Real Estate Investing Taxes: Deductions, Depreciation & 1031 Exchanges

Real estate investing taxes affect nearly every stage of owning an investment property. The tax consequences begin when you establish the property’s basis, continue while you report rental income and expenses, change as you make repairs or capital improvements, and become especially important when you sell or exchange the property.

The rules also depend on facts that can vary from investor to investor. Property type, personal use, ownership structure, participation level, placed-in-service dates, prior depreciation, and the way a property is sold can all change the result.

This guide explains the federal tax framework that real estate investors commonly encounter. It is designed to help you understand the major concepts and the questions to raise with a qualified tax professional. It does not replace fact-specific tax advice or return preparation.

If you are still building your broader investment framework, start with our guide to real estate investing.

How Real Estate Investing Taxes Work

A useful way to understand real estate investing taxes is to follow the property’s lifecycle.

An investor generally needs to understand:

1. Basis at acquisition. What amount becomes the starting point for depreciation and future gain or loss calculations?
2. Income during ownership. What rent and other payments must be reported?
3. Current deductions. Which operating costs may be deductible now?
4. Capitalized costs. Which expenditures must be added to basis and recovered over time?
5. Depreciation. Which portions of the property can be depreciated, over what recovery periods, and under which rules?
6. Loss limitations. Are rental losses currently deductible, limited by at-risk rules, or limited by passive-activity rules?
7. Disposition. What happens to adjusted basis, prior depreciation, and gain when the property is sold?
8. Tax deferral. Could a qualifying Section 1031 exchange defer recognition of some gain?

These pieces interact. A renovation may increase basis. Depreciation may reduce adjusted basis. Lower adjusted basis can increase taxable gain when the property is sold. A qualifying exchange may defer recognition, but it generally does not make the deferred tax history disappear.

Good tax planning therefore starts with accurate records and a clear understanding of how one year’s decisions affect later years.

Rental Income and How It Is Reported

Rental income is broader than the monthly rent stated in a lease. The IRS explains in Publication 527 that rental income generally includes amounts received for the use or occupation of property.

For many individual landlords, residential rental activity is commonly reported on Schedule E, although the appropriate form can depend on the activity and ownership structure.

Advance rent

Advance rent is generally included in rental income in the year it is received, even if it covers a future rental period.

For example, if a tenant pays the first month’s rent and the final month’s rent at the beginning of a lease, the advance amount can be taxable when received rather than when that future month arrives.

Security deposits

A refundable security deposit is generally not income when received if you intend to return it to the tenant at the end of the lease.

The treatment can change if you later keep some or all of the deposit because the tenant failed to meet the lease terms.

If an amount labeled a security deposit is actually intended to serve as the final rent payment, the IRS treats it as advance rent.

Expenses paid by a tenant

If a tenant pays an expense that is legally yours to pay, that payment can be rental income to you.

If the underlying expense is otherwise deductible, you may also be able to deduct the expense. The income and expense do not simply disappear because the tenant paid the bill directly.

Property or services received instead of cash

Rent does not have to be paid in cash. If a tenant provides property or services in place of rent, the fair market value of what you receive can generally be rental income.

The practical lesson is simple: Track all forms of rental income, not only deposits that look like ordinary monthly rent.

Common Rental Property Tax Deductions

Rental property can generate many ordinary operating expenses. Publication 527 identifies common categories such as:

• advertising;
• cleaning and maintenance;
• commissions;
• insurance;
• legal and professional fees;
• local transportation;
• management fees;
• mortgage interest;
• repairs;
• taxes;
• utilities;
• depreciation.

A cost appearing on that list does not automatically mean every payment is fully deductible in the year you make it. Timing and classification matter.

Some costs must be capitalized. Some deductions can be limited. Personal-use portions may need to be separated. Interest deductions can be affected by other tax rules. Travel and vehicle costs require adequate substantiation.

The tax question is therefore not just, “Did I spend money on the rental?” A better question is, “What was the expense for, when was it incurred, what tax rule applies, and is the deduction currently allowed?”

