve. Understanding the current environment and adapting your real estate tax strategies accordingly can mean significant savings. Here's what you need to know for 2025.

Key Tax Changes Affecting Real Estate in 2025

Bonus Depreciation Phase-Out

The most significant change for real estate investors is the continued phase-out of bonus depreciation:

Impact: First-year depreciation deductions from cost segregation will be lower than previous years, but still valuable. Strategy: If you're considering cost segregation, acting in 2025 still captures meaningful bonus depreciation benefits.

Interest Deduction Limitations

For larger real estate businesses, interest deductions may be limited under Section 163(j):

• Limitation: 30% of adjusted taxable income
• Electing real property trade or business status allows unlimited deductions
• But requires using Alternative Depreciation System (ADS)

Strategy: Work with your CPA to determine if the election makes sense for your situation.

State Tax Considerations

Many states don't conform to federal bonus depreciation:

• California: No bonus depreciation allowed
• New York: Limited conformity
• Various others: Different rules apply

Strategy: Calculate federal and state impacts separately when planning.

Real Estate Tax Strategies to Implement Now

Strategy 1: Accelerate Cost Segregation Studies

With bonus depreciation declining annually, there's urgency to complete cost segregation studies:

For New Acquisitions:

• Order studies before closing when possible
• Implement in the year of acquisition
• Capture current bonus depreciation rates

For Existing Properties:

• Look-back studies are still available
• Can capture depreciation from prior years
• File Form 3115 for catch-up deduction

Strategy 2: Strategic Timing of Improvements

If you're planning property improvements, consider timing:

2025 Improvements:

• Eligible for 40% bonus depreciation on qualifying assets
• Cost segregation can identify short-life components
• Still significant first-year benefits

Deferrable Improvements:

• If bonus depreciation is eliminated and later restored, waiting could be beneficial
• Monitor legislative developments

Strategy 3: Maximize Current Deductions

Beyond depreciation, ensure you're capturing all available real estate writeoffs:

Often Missed Deductions:

• Mileage to properties
• Home office expenses
• Professional development
• Software subscriptions
• Bank and credit card fees

Timing Strategies:

• Prepay expenses in December for current-year deduction
• Accelerate repairs in high-income years

Strategy 4: Entity Structure Review

Review your ownership structure for tax efficiency:

Consider:

• LLC vs. S-Corp for active investors
• Partnership structures for multiple properties
• Self-directed IRA investments
• Qualified Opportunity Zone funds

Annual Review Questions:

• Is your current structure still optimal?
• Have circumstances changed?
• Are there better alternatives?

Strategy 5: Plan for Exits Now

Real estate tax strategies should include exit planning:

1031 Exchanges:

• Defer capital gains by exchanging into like-kind property
• Must follow strict timelines
• Plan identification strategy in advance

Installment Sales:

• Spread gain recognition over multiple years
• Can reduce total tax liability
• Must structure properly at sale

Charitable Strategies:

• Donor-advised funds
• Charitable remainder trusts
• Can avoid capital gains while achieving philanthropic goals

Real Estate Tax Tips for Specific Situations

For High-Income Investors

If you're in the highest tax brackets:

• Maximize depreciation through cost segregation
• Consider real estate professional status (if eligible)
• Evaluate Opportunity Zone investments
• Plan for Net Investment Income Tax (NIIT)

For Passive Investors

If you have primarily passive rental income:

• Monitor passive activity loss limitations
• Consider grouping elections
• Track basis carefully
• Plan for disposition to release suspended losses

For Short-Term Rental Operators

STR investors have unique opportunities:

• Material participation may qualify losses as non-passive
• Can offset W-2 income if requirements are met
• Cost segregation particularly valuable
• Document hours worked carefully

For Developers and Flippers

Active real estate businesses have different considerations:

• Inventory vs. investment property treatment
• Self-employment taxes on profits
• Possible qualified business income deduction
• Section 1231 gain treatment

Creating Your 2025 Tax Plan

Q1: Assessment

• Review 2024 tax return for optimization opportunities
• Identify properties suitable for cost segregation
• Evaluate entity structure
• Set up or improve expense tracking

Q2: Implementation

• Order cost segregation studies for priority properties
• Implement any entity changes
• Begin tracking real estate professional hours (if applicable)
• Review mid-year income projections

Q3: Optimization

• Evaluate year-to-date results
• Plan acquisitions or dispositions
• Consider timing of improvements
• Review estimated tax payments

Q4: Execution

• Execute year-end tax strategies
• Complete pending transactions
• Prepay deductible expenses if beneficial
• Finalize cost segregation implementations

Working with Professionals

Effective real estate tax strategies require a team:

CPA/Tax Advisor

Choose one with real estate experience:

• Understands passive activity rules
• Knows cost segregation benefits
• Stays current on law changes
• Provides proactive planning

Cost Segregation Specialist

For properties over $200,000:

• Engineering-based studies
• IRS-compliant documentation
• CPA coordination
• Implementation support

Legal Counsel

For complex situations:

• Entity structuring
• 1031 exchange guidance
• Partnership agreements
• Tax controversy matters

Key Takeaways for 2025

Act on bonus depreciation while it's still available at 40%

Track all expenses meticulously throughout the year

Review entity structure annually for optimization

Plan exits in advance to minimize tax impact

Work with specialists who understand real estate taxation

The investors who benefit most from real estate tax strategies are those who plan proactively rather than react at tax time.

Conclusion

2025 brings both challenges and opportunities for real estate investors. While bonus depreciation continues to phase out, there's still significant value in accelerated depreciation strategies. The key is acting now while benefits remain available.

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