Tax Benefits of Real Estate Investing

Real estate investing can generate income, but higher income does not automatically mean higher taxes. While taxes generally cannot be avoided, certain tax rules that apply to real estate may reduce taxable income in some situations. As a result, rental income or proceeds from selling property may be taxed differently than other types of income. Real estate investors may be eligible for deductions, credits or other tax provisions, depending on how the activity is structured and reported. Working with a financial advisor can help you evaluate how real estate fits into your overall financial plan.

Tax Benefit of Real Estate Investing

Real estate investing can bring a host of benefits at tax time. Whether you invest in family homes or commercial real estate, the following elements of real estate investing can help you minimize your tax burden and receive a healthy refund when you file. Here are seven tax benefits of investing in real estate.

1. Real Estate Deductions

Real estate deductions are excellent for lowering your taxable income. These deductions typically apply to the costs of property management and business operations. Specifically, the following deductions can help you reduce taxes:

Property taxes
Mortgage interest
Insurance
Property management expenses, such as utilities and lawn care
Building repair and upkeep
Home office deduction
Advertising
Travel expenses
Legal and accounting expenses
Business equipment, such as laptops and printers

Because of the numerous deductions available, recording your relevant expenses is crucial. Claiming deductions is next to impossible without detailed records and receipts. Plus, an audit from the IRS will require you to produce proof of your deductions.

2. Depreciation

Investors can subtract property depreciation from their taxable rental income, meaning they receive a deduction for how buildings deteriorate over time. Specifically, you’ll receive depreciation for the lifespan of the building according to the IRS’s timetable. Currently, residential properties have a lifespan of 27.5 years and commercial properties have 39 years.

You can take a depreciation deduction each year based on the real estate you own. For example, say you own a commercial building valued at $500,000. The land it sits on doesn’t count. When you file taxes, you can divide $500,000 by the lifespan of 39, meaning your property receives an annual depreciation deduction of $12,820.

3. Capital Gains

A man reviews the tax benefits of real estate investing.

Capital gains taxes come from selling real estate at a profit. These taxes fall into one of two categories: short-term and long-term. Short-term capital gains are those you make from assets held for less than one year, while long-term capital gains are profits from selling assets held for a year or more. Short-term capital gains receive no tax benefits because the IRS considers them regular income. So, short-term capital gains can make you jump multiple rungs in the tax bracket, raising your income taxes.

Fortunately, long-term capital gains create tax advantages. First, they receive a lower tax rate than short-term gains and don’t count as normal income. If you reap long-term capital gains, your profit will fall into one of three tax brackets: 0%, 15%, and 20%. So, if you’re married and filing jointly with an income of $98,900 or less for the 2026 tax year ($96,700 in 2025), you won’t pay a penny of taxes on long-term capital gains. The same applies to those who file as the head of a household ($66,200 in 2026) or file single ($49,450 in 2026).

4. 1031 Exchange

If you sell an investment property you’ve taken depreciations for, you’ll have to pay capital gains taxes on the sale and recapture taxes on all prior depreciation deductions. However, you can defer this tax, called depreciation recapture, by using the 1031 exchange.

This provision allows you to defer capital gains taxes when you sell an investment property and reinvest the proceeds into another qualifying property of equal or greater value. However, 1031 exchanges follow strict rules around timing, property identification and the handling of sale proceeds, and failing to meet any requirement can trigger immediate taxes. Because of this complexity, 1031 exchanges are typically completed with the help of tax professionals who specialize in these transactions.

5. Passive Income and Pass-Through Deductions

A pass-through deduction may be available when real estate activity is conducted through a sole proprietorship, partnership, LLC or S corporation. However, eligibility depends on the rental activity being treated as a trade or business rather than passive investment income, and the income generally must be subject to self-employment or payroll taxes. Because these rules are narrow and fact-specific, many real estate investors do not qualify for the deduction, even when operating through a pass-through entity.

For example, say you operate rental properties through a real estate limited partnership. You receive $25,000 of annual income from the business, meaning you might be able to deduct $5,000 of that income when filing taxes.

6. Self-Employment With the FICA Tax

Self-employed workers generally pay 15.3% in FICA taxes on earned income. Passive rental income, however, is typically not subject to FICA. As a result, rental income that is treated as passive is not subject to Social Security and Medicare taxes.

This treatment is separate from the Qualified Business Income (QBI) deduction, which generally requires the activity to be classified as a trade or business and may involve income subject to employment taxes. Investors typically cannot receive both outcomes on the same rental income.

7. Opportunity Zones

Opportunity zones can provide tax deferral opportunities for real estate investors, but the rules are narrow and highly structured. In general, capital gains may be deferred only if the proceeds are invested in a qualified opportunity fund, not simply by purchasing property located in an opportunity zone. These programs are designed to encourage investment in designated areas, but they involve strict timing, reporting and compliance requirements.

Investing in an opportunity zone will provide three tax benefits. First, you can defer capital gains taxes through 2026 or when you sell your investment. In addition, your capital gains will receive a 10% step-up in basis if you stay invested for at least five years. Lastly, you can eliminate capital gains taxes completely if you hold that investment for at least 10 years.

Other Ways to Minimize Your Tax Bill as a Real Estate Investor

Minimizing your tax bill goes beyond the deductions mentioned above. As a real estate investor, you can reduce income taxes with the following strategies:

Open an IRA: As previously stated, an IRA can help you access real estate investments. In addition, it can reduce income taxes. Specifically, you can open a traditional IRA and invest pre-tax dollars, lowering your tax burden further. You can invest $7,500 in your IRA in 2026, meaning you can lower your taxable income by that amount. If you’re 50 or older, your IRA contribution limit is $8,600.
Contribute to a 401(k): Similarly, you can contribute pre-tax dollars to a 401(k) if your employer provides one. However, 401(k)s have a higher contribution limit than IRAs. You can contribute $24,500 to your 401(k) in 2026, making it an excellent tax shelter. Plus, if you’re 50 or older, you can deposit another $8,000 in catch-up contributions. Starting in 2025, 401(k) participants between 60 and 63 can make catch-up contributions of up to $11,250. But remember that you’ll pay regular income taxes on the money you withdraw from your 401(k).
Consider asset location: You’ll typically have to pay taxes on real estate income the year you receive it. However, you can transfer your assets to financial instruments that shield you from current taxes. As mentioned above, an IRA can delay taxes on real estate income until you withdraw funds during retirement.

Bottom Line

An investor calculates taxes on their real estate investment.

Real estate can be a lucrative investment without incurring heavy taxes. You can take numerous deductions to offset income, such as property management expenses and depreciation deductions. In addition, regulations like the 1031 exchange and opportunity zone funds can delay or even negate taxes. If you still have income left over after these deductions, you can use an IRA, 401(k) or another tax-advantaged financial account to further reduce taxes. Therefore, it’s crucial to familiarize yourself with these strategies and consult a tax professional to optimize your deductions.

Tax Tips for Real Estate Investors

A financial advisor can review your assets and potentially help you develop strategies for minimizing your tax liability. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Everyone’s tax situation is unique, and it can be challenging to tell if you need a tax professional. Whether you have questions about lowering income taxes or are unsure of the tax implications of launching a real estate business, it’s beneficial to work with a tax advisor.
Need help calculating your capital gains tax bill? SmartAsset’s Capital Gains Tax Calculator can help you estimate how much you may owe on the profits from selling an asset like property.