For day-to-day rental operations outside the tax context, see Landlord Operations.

Repairs vs Improvements

The repair-versus-improvement distinction matters because the timing of the tax benefit can be different.

Publication 527 explains that a repair or maintenance expense may generally be deductible when capitalization is not required. An improvement generally must be capitalized.

At a high level, an expenditure may be an improvement when it:

• results in a betterment;
• restores the property;
• adapts the property to a new or different use.

A repair is more likely to keep the property in ordinarily efficient operating condition without materially improving it. The facts matter.

Replacing a broken component can sometimes be a repair. Replacing a major building system can be a capital improvement. A project that looks small in dollar terms can still be capital in nature, while a more expensive recurring maintenance item may be deductible depending on the facts and applicable rules.

There is no safe universal rule that says every expense below a particular dollar amount is automatically a repair.

Why the distinction matters

A currently deductible repair may reduce taxable rental income now. A capital improvement generally increases basis and is recovered through depreciation or when the property is sold.

That difference affects:

• current taxable income;
• depreciation deductions;
• adjusted basis;
• gain or loss at disposition.

Keep invoices and descriptions detailed enough to show what work was performed and why.

Tax Basis and Adjusted Basis

Basis is one of the most important tax concepts in real estate investing. The IRS explains in Publication 551 that the basis of property you buy is generally its cost, subject to adjustments and special rules.

Your initial basis can include more than the purchase price. Certain acquisition costs may be capitalized into basis rather than deducted immediately.

What can increase basis?

Basis can increase when you make capital improvements. Examples can include qualifying costs for:

• additions;
• major renovations;
• structural improvements;
• certain building systems;
• other capital expenditures.

What can reduce basis?

Basis is reduced by certain events, including depreciation that was allowed or allowable. That point is important.

Publication 551 explains that basis can be reduced by depreciation you could have taken under the method you selected even if you did not actually claim the full allowable amount.

Skipping depreciation can therefore create a poor result: you may lose the current deduction while still facing a lower basis later.

Why adjusted basis matters

Adjusted basis is central to determining gain or loss when you sell.

At a simplified level, gain or loss starts with the amount realized from the disposition compared with the property’s adjusted basis.

The actual calculation can involve selling costs, depreciation, casualty adjustments, partial dispositions, improvements, prior exchanges, and other items. Accurate basis records should be maintained from the day you acquire the property.

Depreciation on Rental Property

Depreciation is the tax system’s method for recovering the cost of qualifying property over time. It is not a statement that the market value of the property is necessarily falling.

Land is not depreciable

Land is not depreciated because it does not have a determinable useful life for depreciation purposes.

When you buy a property that includes both land and a building, the purchase price generally must be allocated between the nondepreciable land and the depreciable building and other qualifying components.

When depreciation begins

Depreciation generally begins when qualifying property is placed in service. For rental property, that means the property is ready and available for rent, not merely the date you bought it.

Residential rental property

Publication 527 states that residential rental property under the General Depreciation System generally uses a 27.5-year recovery period. Commercial and other nonresidential real property use different rules.

If you invest in larger multifamily, office, industrial, retail, or other commercial assets, our commercial real estate investing guide explains the investment side of those property types.

Depreciation and future gain

Depreciation reduces adjusted basis. That means the deductions you claim during ownership can affect the tax calculation when the property is eventually sold.

This is one reason depreciation should never be viewed in isolation from the investor’s longer-term hold and disposition plan.

Cost Segregation and Bonus Depreciation

Cost segregation is a tax-planning method used to identify components of a building or project that may qualify for shorter recovery periods than the building itself.

Instead of treating every eligible cost as part of one long-lived building category, a cost-segregation analysis may identify qualifying components such as certain personal property or land improvements.

The classification has to be supportable. A cost-segregation study does not make the entire building immediately deductible.

Current bonus depreciation rule

Current IRS guidance confirms that the 100% additional first-year depreciation deduction is permanent under current law for certain qualified property acquired and placed in service after January 19, 2025. The IRS issued Notice 2026-11 with interim guidance on the restored Section 168(k) deduction.

