For rental property and real estate investors
Real estate is supposed to be a tax shelter. Is yours?
One property or twelve, long-term tenants or short-term rentals, in Florida or across four states. I handle rental depreciation, passive loss rules, 1031 exchanges, cost segregation, and the recapture nobody warns you about until you sell.
Most rental owners are leaving something behind. Usually not because anyone did anything wrong — because nobody looked.
Three things you can check on last year’s return
Find Schedule E. It’s usually two or three pages in. This takes about five minutes.
Is there a depreciation figure at all?
If the depreciation line is blank or obviously too small, that’s the first thing to look at — and here is why it matters far more than people realise.
When you sell, the IRS recaptures depreciation that was allowed or allowable. Not the depreciation you took — the depreciation you were entitled to take. Skipping it doesn’t protect you. You get taxed on it at sale whether you claimed the deduction or not.
Did your losses actually reduce your tax?
A rental can show a loss on Schedule E and still change your tax bill by nothing, because passive activity rules suspended it.
Suspended losses aren’t gone — they carry forward and are generally released when you dispose of the property. But somebody has to be tracking them across years. When a client changes preparers, that history is the thing most likely to be lost, and it can be worth a great deal at sale.
How much was allocated to land?
Land is not depreciable. Buildings are. So the split between the two, made once when the property went into service, quietly determines your deduction every year for decades.
A common shortcut is to lift the ratio straight off the property tax assessment, which is convenient and frequently wrong. Getting it right is one of the higher-value things anyone can do with an hour.
How does rental property depreciation work?
Residential rental property is depreciated over 27.5 years and commercial property over 39 years, using the straight-line method. Only the building depreciates — land never does — so the purchase price has to be split between the two before anything else happens.
That’s the simple version. The parts that actually cost people money are these:
Not everything belongs on a 27.5-year schedule. Appliances, carpet, landscaping, fencing, and specific building components have much shorter lives. Lumping the entire purchase into one long schedule is the default when nobody breaks it out, and it delays deductions by decades.
Repairs and improvements are treated completely differently. A repair is deductible now; an improvement is capitalised and depreciated. The line between them is genuinely technical, and there are safe harbours that let more of it be deducted immediately than most owners realise.
Missed depreciation can often be recovered. If a property has been under-depreciated for years, there is a procedure for catching up the whole cumulative amount in a single year without amending old returns. It’s one of the more satisfying things I get to do, and most owners have never heard of it.
Why can’t I deduct my rental losses?
Because rental activity is treated as passive by default, and passive losses can generally only offset passive income — not your salary or your business profit. There are three well-established ways out of that, and which one fits you depends on facts about how you spend your time.
The $25,000 allowance
If you actively participate in the rental — which is a much lower bar than it sounds, mostly meaning you make management decisions — you may deduct up to $25,000 of loss against other income.
It phases out as income rises and disappears entirely above a threshold, which is why higher earners often find their rental losses do nothing at all.
Real estate professional status
If you spend more than 750 hours a year in real property trades or businesses, and more than half your total working time, your rentals can stop being passive altogether.
This is powerful and it is heavily examined. It requires contemporaneous time records, and it usually requires an election to group your properties. Claiming it without documentation is how people lose an audit they should have won.
Short-term rentals
When the average guest stay is seven days or fewer, the activity isn’t a rental under the passive loss rules at all. Meet the material participation tests and the losses may offset ordinary income — without needing real estate professional status.
This is why short-term rentals get talked about so much. It’s real, it’s in the regulations, and it depends on facts that need documenting.
And if none of them apply, the losses still aren’t wasted. They suspend, they carry forward, and they’re generally freed up when you sell the property — provided somebody kept the record.
How does a 1031 exchange work, and what are the deadlines?
A 1031 exchange lets you defer capital gains tax when you sell investment property and reinvest in other investment property. Two deadlines govern it, both run from the day your sale closes, and neither can be extended: you have 45 days to identify replacement property in writing, and 180 days to close on it.
The ways people lose one
- Touching the money. A qualified intermediary must be in place before the sale closes. If the proceeds reach you, even briefly, the exchange is dead and nothing can revive it.
- Missing the 45-day identification. It runs on calendar days, including holidays, and there is no extension for any reason.
- Taking cash or debt relief out of the deal — that’s boot, and it’s taxable to that extent.
- Buying down. Replacing with something cheaper or less leveraged creates gain.
- Not knowing the identification rules — how many properties you may name and on what terms.
And whether you should do one at all
An exchange defers tax. It doesn’t forgive it. Your basis carries over to the new property, which means lower depreciation going forward and a larger gain whenever you eventually sell for cash.
Sometimes paying the tax now is the better answer — if you have suspended losses to release, if you’re in an unusually low-income year, or if you’re about to stop being an investor. Sometimes the answer is an instalment sale instead, spreading the gain across years.
That conversation has to happen before you go under contract. Afterwards there’s nothing to decide.
What else I handle
Cost segregation
An engineering study that reclassifies parts of a building into shorter depreciation lives, pulling deductions forward significantly. Worth it above a certain property value and not below it — I’ll tell you honestly which side you’re on before you pay for a study, and I coordinate with the firms that perform them.
