Real Estate Investor Tax Strategies Face Changes in 2025

Real estate investor tax strategies are coming under renewed attention as Congress adjusts rules governing deductions, depreciation, and pass-through income. The One Big Beautiful Bill Act (OBBB), signed into law on July 4, 2025, as Public Law 119-21, introduced significant changes affecting how real estate investors approach deductions and long-term planning. Changes affecting the SALT deduction cap, the continued availability of the Section 199A deduction, and the restoration of full bonus depreciation are all reshaping how investors manage taxable income, tax liability, and planning decisions.

SALT Deduction Limits Revised Under New Legislation

The state and local tax deduction cap has been a central concern for real estate investors, particularly those with property holdings in high-tax states. The OBBB, signed July 4, 2025, raised the SALT deduction cap from $10,000 to $40,000 for eligible filers, representing the most significant change to this limit since the Tax Cuts and Jobs Act first imposed it in 2017. The increased cap is subject to income phaseouts, and investors in higher income brackets should confirm their eligibility with a tax professional.

For owners with multiple rental properties, the prior $10,000 cap had significantly increased federal taxable income. The higher limit now in place may allow more investors to deduct property taxes and state income taxes paid during the year, though the phaseout rules mean the benefit is not uniform across all income levels. Because further legislative changes remain possible, investors should continue to monitor their exposure annually.

Pass-Through Elections Offer a Workaround

In response to earlier 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. Even with the SALT cap raised, this workaround remains relevant for investors whose income exceeds the phaseout thresholds. Eligibility depends on state law, business structure, and timely elections, making coordination with a tax professional critical.

Section 199A Continues to Shape Rental Income

The Section 199A deduction remains a key component of real estate investor tax strategies. 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.

Income Thresholds Affect Eligibility

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 Rules Create Timing Opportunities

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 39 years. Accelerated depreciation methods can significantly change when deductions are realized.

Cost Segregation Moves Deductions Forward

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.

Full Bonus Depreciation Restored

Bonus depreciation has been reinstated at 100 percent for qualifying property placed in service after the applicable effective date, as confirmed under the OBBB (Section 70307). 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.

Policy Decisions Behind Today's Rules

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 the OBBB restored full expensing, effective for qualifying property placed in service after January 19, 2025. The OBBB also raised the SALT deduction cap, marking a significant shift in how the law affects investors in high-tax states. These legislative changes underscore the importance of planning around acquisition dates, improvements, and the date the property is placed in service.

What Tax Professionals Are Saying

"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."

Regarding depreciation planning, a cost segregation specialist noted renewed investor interest. "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."

What This Means for Real Estate Investors

For real estate investors, the current landscape underscores the importance of proactive tax planning. The OBBB has introduced meaningful changes to the SALT cap, bonus depreciation, and other provisions that directly affect real estate holdings. 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 changes, pass-through entity elections, Section 199A, and depreciation deductions is complex, but the potential tax savings remain significant for those who plan carefully.

Sources

• IRS Notice 2020-75 on Pass-Through Entity Taxes
• IRS Revenue Procedure 2019-38, Rental Real Estate Safe Harbor
• IRS Publication 925, Passive Activity and At-Risk Rules
• One, Big, Beautiful Bill Act (Public Law 119-21), IRS provisions overview: https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions

By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now