That does not mean the residential or commercial building itself automatically qualifies for 100% bonus depreciation.

Qualified property generally includes certain property with recovery periods of 20 years or less and other specifically defined categories.

This is why cost segregation and bonus depreciation are often discussed together. A properly classified shorter-life component may qualify for treatment that the building structure does not.

Timing matters

The current rules distinguish property based on acquisition and placed-in-service dates.

Property acquired before January 20, 2025, or placed in service during the transition period can be subject to different rules.

Do not rely on an old article, spreadsheet, or acquisition model that assumes the pre-2025 phase-down rules still apply to every new investment.

The future tax effect matters too

Accelerated depreciation can create a large current deduction, but it can also affect:

• adjusted basis;
• gain at sale;
• recapture treatment;
• passive-loss limitations;
• the economics of a later 1031 exchange.

A large deduction is not automatically a good strategy for every investor.

Passive Activity Loss Rules

Rental property deductions do not always produce an immediately usable tax loss. The IRS explains in Publication 925 that rental activities are generally passive activities, even when the owner participates, unless an exception applies.

Passive losses are generally limited to passive income, subject to specific exceptions and carryforward rules.

At-risk rules can apply first

Before passive-activity rules determine whether a loss is usable, at-risk limitations may also restrict losses.

This matters when an investor has financing or ownership arrangements that reduce the amount economically at risk.

Active participation exception

Certain rental real estate owners who actively participate may qualify for a limited special allowance, subject to income and other requirements.

That rule is different from real estate professional status. Do not treat “I manage my own rental” as equivalent to being a real estate professional for tax purposes.

Suspended passive losses

A loss that is not currently deductible because of passive limitations may carry forward. The treatment of suspended losses can change when income is generated, participation changes, or the investor disposes of the entire interest in the activity in a taxable transaction.

These rules can become complicated quickly when an investor owns multiple properties or activities.

Real Estate Professional Tax Status

Real estate professional status is one of the most misunderstood areas of real estate tax planning. Publication 925 states that an individual generally qualifies as a real estate professional for the year only if both of these tests are met:

• more than half of the personal services performed in trades or businesses during the year are performed in real property trades or businesses in which the taxpayer materially participates; and
• the taxpayer performs more than 750 hours of services during the year in real property trades or businesses in which the taxpayer materially participates.

Meeting those tests does not automatically make every rental loss deductible. Material participation in the rental activities still matters.

It is not a job title

Calling yourself a real estate professional, holding a real estate license, owning several rentals, or spending significant money on properties does not by itself establish the tax status.

The test is based on the statutory participation requirements. Documentation can be critical.

Investors claiming real estate professional treatment should maintain credible records of the services performed, time spent, and activities involved.

Short-Term Rentals and Material Participation

Short-term rental tax treatment is frequently oversimplified. The passive-activity rules do not classify every property rented to guests as a rental activity.

Publication 925 states that an activity is not treated as a rental activity for passive-activity purposes when certain exceptions apply.

One important exception applies when the average period of customer use is 7 days or less.

Another can apply when the average period of customer use is 30 days or less and significant personal services are provided.

If an activity is not treated as a rental activity under these rules, the analysis can shift to the material-participation tests that apply to trade or business activities.

That does not mean every short-term rental loss is automatically nonpassive.

The investor must still evaluate the exact activity, average customer use, services provided, and material participation.

QBI and Rental Real Estate

The qualified business income deduction can apply to some rental real estate activities. The current Instructions for Form 8995 state that ownership and rental of real property may constitute a trade or business for Section 199A purposes.

Revenue Procedure 2019-38 also provides a safe harbor under which a qualifying rental real estate enterprise can be treated as a trade or business for QBI purposes.

The safe harbor is not the only route. A rental that does not meet the safe harbor may still qualify if it otherwise rises to the level of a Section 162 trade or business.

This area depends heavily on facts such as:

• regularity and continuity of activity;
• the nature of services performed;
• ownership and management structure;
• whether the rental is part of a qualifying enterprise;
• other Section 199A rules and limitations.

