Real Estate Tax Planning Guide for 2025

If you’re an investor, analyzing your financial situation and understanding real estate tax laws can be crucial to maximizing tax efficiency. Staying knowledgeable allows you to create tax strategies that legally take advantage of tax deductions, exemptions and credits. This guide explores four real estate tax strategies and the main components of tax compliance to help you improve your financial management.

Importance of Real Estate Tax Planning

Tax planning is critical for helping real estate investors comply with tax laws and regulations. It may also help you avoid legal issues, penalties and fines. Some reasons why real estate tax planning is important include:

• Managing cash flow: Planning taxes correctly helps your cash flow stay steady throughout the year. It also allows you to save on taxes and make early investments to prevent the financial strain of tax filing.
• Optimizing investments: Strategic and early tax planning helps identify tax-efficient investment avenues, allowing you to earn a better return on investment.
• Reducing tax liabilities: You may be able to decrease tax liabilities by leveraging deductions and exemptions.
• Ensuring compliance: Tax strategies help taxpayers anticipate and understand the tax laws that apply to them, allowing them to make the correct tax payments to maintain compliance.
• Mitigating risks: Well-planned tax strategies allow you to fulfill all necessary tax obligations and effectively avoid risks like unexpected tax demands.

When Should You Begin Tax Planning?

It’s best to start your real estate tax planning early in the year. At this time, you’ll want to:

• Review your paychecks
• Update your savings rates
• Plan for equity compensation
• Strategize retirement contributions

In the middle of the year, check your progress and adjust accordingly. Adjustments might include reviewing unexpected income, changes in employment that affect your tax situation, new charitable contributions, and gains or losses on investments.

Then, in the last quarter, you can fine-tune your tax strategy to account for all income and expenses. Finalize your tax payments and benefits and maximize tax-advantaged accounts. These steps will help you align your tax strategy with broader financial goals.

4 Real Estate Tax Strategies

Here are four top real estate tax strategies investors can use.

1. Leverage Tax Deductions

You may be able to leverage deductions as a real estate investor. Tax deductions are allowed for any expenses related to your rental property, including:

• Maintenance costs
• Legal and accounting fees
• Property management costs
• Property taxes and insurance
• Advertising costs for attaining new tenants
• Business expenses like computers and software

These deductions reduce your taxable income. Real estate accounting software may help you maximize and keep track of your end-of-year deductions.

2. Minimize Capital Gains Tax

There are two types of capital gains tax:

• Short-term capital gains: These can be applied to assets you’ve bought and sold for a profit during the year. They are typically taxed at the same rate as regular income.
• Long-term capital gains: These taxes are lower and require you to hold the property for over a year.

You may be able to avoid capital gains tax on real estate by making the property your primary residence. You may then use the Section 121 exclusion to sell your primary residence and not pay capital gains of up to $250,000 as an individual. You can only claim the property as your primary residence after living there for two years out of the past five years.

Otherwise, you might sell your property and defer capital gains by investing in an opportunity zone established in the Tax Cuts and Job Act of 2017. This property could be anywhere within an established rural or financially distressed area.

A 1031 exchange allows you to exchange one real estate investment property for another like-kind investment and defer capital gains taxes. The capital gains from the relinquished property roll over to the acquired property, helping you avoid taxes until you cash out.

3. Borrow Against Your Equity

If you want to free up some cash or fund a new investment, borrowing against your equity might be another valuable solution. You can use a cash-out refinance to receive funds and a new mortgage on the property. This option can be better than selling when you don’t want to pay capital gains tax because mortgage payments with interest may be more affordable than capital gains taxes. While long-term capital gains tax may go up to 20%, fixed-rate mortgages on residential real estate today have a maximum of around 6.81% interest.

4. Deduct for Depreciation

This real estate tax strategy allows you to deduct the loss on your taxes when the investment property does not appreciate in value. The depreciation deduction helps lower your total taxable income. However, if you sell the property and make a profit on it, you’ll need to report it to the IRS and state taxing entity as depreciation recapture. You may need to pay extra tax on this gain to cover the depreciation you deducted.

Important Real Estate Tax Compliance Factors

Investors must comply with real estate tax laws to avoid hefty penalties and fines. Some of the key compliance requirements include:

• Rental income tax: Rental property owners must report their rental income and loss in their personal income tax return Schedule E of Form 1040. You may also need to file Form 4562 to report depreciation.
• Property tax: Your local government likely collects property taxes annually. It is crucial to pay it on time to avoid the government seizing your property.
• Capital gains tax: This tax is relevant when exchanging or selling properties. It is calculated based on your net gross proceeds from the rental property sale and the costs associated with purchasing, owning and maintaining the property.
• Rental property sales tax: Depending on your state, you may need to pay sales or use taxes on rental income. Sales taxes are typically paid on your total income and paid by the tenant, making it your responsibility to collect it from them.
• Estimated tax: Depending on your state, estimated tax payments should be made quarterly or even every month. The amount is based on your projected income, credits and deductions.

With various tax considerations, it’s helpful to take a comprehensive approach that helps you account for every aspect of tax compliance. Work with tax professionals to help you understand what taxes you owe and when you should pay them. A collaborative team of accountants, attorneys and financial advisors ensures all aspects of your particular situation are considered.

Enhance Your Tax Preparation With Polston Tax

Are you looking to boost your real estate tax strategies? At Polston Tax, we have skilled and knowledgeable tax preparation teams and accountants who can help customize tax strategies to your unique situation. We provide a collaborative team consisting of a tax preparer, tax attorney, accountant and case manager.

Our tax preparer will ensure you file the necessary deductions based on the information you provide and create strategies to help you lower yearly taxes. Meanwhile, our accountants can handle your monthly and quarterly reports to ensure you stay compliant. To enhance your real estate tax planning, contact our tax professionals today.