Real Estate Investing Tax Strategies

When you’re making any type of investment, it’s always good to be aware of potential tax implications. This is especially true when investing in real estate. Because the government wants to encourage real estate investment, there are several real estate investing tax strategies that investors can use to their advantage. Let’s go over five of the major tax strategies and how you can make them work for you.

A financial advisor can help you optimize a tax strategy for your real estate investments and goals. Connect with an advisor for free.

1. Minimize or Avoid Capital Gains Tax

When it comes to tax on capital gains, there are two ways they’re taxed: long-term and short-term capital gains. Short-term capital gains are applied to any asset you’ve bought and sold for a profit within a year. They’re taxed at the same rate as income tax. Long-term capital gains taxes are much lower, but you’ll need to hold the property for over a year.

One way to avoid capital gains tax on real estate is to make the property your primary residence. Through using a Section 121 Exclusion, you may be able to sell your primary residence and exclude a gain of up to $250,000, or up to $500,000 if you’re married and filing jointly. In general, you must satisfy both ownership and residence requirements during the five-year period before the sale, although additional rules and exceptions can affect eligibility.

2. Take Advantage of Deductions

There are many tax deductions you can make on the real estate you own. While you can deduct your mortgage interest on your home, it’s especially true when we’re talking investments beyond your residence. Here are some examples of what you can deduct on your taxes as a real estate investor:

• Property taxes and insurance
• Cost of maintenance
• Property management costs (if you use a property management company)
• Advertising costs to get new tenants
• Legal and accounting fees
• Business expenses such as software, computers and other tools and resources

3. Account for Depreciation

Accounting for depreciation is another real estate investing tax strategy. Depreciation generally allows an investor to recover the cost of qualifying income-producing property over time rather than requiring the property itself to decline in market value. Under the general federal tax rules, residential rental property is typically depreciated over 27.5 years, while nonresidential real property is generally depreciated over 39 years. Land is not depreciable.

Depreciation also affects the tax calculation when an investment property is sold. A portion of the gain associated with depreciation deductions may receive different federal tax treatment from the rest of the gain, so the tax consequences of a sale can differ from a straightforward long-term capital gain calculation.

4. Defer Taxes

There are a couple ways you can defer your taxes on real estate. The government uses these two programs to encourage investment:

• 1031 Exchange: A qualifying exchange can postpone recognition of gain when real property held for investment or business use is exchanged for qualifying like-kind real property. For a deferred exchange, replacement property generally must be identified within 45 days after the relinquished property is transferred and received within 180 days or by the applicable tax-return deadline, including extensions, if that comes first.
• Qualified Opportunity Zone Funds: The rules affecting these investments are changing after 2026. Under the rules applicable to qualifying investments made through 2026, eligible gains invested in a Qualified Opportunity Fund can be deferred only until an earlier inclusion event or Dec. 31, 2026. A revised Opportunity Zone framework applies to qualifying investments made beginning in 2027.

Use our calculator to understand how tax brackets apply to your earnings.

5. Borrow Against Your Equity

You may be tempted to sell the property when you need to liquidate. But, if you need to fund a new investment or free up some cash, think about dipping into your equity. A cash-out refinance will give you a new mortgage on the property in exchange for cash.

Borrowing against a property rather than selling it generally does not create a capital gain because loan proceeds are not sale proceeds. However, a refinance creates interest costs and other borrowing expenses, so whether it is less expensive than selling depends on the loan terms and the taxes that a sale would actually trigger. Long-term capital gains can be subject to federal rates of 0%, 15% or 20%, depending on taxable income and filing status. As of Sept. 17, 2026, the average rate for a 30-year fixed-rate mortgage was 6.95%, ¹ while the average 15-year fixed-rate mortgage rate was 6.26%. ²

How Passive Activity Rules Can Limit Rental Losses

Owning a rental that finishes the year in the red does not necessarily produce an immediate deduction against the investor’s other earnings. Federal tax rules can restrict when a rental loss is used, which means the timing of the tax benefit may differ from the property’s financial results for that year.

Consider an investor whose rental produces $18,000 of deductible expenses and depreciation beyond its rental income. If tax rules prevent the investor from claiming all $18,000 that year, the restricted amount can generally remain available for a later year rather than disappearing. Future passive income may provide an opportunity to use it, and disposing of the entire interest in the activity in a qualifying taxable transaction can also affect previously suspended losses.

There are circumstances in which rental losses receive different treatment. The result can depend on factors such as the owner’s involvement with the property, income and whether the taxpayer meets the separate requirements that apply to certain real estate professionals. Because those rules can change how much of a loss is currently deductible, investors should determine the tax treatment before counting a rental loss as an offset to income from another source.

Bottom Line

Part of having a successful real estate investing business is employing real estate investing tax strategies. From maximizing deductions to using incentive programs to defer taxes, there are several things you can do to cut your tax bill. A big part of being able to take full advantage of these tax strategies is knowing they exist. That’s where a financial advisor and an accountant that specialize in real estate can be major assets.

Real Estate Investment Tips

• A financial advisor can help you figure out how to invest in real estate effectively. 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.
• Real estate investment trusts, also known as REITs, are purpose-built for people who want to invest in real estate without buying property. There are three main types, and each has its own pros and cons.

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