Avoid assuming that every rental automatically qualifies for QBI or that failing the safe harbor automatically disqualifies it.

What Happens When You Sell a Rental Property?

Selling rental real estate can trigger several different tax concepts at once.

The analysis can involve:

• amount realized;
• adjusted basis;
• selling costs;
• prior depreciation;
• Section 1231 treatment;
• Section 1250 rules;
• capital gain concepts;
• passive-loss carryforwards;
• installment-sale rules where applicable;
• state taxes;
• potential Section 1031 deferral.

A simple statement such as “rental property is taxed at the capital gains rate” can therefore be misleading.

Adjusted basis is central

The gain calculation starts with the property’s adjusted basis, not simply the original purchase price.

If depreciation reduced basis during ownership, the difference between sale proceeds and adjusted basis can be larger than the investor expects.

Holding period and property use matter

Real property used in a trade or business or held for production of income can be subject to Section 1231 rules when the applicable requirements are met.

Property held primarily for sale to customers can be treated differently. The tax treatment depends on what the property was and how it was held.

Depreciation Recapture

“Depreciation recapture” is commonly used as a shorthand for the tax consequences associated with prior depreciation when property is sold.

The actual rules can differ depending on the type of property and depreciation claimed.

Real estate can involve Section 1250 and unrecaptured Section 1250 gain concepts, while shorter-life property identified in a cost-segregation study may involve Section 1245 recapture rules.

The key planning point is that depreciation reduces basis, and accelerated deductions can affect the character and timing of taxable gain later.

That does not make depreciation undesirable. It means investors should model both the current benefit and the eventual disposition.

A tax professional should calculate the actual character of gain rather than applying one generic “recapture rate” to every component.

What Is a 1031 Exchange?

Section 1031 can allow an investor to defer recognition of gain when qualifying real property is exchanged for other qualifying real property.

The IRS explains in Publication 544 that the like-kind exchange rules generally apply to real property held for investment or productive use in a trade or business.

A 1031 exchange is tax deferral

A 1031 exchange can defer recognition of gain. It is not automatically permanent tax elimination.

The deferred gain is generally reflected in the basis of the replacement property, subject to the exchange calculations.

If the replacement property is later sold in a taxable transaction, previously deferred gain can become relevant.

Property held for investment or business use

Qualifying property generally must be held for investment or productive use in a trade or business.

Property held primarily for sale does not qualify. That distinction matters for investors who buy property with an immediate resale business model.

Real property only

Current Section 1031 nonrecognition applies to qualifying real property. Personal or intangible property that does not qualify as real property under the applicable regulations cannot simply be exchanged under Section 1031 because it was used in the same real estate business.

1031 Exchange Timeline

Timing is one of the most important parts of a deferred exchange. The current Instructions for Form 8824 state that replacement property generally must be identified within 45 days after the relinquished property is transferred.

The replacement property must generally be received by the earlier of:

• the 180th day after the relinquished property is transferred; or
• the due date of the tax return for the year of the transfer, including extensions.

These periods are not casual planning targets. Missing the applicable deadline can cause the transaction to fail as a deferred exchange.

The 45-day identification rule

The replacement property must be identified within the required identification period. The identification must satisfy the applicable rules for describing the property and communicating the identification.

Investors should not wait until the final days of the identification window to begin searching.

The 180-day receipt rule

The replacement property must be acquired within the applicable exchange period. The 180-day period does not always provide a full six months after the 45-day identification period because both clocks generally begin when the relinquished property is transferred.

The tax-return due-date limitation can also shorten the practical period unless an extension applies.

Qualified Intermediaries

A qualified intermediary, often called a QI, is commonly used to structure a deferred 1031 exchange. The role is more important than simply holding money.

A properly structured QI arrangement can help prevent the seller from having actual or constructive receipt of the exchange proceeds.

The Form 8824 instructions explain that a deferred exchange using a qualified intermediary can be treated as a like-kind exchange when the applicable requirements are met.

