NEWS
Real estate investor tax strategies are coming under renewed attention in 2025 as Congress adjusts rules governing deductions, depreciation, and pass-through income. Changes affecting the SALT deduction cap, continued availability of the Section 199A deduction, and the return of full bonus depreciation are reshaping how investors manage taxable income, tax liability, and long-term planning decisions.
The state and local tax deduction cap continues to affect real estate investors, particularly those with property holdings in high-tax states. Although lawmakers temporarily increased the cap for certain filers in 2025, many investors still cannot fully deduct property taxes and state income taxes paid during the year.
For owners with multiple rental properties, these limits can significantly increase federal taxable income. Even with temporary relief, the cap continues to influence how investors structure real estate investments and approach tax planning, especially as future changes remain uncertain.
In response to SALT limits, more than 30 states now allow pass-through entities to pay state income tax at the entity level. Partnerships, S corporations, and qualifying limited liability companies can elect this treatment, shifting the tax burden away from individual owners.
The Internal Revenue Service has confirmed that these entity-level taxes are deductible as business expenses for federal purposes. When properly implemented, the election allows eligible real estate investors to reduce taxable income without being constrained by the individual SALT cap. Eligibility depends on state law, business structure, and timely elections, making coordination with a tax professional critical.
The Section 199A deduction remains a key component of real estate investor tax strategies in 2025. The provision allows eligible owners of pass-through businesses to deduct up to 20 percent of qualified business income, directly reducing tax liability without reducing cash flow.
Rental income does not automatically qualify. The IRS requires rental activities to meet the definition of a trade or business. To clarify eligibility, the agency established a rental real estate safe harbor that outlines specific requirements, including maintaining separate books and records, performing at least 250 hours of rental services annually, and keeping contemporaneous documentation.
The availability of the deduction is also shaped by taxable income thresholds. Higher-income investors may see the deduction phased out or eliminated, while many middle-income investors continue to qualify. Because these thresholds can shift from year to year, investors often need to reassess eligibility annually as income levels change.
Depreciation deductions remain one of the most powerful tools available to real estate investors. Residential rental properties are generally depreciated over 27.5 years, while commercial properties are depreciated over a 39-year schedule. Accelerated depreciation methods can significantly change when deductions are realized.
A cost segregation study examines building components and land improvements to identify assets that qualify for shorter depreciation schedules. Items such as specific wiring, plumbing, flooring, and exterior improvements may be eligible for five-, seven-, or fifteen-year depreciation, rather than the decades-long schedules typically associated with these types of improvements.
By accelerating depreciation deductions, cost segregation can generate substantial paper losses early in the ownership period. These losses may offset rental income and, in some cases, other income, depending on the passive activity rules and the investor's participation.
Bonus depreciation has been reinstated at 100 percent for qualifying property placed in service after the applicable effective date. This allows eligible assets identified through cost segregation to be fully expensed in the year they are placed in service. For investors making capital improvements or acquiring new properties, the timing of those expenditures has become a key element of tax planning.
Many of the tax rules affecting real estate investors today can be traced back to the Tax Cuts and Jobs Act of 2017. That legislation introduced the SALT cap and created the Section 199A deduction, fundamentally altering how pass-through income is taxed. States responded by adopting entity-level tax regimes, prompting the IRS to issue guidance clarifying their federal treatment.
Depreciation policy has also changed repeatedly. Bonus depreciation percentages declined in recent years before Congress restored full expensing. These shifts have increased the importance of planning around acquisition dates, improvements, and the date the property is placed in service.
“Entity structure has become one of the most important tax decisions for real estate investors,” said a certified public accountant who advises property owners nationwide. “Holding properties individually can limit access to deductions that are otherwise available through pass-through entities.”
Another tax advisor emphasized the importance of documentation. “The rental safe harbor under Section 199A is particular. Investors who fail to track hours or maintain separate records often lose deductions they expected to claim.”
On depreciation planning, a cost segregation specialist noted renewed interest from investors. “With full bonus depreciation back, we are seeing more investors revisit properties they acquired years ago. Look-back studies can still produce meaningful depreciation deductions when supported by proper analysis.”
For real estate investors, the 2025 landscape underscores the importance of proactive tax planning. Reviewing business structure, documenting rental activities, and coordinating depreciation strategies can materially affect taxable income and cash flow.
Investors seeking professional status as real estate professionals must also pay close attention to material participation and hour requirements to avoid passive activity limits. The interaction between SALT workarounds, Section 199A, and depreciation deductions is complex, but the potential tax savings remain significant for those who plan carefully.
By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now
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