By Forbes & Company — CPAs and financial advisors for real estate professionals in Alpharetta, Georgia; Charleston, South Carolina; and across the United States.
Real estate offers some of the most powerful tax benefits in the entire tax code, but many of them depend on choices and records you have to lock in before the year ends. Whether you own rentals, flip houses, develop property or sell homes as an agent or broker, the next few months are your best chance to turn a good year into a tax-efficient one.
At Forbes & Company, real estate is one of our core specialties. From our offices in Alpharetta, Georgia and Charleston, South Carolina, we help investors, developers, agents and brokers across the country plan ahead, and here’s the year-end playbook we walk them through.
Real estate professional status is your biggest lever
What is real estate professional status (REPS)?
Real estate professional status is a tax classification that lets rental losses offset your wages, business income and other ordinary income. Without it, rental losses are generally treated as passive, which means they’re trapped and can only offset passive income until you sell the property or have passive income to absorb them. For an investor with significant depreciation, that difference can be worth tens of thousands of dollars a year.
How do you qualify as a real estate professional?
To qualify, you need to meet both of these tests for the year:
- You spend more than 750 hours in real property trades or businesses, such as development, construction, acquisition, rental, management, leasing or brokerage.
- More than half of your total working time is spent in those real estate businesses.
On top of that, you have to materially participate in your rentals. If you’re married and file jointly, one spouse has to meet both hour tests on their own, although either spouse’s hours can count toward material participation. The second test is where many people with full-time W-2 jobs fall short, since 750 real estate hours won’t be more than half of a 2,000-hour work year.
Why your hour log matters so much
The IRS expects your hour logs to be contemporaneous, meaning they’re kept as you go rather than reconstructed at tax time. REPS is one of the most frequently challenged positions in audits, and the taxpayers who lose usually lose because of thin or after-the-fact records. Year-end is the time to reconcile your calendar, emails, texts and mileage against your log so every entry is specific, including the date, the property, what you did and how long it took.
Should you group all your rentals as one activity?
If you own several rentals, material participation is normally tested property by property, which can make it hard to qualify on each one. The IRS lets real estate professionals make an election to treat all their rental real estate as a single activity, so your combined hours count together. This election is made by attaching a statement to your return, and once it’s made, it generally stays in place for future years. Part of your year-end review should be deciding whether to make the election or confirming it’s already on file.
The short-term rental route
Short-term rentals offer a separate path that doesn’t require REPS at all. When the average guest stay is seven days or fewer, the property generally isn’t treated as a rental activity under the passive loss rules. If you materially participate in running it, its losses can be non-passive and offset your other income, even if you have a full-time job outside of real estate. This is why short-term rentals have become so popular with high-income professionals, but the material participation requirement is strict, so you’ll want the same careful hour tracking.
Depreciation is where the big deductions come from
Is 100% bonus depreciation back for real estate?
Yes. The One Big Beautiful Bill Act (OBBBA) permanently restored 100% bonus depreciation for qualifying property acquired after January 19, 2025. The building itself still depreciates over 27.5 years for residential property or 39 years for commercial property, but many of its components can qualify for immediate write-offs.
How does a cost segregation study help?
A cost segregation study is an engineering-based analysis that breaks a building into its components, such as flooring, cabinetry, specialty electrical, landscaping, parking areas and site improvements. Many of those components have 5-, 7- or 15-year lives, which makes them eligible for bonus depreciation. On a building you placed in service this year, a cost segregation study can generate a large first-year deduction, often a meaningful percentage of the purchase price.
Here’s the key planning point: that deduction is worth far more if you have REPS or use the short-term rental route. Otherwise, the losses it creates may be passive and sit unused on your return for years. It’s worth pairing any cost segregation decision with an honest look at your status, and keeping in mind that accelerated depreciation can be recaptured when you sell. Very large losses can also run into the excess business loss limit, so it’s smart to model the numbers before you commit.
Transactions that straddle year-end
Real estate deals don’t always wrap up neatly by December 31, and the timing of a closing can change your tax bill in a big way.
How do 1031 exchange deadlines work at year-end?
In a 1031 exchange, you have 45 days from the sale of your property to identify replacement property and 180 days to close on it. For sales in the fourth quarter, those deadlines can cross into the new year. The part that surprises people is that the 180-day window is cut short if your tax return is due first. If you sell in the fall and don’t extend your return, your exchange period could end on April 15 rather than a full 180 days later, so filing an extension may be necessary to protect your exchange.
When does an installment sale make sense?