Why receiving the money yourself is a problem

If you receive or control the sale proceeds before acquiring the replacement property, the transaction can fail to qualify for tax deferral.

That is why the exchange structure should generally be established before the relinquished property closes.

Do not sell first and then assume a QI can retroactively turn the sale into a deferred exchange.

What Is Boot in a 1031 Exchange?

A Section 1031 exchange does not always involve only qualifying real property of identical value and financing.

An investor may receive:

• cash;
• non-like-kind property;
• debt relief;
• other economic value.

Money or non-like-kind property received in the exchange can cause gain to be recognized. The exact calculation can be complex, especially when liabilities change.

Investors commonly refer to cash or other nonqualifying value received as “boot.” The important point is not the nickname.

It is that receiving something outside the qualifying like-kind property can create current taxable gain even when the overall transaction still receives partial Section 1031 treatment.

Basis After a 1031 Exchange

A successful 1031 exchange generally carries deferred gain into the tax basis of the replacement property. That is how the tax deferral is preserved.

If an investor sells a property with a large built-in gain and buys a replacement property, the replacement property’s tax basis may be lower than its purchase price because of the deferred gain.

Future depreciation can therefore be affected. The exact basis calculation depends on:

• basis of the relinquished property;
• realized and recognized gain;
• money paid or received;
• liabilities;
• other property involved;
• exchange expenses.

A 1031 exchange should be modeled as both a current tax-deferral transaction and a future basis decision.

Special 1031 Situations

Some exchanges require more specialized analysis.

Reverse exchanges

A reverse exchange generally involves acquiring replacement property before disposing of the relinquished property.

These transactions require specialized structuring and should not be treated as a normal delayed exchange with the order reversed informally.

Related-party exchanges

The Form 8824 instructions explain that special rules apply to direct and indirect exchanges involving related parties. Related-party transactions can trigger additional holding-period and anti-abuse rules.

Vacation homes and second homes

A property with substantial personal use may not automatically qualify as investment property.

The facts surrounding investment intent, rental use, personal use, and applicable safe-harbor guidance matter.

Partnership and entity issues

Changes in taxpayer identity can complicate Section 1031 qualification. Partnership distributions, entity changes, and multi-owner transactions should be reviewed before closing to confirm that the exchange is structured for the correct taxpayer.

These issues should be addressed before closing rather than after the exchange documents are signed.

Inherited Rental Property and Basis

Inherited real estate can have a very different basis from property purchased directly.

Publication 551 explains that the basis of inherited property is generally tied to fair market value at the date of death, an alternate estate valuation when properly elected, or another applicable estate-tax valuation rule.

Certain inherited property is also subject to consistent-basis requirements tied to estate-tax reporting. There are exceptions.

For example, special rules can apply to certain appreciated property that was transferred to the decedent shortly before death.

Do not assume that every inherited rental property simply receives a new basis equal to whatever value the heir chooses.

Obtain and preserve:

• estate appraisal information;
• Form 8971 / Schedule A if applicable;
• date-of-death valuation records;
• records of improvements after inheritance;
• subsequent depreciation schedules.

Inherited basis becomes the foundation for future depreciation and gain calculations.

Records Real Estate Investors Should Keep

Tax planning becomes much harder when the records are incomplete. Keep organized records for the full ownership period.

Important documents can include:

• purchase contract;
• closing disclosure or settlement statement;
• title and legal fees;
• allocation between land and depreciable property;
• invoices and receipts for improvements;
• repair and maintenance records;
• depreciation schedules;
• cost-segregation report, if used;
• insurance records;
• property tax bills;
• mortgage interest records;
• management statements;
• rental income records;
• mileage and travel substantiation where applicable;
• suspended passive-loss records;
• 1031 exchange agreements;
• QI statements;
• replacement-property identification documents;
• sale closing statements;
• prior tax returns and supporting schedules.

A property can be held for decades. The records needed at sale may come from transactions that occurred many years earlier.

When to Use a CPA, EA, Tax Attorney, or Qualified Intermediary

Different professionals serve different functions.