Selling, and recapture
Depreciation recapture is taxed at a higher rate than long-term capital gains and it surprises almost every first-time seller. Model it before you list, not after you close. Instalment sale treatment, suspended loss release, and the net investment income tax all belong in the same conversation.
Converting a home to a rental, or back
The primary residence exclusion can shelter a substantial gain, but the rules change once a property has been rented, and moving back into a former rental doesn’t restore the full benefit. Basis on conversion follows its own rule that trips people up.
Out-of-state and multi-state
Property generally creates a filing obligation in the state where it sits, whether or not you’ve ever been there. Florida owners with property elsewhere, and out-of-state owners with Florida property, both end up here. Credits, apportionment, and returns nobody realised were due.
Short-term rental specifics
Average stay calculations, material participation records, the personal-use rules that apply when you also stay there yourself, whether services provided tip you into self-employment tax, and local tourist development taxes that have nothing to do with the IRS but will still find you.
Entities and financing
Whether an LLC per property actually helps you or just multiplies filings. Partnership returns where you hold property with others. Seller financing and instalment notes. The Section 199A deduction on rental income and the safe harbour for claiming it.
Questions people ask
What is depreciation recapture and how much is it?
When you sell a rental property, the depreciation you claimed over the years gets recaptured and taxed at a maximum rate of 25% — higher than the long-term capital gains rate that applies to the rest of your gain. It is calculated on depreciation allowed or allowable, meaning you are taxed on it whether or not you actually took the deduction.
That last point catches people who deliberately skipped depreciation thinking they were avoiding a problem. They weren’t — they gave up the deduction and still owe the recapture.
Can I claim rental losses against my salary?
Sometimes. Rental activity is passive by default, so losses generally can’t offset wages. Three exceptions exist: the $25,000 special allowance for active participants, which phases out as income rises; real estate professional status, which requires more than 750 hours and more than half your working time in real property businesses; and short-term rentals averaging seven days or less per stay, which aren’t rentals under these rules at all.
If none apply, losses suspend and carry forward, and are generally released when you sell the property.
I never claimed depreciation. Can I fix it?
Usually yes, and it doesn’t require amending old returns. There is an accounting method change procedure that lets you catch up the entire cumulative missed depreciation as a single adjustment in the current year.
For a property held ten or fifteen years without depreciation, that adjustment can be very large. It’s one of the more worthwhile things to check if you inherited a return from a preparer who wasn’t paying attention.
Is a cost segregation study worth it?
It depends on the property’s value, how long you intend to hold it, and whether you can actually use the accelerated deductions — which comes back to the passive loss rules. A study that generates deductions you can’t deduct this year has bought you very little.
Below roughly a few hundred thousand dollars of building value the fee often outweighs the benefit. I’ll run that arithmetic with you before you commission anything, and I don’t receive a referral fee from anybody who performs them.
Do I have to file a tax return in the state where my property is?
Generally yes, if that state has an income tax. Rental income is usually sourced to the state where the property sits, regardless of where you live, and that obligation can exist even in a year the property ran at a loss.
Florida has no personal income tax, so Florida-only owners avoid this entirely. Florida residents who own property in Georgia, New York or California do not.
Should I put each rental in its own LLC?
That’s primarily a legal liability question rather than a tax one, and it’s worth asking an attorney. From the tax side, a single-member LLC holding a rental is usually disregarded — it reports on your personal return exactly as it would without the LLC, so it changes nothing about your tax.
What it does change is cost and administration: state filing fees, registered agent fees, and annual reports, multiplied by the number of entities. Sometimes that’s worth it. Often people are paying for structure they don’t need.
Why me for this
I’m an Enrolled Agent and a CFP® professional, and I owned and ran a business before I did anyone’s taxes — so I understand a property the way an operator does, not just as numbers on a schedule.
What that means in practice: I’ll ask what you paid, what you fixed, what you replaced, how long the unit sat empty, and what you’re planning to do in three years. Those answers change the return. A preparer who only asks for your rent roll and your mortgage statement is going to file something correct and leave money behind.
And because I’m an Enrolled Agent, if a return with real estate professional status or a large cost segregation deduction ever draws questions, I can represent you before the IRS myself. That matters on positions like these, which are examined more often than most.
Tell me about your properties
How many, where they are, how long you’ve had them, and what’s on your mind. If you’re about to buy or sell something, say so — that one’s time-sensitive.
Please don’t attach closing statements or returns here. Once we’re talking you’ll get a secure portal.
What happens next
A reply in a day
If there’s a closing date involved, tell me and I’ll move faster.
A look at the depreciation schedule
It’s the fastest way to see whether anything has been left behind, and it’s usually the first thing I ask for.
A fixed price
In writing before anything begins. Catch-up depreciation work and multi-state returns are quoted separately so you can see what’s what.
Then we plan ahead
Exchanges, sales and conversions are decided before contracts get signed. The useful conversations happen months before the return does.
Michael Jones, EA & CFP® — Enrolled Agent, licensed by the U.S. Department of the Treasury to represent taxpayers before the IRS in all fifty states. This page is general information about tax rules, not advice about your specific situation. Thresholds and rates change; confirm anything here before acting on it.