An installment sale lets you spread your gain over the years in which you actually receive payments, which can keep you in a lower bracket and smooth out a large one-time gain. Keep in mind that any depreciation recapture is generally taxed in the year of the sale, even if most of the cash comes later.
Should you close in December or January?
Choosing whether a closing lands in December or January decides which tax year the gain or income falls into. If this year’s income is unusually high, pushing a sale into January can help. If you expect higher income or a different situation next year, closing before December 31 may be the better move. This is a simple lever, but it only works if you plan it before the closing date is set.
Flippers and developers: Dealer or investor?
What is the difference between a real estate dealer and an investor?
If you flip houses or develop property to sell, the IRS may treat you as a dealer rather than an investor. Dealer income is taxed at ordinary income rates plus self-employment tax, rather than at the lower long-term capital gains rates investors enjoy. Dealer property also isn’t eligible for 1031 exchanges or installment sale treatment.
The IRS looks at factors like how often you sell, how long you hold properties, how much improvement work you do, how you market properties and what your intent was when you bought them. If you do both, keeping investment properties clearly separated from flips (sometimes in separate entities) and documenting your intent at purchase can help protect capital gains treatment on your long-term holdings. Active flippers who are clearly dealers may also benefit from an S corporation to manage self-employment tax.
Agents and brokers: Think like a self-employed business owner
Real estate agents and brokers are taxed much like other self-employed professionals, so year-end planning centers on a few practical areas.
- Commission timing: Most agents are cash-basis taxpayers, so commissions are taxed in the year you receive them. You can’t simply hold a check that’s already available to you, but the timing of closings you’re still negotiating can shift income between years.
- Vehicle mileage logs: Driving to showings, listings and closings adds up quickly. A contemporaneous mileage log is essential to support the deduction, so fill in any gaps now.
- Marketing costs: Signs, photography, online ads, websites, client gifts (within limits) and CRM subscriptions are generally deductible, and paying for next year’s tools before December 31 can pull deductions into this year.
- An S corporation election: Once your net commissions are consistently strong, an S corp can reduce self-employment tax by paying you a reasonable salary through payroll and taking the rest as distributions.
Do real estate agents qualify for the QBI deduction?
Generally, yes. The Qualified Business Income (QBI) deduction lets eligible business owners deduct up to 20% of their qualified business income, and OBBBA made it permanent. Real estate brokerage is expressly excluded from the “specified service trade or business” (SSTB) category, so agents and brokers don’t lose the deduction the way consultants or financial advisors can at higher incomes. Higher earners do still face wage and property limits, which is another reason an S corp salary can matter.
Can rental property owners qualify for QBI?
They can. Rental owners may qualify for QBI through the 250-hour safe harbor for rental real estate. To use it, you’ll generally need 250 or more hours of rental services a year, separate books and records for the rental enterprise, contemporaneous logs of the services performed and a statement attached to your return. Triple-net leases don’t qualify for the safe harbor, and rentals that don’t meet it can still qualify if they rise to the level of a trade or business.
Your real estate year-end tax checklist
Before December 31, work through the following with your tax advisor:
- Reconcile your REPS or short-term rental hour logs and fill in details while you still remember them
- Decide whether to make or confirm the election to group all rentals as one activity
- Order cost segregation studies for buildings placed in service this year
- Map out 45-day and 180-day 1031 deadlines and plan for an extension if needed
- Choose December or January closing dates with your full-year income in mind
- Document your intent on flips versus long-term holds
- Update mileage logs, marketing expenses and commission records if you’re an agent
- Review S corporation and QBI safe harbor eligibility
Frequently asked questions
Can rental losses offset W-2 income? They can if you qualify for real estate professional status and materially participate, or if you materially participate in a short-term rental with an average stay of seven days or fewer. Otherwise, rental losses are generally passive.
Does bonus depreciation apply to rental buildings? The building itself doesn’t qualify, but components identified in a cost segregation study often do, and 100% bonus depreciation now applies permanently to qualifying property acquired after January 19, 2025.
Do real estate agents lose the QBI deduction at high incomes? No, because real estate brokerage is excluded from the SSTB category, although wage and property limits still apply above certain income levels.
Let Forbes & Company help you plan your next move
Forbes & Company is a family-owned accounting firm that’s been client-focused since 1997, and real estate is one of the industries we know best. Whether you’re in the greater Atlanta area, the Charleston area or anywhere across the United States, we’d love to help you document your status, time your transactions and capture every deduction you’ve earned before the year comes to a close.