CPA or enrolled agent

A CPA or enrolled agent can help with:

• return preparation;
• rental income and expense reporting;
• depreciation;
• passive-activity issues;
• QBI;
• sale reporting;
• tax projections.

The appropriate professional should have meaningful real estate tax experience for the issue involved.

Tax attorney

A tax attorney may be appropriate when the issue involves:

• complex legal interpretation;
• disputed tax positions;
• entity or transaction structuring;
• partnership complications;
• significant controversy or audit risk.

Qualified intermediary

A QI facilitates the exchange structure. The QI does not replace your tax adviser, attorney, lender, title company, or investment adviser.

The exchange professional and tax professional should coordinate when the transaction involves complicated ownership, debt, related parties, or mixed-use property.

Common Real Estate Tax Mistakes

Depreciating land

Land is not depreciable. The acquisition price must be reasonably allocated between land and depreciable property.

Expensing a capital improvement as a repair

A major improvement may need to be capitalized even when it feels like a normal property expense.

Ignoring allowed-or-allowable depreciation

Failing to claim depreciation does not necessarily preserve basis. Basis can still be reduced by depreciation you were entitled to claim.

Assuming rental losses are always currently deductible

Passive-activity and at-risk rules can limit losses. The fact that a property lost money economically does not automatically mean the full tax loss is usable this year.

Treating real estate professional status as a title

The IRS tests involve hours, services, qualifying real property trades or businesses, and material participation.

Using stale bonus-depreciation rules

The law changed for qualified property acquired and placed in service after January 19, 2025. Old phase-down charts should not be treated as the current rule for new qualifying property.

Assuming every short-term rental is nonpassive

Average customer use and material participation matter. Short-term rental is not a universal shortcut around passive-activity rules.

Assuming every rental qualifies for QBI

Rental real estate can qualify, but the Section 162 trade-or-business test, safe harbor, and other requirements matter.

Missing a 1031 deadline

The identification and receipt periods are strict. Start planning before the relinquished property closes.

Taking control of exchange proceeds

Actual or constructive receipt of proceeds can undermine a deferred exchange.

Confusing deferral with elimination

A 1031 exchange usually moves deferred gain into the replacement property’s basis. The tax history generally does not vanish.

Failing to preserve basis records

Incomplete records can lead to lost deductions, unsupported basis, or incorrect gain calculations years later.

Where to Go Next

Use these guides for the investment decisions that connect with tax planning.

If You Need To	Next Guide
Understand the overall real estate investing process	Real Estate Investing
Evaluate rental-property economics before acquisition	Rental Property Investing
Analyze cash flow, returns, and downside assumptions	Real Estate Deal Analysis
Compare investor loan structures and borrowing options	Investment Property Financing
Evaluate office, industrial, retail, multifamily, and other CRE	Commercial Real Estate Investing
Compare REITs, syndications, funds, and other passive structures	Passive Real Estate Investing
Compare LLCs, partnerships, and ownership structures	Real Estate Ownership Structures
Go deeper on exchange mechanics	1031 Exchange Guide
Go deeper on accelerated depreciation	Cost Segregation Guide
Go deeper on passive-loss status	Real Estate Professional Tax Status Guide

Use the linked guides for broader investment decisions. The remaining topics require more specialized tax or legal analysis.

Frequently Asked Questions

What taxes do real estate investors pay?

Real estate investors can encounter federal income tax on rental income, tax on gain from property dispositions, tax consequences related to depreciation, and other federal, state, and local taxes depending on the property and transaction.

The exact result depends on ownership structure, activity type, income, basis, participation, location, and disposition method.

Is rental income taxable?

Rental income is generally taxable. The IRS defines rental income broadly and includes items such as advance rent, certain tenant-paid expenses, and property or services received in place of cash rent.

What rental property expenses are deductible?

Common rental expenses can include mortgage interest, insurance, taxes, repairs, maintenance, management fees, utilities, professional fees, advertising, and depreciation.

Some costs must be capitalized rather than deducted immediately, and other limitations can apply.

