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Real Estate Investor Toolkit

Methodology · Tax & Depreciation

Tax & depreciation methodology

Reviewed by · Last reviewed .

How we treat real-estate tax mechanics across the toolkit. This page covers IRC §168 depreciation, §1031 like-kind exchanges, §469 passive activity loss limitations, and §199A QBI deduction. All tax content is reviewed by a CPA before publication; nothing here is individualized tax advice — consult your CPA for application to your specific situation.

IRC §168 depreciation

Real property is depreciable on straight-line over fixed recovery periods. §168(c) sets the table:

  • Residential rental property: 27.5 years
  • Non-residential (commercial / mixed-use majority commercial): 39 years
  • Land: NOT depreciable (separated from building basis at acquisition; allocation per appraisal or tax-bill ratio)

Cost-segregation studies break out personal property (5/7-year MACRS) and land improvements (15-year MACRS) from the building envelope, accelerating early-year deductions. Worth pricing on properties above $750K basis where the study's $4–8K cost is covered by year-1 tax savings.

IRC §1031 like-kind exchanges

§1031 allows deferral (not elimination) of capital gains tax on the sale of investment real estate when proceeds are reinvested in like-kind property within statutory windows. Mechanics:

  • 45 days from sale-close to identify replacement candidates (up to 3 properties, or more under specific value tests)
  • 180 days total to close on the replacement
  • Proceeds must flow through a Qualified Intermediary — never touch the seller's account
  • Boot (cash received or debt relief beyond replacement debt) is taxable up to the recognized gain
  • Replacement basis carries over from the relinquished property minus deferred gain — depreciation continues on the carryover basis

§1031 is exclusive to investment / business-use real estate since the Tax Cuts & Jobs Act of 2017; personal property exchanges are no longer eligible.

IRC §469 passive activity losses

§469 limits the use of rental real-estate losses (depreciation + operating losses) to offset non-passive income. Key rules:

  • Rental real estate is passive by default regardless of involvement
  • Passive losses can offset passive income; excess passive loss is suspended
  • Suspended losses carry forward indefinitely and free up at sale of the activity
  • $25K active-participation exception: taxpayers with MAGI ≤ $100K can deduct up to $25K of rental losses against non-passive income; phases out 50¢ per $1 between $100K and $150K MAGI
  • Real Estate Professional status (§469(c)(7)): 750+ hours/year + more than half of personal services in real estate trades = rental activities become non-passive; full loss deductibility

IRC §199A QBI on rental income

§199A allows a 20% deduction on qualified business income for pass-through entities. Whether rental income qualifies:

  • Rental that rises to the level of a §162 trade or business: qualifies
  • The §199A safe harbor (Rev. Proc. 2019-38): 250+ hours of rental services per year + separate books per enterprise + contemporaneous records — satisfies the trade-or-business test
  • Triple-net leases: presumptively NOT a trade or business; QBI uncertain
  • Self-rental rules and aggregated-enterprise election (Reg §1.199A-4) for portfolios

§199A QBI on rental is one of the most-litigated and fact-specific areas of post-TCJA tax law. CPA review on application to your specific portfolio is essential.

Sources

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