Can land be depreciated?

No. Land is not depreciable. The cost of a property that includes land and buildings generally must be allocated so that depreciation is applied only to qualifying depreciable property.

How long is residential rental property depreciated?

Under the General Depreciation System, residential rental property is generally depreciated over 27.5 years.

Other property types and components can have different recovery periods.

What is the difference between a repair and an improvement?

A repair generally keeps property in ordinarily efficient operating condition when capitalization is not required.

An improvement generally betterments the property, restores it, or adapts it to a new or different use and is capitalized. The facts of the work control the classification.

What is adjusted basis?

Adjusted basis is the property’s basis after increases and decreases. Capital improvements can increase basis. Depreciation and certain other adjustments can reduce it.

Adjusted basis is important for depreciation and for determining gain or loss when property is sold.

What is depreciation recapture?

Depreciation affects both basis and the character of gain when depreciated property is sold.

Different rules can apply to real property and shorter-life components, so the tax result should be calculated based on the actual property and depreciation history rather than one universal recapture rule.

Are rental losses always deductible?

No. Rental real estate is generally subject to passive-activity rules, and at-risk limitations may also apply.

Exceptions and special allowances can apply depending on participation, income, tax status, and other facts.

What is real estate professional tax status?

For individuals, the IRS generally requires more than half of personal services in trades or businesses to be performed in qualifying real property trades or businesses in which the taxpayer materially participates, plus more than 750 hours of such services during the year.

Material participation in rental activities remains important.

Can short-term rentals avoid passive-loss treatment?

Some short-duration activities are not treated as rental activities under the passive-activity rules.

For example, an average customer-use period of 7 days or less can fall within an exception.

That does not automatically make losses deductible. Material participation and other limitations still matter.

Does rental property qualify for the QBI deduction?

It can. Rental real estate may qualify if it rises to the level of a Section 162 trade or business, meets the Rev. Proc. 2019-38 safe harbor, or satisfies another applicable Section 199A rule.

Not every rental automatically qualifies.

What is a 1031 exchange?

A Section 1031 exchange allows qualifying real property held for investment or productive use in a trade or business to be exchanged for other qualifying real property while deferring recognition of gain when the requirements are met.

What is the 45-day rule in a 1031 exchange?

In a deferred exchange, replacement property generally must be identified within 45 days after the relinquished property is transferred.

What is the 180-day rule in a 1031 exchange?

Replacement property generally must be received by the earlier of the 180th day after the relinquished property is transferred or the due date of the tax return for the year of the transfer, including extensions.

What is boot in a 1031 exchange?

Boot is a common term for cash or other non-like-kind value received in an exchange.

Receiving money or non-like-kind property can cause some gain to be recognized currently.

Does a 1031 exchange eliminate taxes permanently?

Not necessarily. A 1031 exchange generally defers gain by carrying tax attributes into the replacement property.

A later taxable disposition can bring deferred gain back into the tax calculation.

What happens to basis after a 1031 exchange?

The replacement property’s basis generally reflects the basis carried from the relinquished property and the gain deferred, adjusted for money, liabilities, recognized gain, and other exchange items.

The calculation can be complex and affects future depreciation and gain.

What is the basis of inherited rental property?

Inherited property’s basis is generally tied to fair market value at the date of death or another applicable estate-tax valuation rule.

Special exceptions and consistent-basis requirements can apply.

Conclusion

Real estate investing taxes are easiest to understand as one connected lifecycle. Basis starts the record. Rental income and expenses determine taxable operating results.

Repairs, improvements, depreciation, cost segregation, and bonus depreciation determine when costs are recovered.

At-risk and passive-activity rules determine whether losses are currently usable. Adjusted basis and prior depreciation matter again when the property is sold.

A qualifying 1031 exchange may defer gain, but it generally carries the tax history forward rather than erasing it.

The most important practical habits are to keep complete records, use current tax rules, and identify complex issues before a transaction closes.

Tax planning is most useful before the deadline, before the sale, and before the exchange funds move.