Real Estate Tax Planning for Landlords: A Year-Round Guide

Real estate tax planning means deciding, before each deadline, how and when you buy, spend, record and sell, so your rental business pays the tax it owes and no more.

For a US landlord it comes down to four jobs:

• Set up depreciation correctly when you buy
• Record every deductible expense through the year
• Know which losses you can actually use
• Time big moves around December 31

This guide takes those jobs in the order you meet them, with a calendar you can reuse every year. It reflects the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, which changed several rules landlords rely on.

Key takeaways

• Residential rental buildings are depreciated over 27.5 years. Land is never depreciated.
• Bonus depreciation is back at 100%, permanently, for qualifying property acquired after January 19, 2025. It covers items like appliances, carpet and furniture, not the building itself.
• Rental losses are usually passive. Up to $25,000 can offset your other income if you actively participate, phasing out between $100,000 and $150,000 of modified adjusted gross income.
• The 20% qualified business income (QBI) deduction is now permanent, and many rental businesses qualify.
• When you sell, your gain is the amount you receive minus your adjusted basis, and past depreciation is taxed at up to 25%.

When should landlords do their tax planning?

What tax planning should you do when you buy a rental property?

Get three numbers right at purchase, because every later deduction and your eventual gain depend on them: your cost basis, the land and building split, and the date the property is placed in service.

What counts in your cost basis?

Your basis is the purchase price plus certain settlement costs. IRS Publication 527 lists abstract fees, legal fees, recording fees, surveys, transfer taxes, title insurance and charges for installing utility services as part of basis. Keep the closing statement with your records for as long as you own the property. Learn more in cost basis in real estate.

How do you split land from building?

Only the building can be depreciated. If your contract doesn't split the price, the IRS lets you use the ratio from your property tax assessment. For example, if the assessor values the building at 85% of the total, 85% of your basis goes to the building.

When is a rental placed in service?

Depreciation starts when the property is ready and available for rent, not when you close or when the first tenant moves in. Pub 527 also says you can deduct ordinary running costs from the time the property is available for rent. Renovation work that improves the property before then is added to basis and depreciated, not deducted.

Worked example: you buy a rental for $300,000 plus $6,000 of qualifying closing costs. The assessor puts 20% of value on the land. Your depreciable building basis is $244,800 (80% of $306,000), which gives about $8,902 of depreciation a year over 27.5 years. The first year is prorated by the month you place it in service.

Which rental expenses can you deduct this year, and which must you depreciate?

Ordinary running costs are deducted in the year you pay them. Anything that betters, restores or adapts the property is an improvement, which you add to basis and depreciate. The table shows where common costs land on Schedule E.

Three IRS safe harbors let small landlords deduct costs that might otherwise be capitalized.

See capital improvements vs repairs for examples.

What counts as rental income?

Rent, advance rent (taxed in the year you receive it) and any part of a security deposit you keep are income.

A security deposit you plan to return is not income when you receive it. Rent paid through apps or card processors may also arrive with a Form 1099-K once payments pass $20,000 and 200 transactions in a year.

Do landlords need to pay estimated tax?

If rental profit leaves you owing tax that withholding from a job won't cover, you may need to pay quarterly estimated tax using Form 1040-ES. Rental income usually isn't subject to self-employment tax, so the estimate covers income tax, not Social Security and Medicare. Short-term rentals where you provide hotel-style services can be different.

How should you keep records?

Keep receipts, invoices and bank records for every expense, plus a mileage log and your closing statement.

The IRS generally asks for records for three years after you file, but keep property records until three years after you sell, because they prove your basis.

Software like Landlord Studio links your bank accounts, categorizes transactions to Schedule E lines and stores scanned receipts, so the year-end close takes hours, not weekends.

How does rental property depreciation work in 2026?

You recover the cost of the building and its contents over set periods under MACRS, starting the month the property is placed in service. Depreciation is a non-cash deduction, so it often turns a cash-positive rental into a tax loss on paper.

Is bonus depreciation 100% in 2026?

Yes. The OBBBA permanently restored the 100% special depreciation allowance for qualified property acquired and placed in service after January 19, 2025. Qualified property generally means assets with a recovery period of 20 years or less, so a new refrigerator or carpet can be written off in full in the year you place it in service. The building itself and structural work like a new roof stay on the 27.5-year schedule. You can elect out of bonus depreciation by asset class if spreading the deduction suits you better.

A cost segregation study separates a building's 5- and 15-year components from the 27.5-year structure, so more of the purchase price qualifies for bonus depreciation. It usually pays for itself only on larger or higher-priced properties.

Can landlords use the section 179 deduction?

Mostly no. Publication 946 excludes property used predominantly to furnish lodging from section 179, which covers appliances and furniture in a typical long-term residential rental. Residential landlords get a similar result from 100% bonus depreciation instead. Section 179 can apply to some nonresidential property; see section 179 for real estate.

You claim depreciation on Form 4562 in the year an asset is placed in service, then on Schedule E line 18. Learn more about depreciation and recapture.

Can rental losses reduce your other income?

Usually only up to $25,000 a year, and only if your income is under $150,000. Rental losses are passive by default, so they offset passive income, like profit from another rental, but not wages, interest, dividends or stock gains. There are four ways a loss gets used:

Limits are lower if you're married filing separately. Rules are from IRS Publication 925.

What does real estate professional status change?

Real estate professional status removes the $25,000 cap, so rental losses can offset any income. It doesn't change your depreciation, only whether you can use the losses depreciation creates. Keep a contemporaneous time log: the IRS often asks for one.

Do landlords qualify for the QBI deduction?

Many do. The qualified business income deduction lets eligible owners deduct up to 20% of qualified business income, and the OBBBA made it permanent. Your rental needs to count as a trade or business. The IRS safe harbor in Rev. Proc. 2019-38 treats it as one if you:

• Keep separate books for the rental enterprise
• Perform at least 250 hours of rental services a year (for enterprises under four years old)
• Keep time records of who did what, and when

Income limits apply, so confirm eligibility with your tax preparer.

Go deeper on each of these in passive activity loss limitations and the real estate tax strategies guide.

What should landlords do before December 31?

Most tax-saving choices have to be made inside the tax year, so run this checklist in November.

• Pay planned expenses now: most landlords use the cash method, so a repair paid on December 30 counts this year and one paid on January 2 counts next year. Insurance prepaid for more than 12 months is still deducted year by year.
• Place planned purchases in service: a new appliance or carpet needs to be installed and available in the rental by December 31 to take 100% bonus depreciation this year.
• Check your safe harbor room: if you use the small taxpayer safe harbor, keep the year's repairs and improvements under the lesser of 2% of the building's basis or $10,000.
• Update your hours log: real estate professional status and the QBI safe harbor both depend on hours you can prove.
• Time any sale: closing in December or January decides which tax year the gain lands in.
• Top up estimates: if the year ran more profitably than planned, increase the January 15 payment.

What tax do you pay when you sell a rental property?

You pay tax on your gain, which is the amount you receive minus your adjusted basis, not the sale price minus selling costs. Adjusted basis is your original basis plus improvements, minus the depreciation you took, or were entitled to take.

The gain is then split in two. The part equal to your past depreciation is taxed at up to 25%. The rest is taxed at long-term capital gains rates if you held the property for more than a year. Any suspended passive losses are generally released in the year of the sale.

A 1031 exchange defers both parts if you reinvest in other investment real estate. You must identify the replacement property within 45 days, close within 180 days and use a qualified intermediary. More options are in how to reduce capital gains tax on rental property.

How do you plan for passing rental property to your heirs?

Holding a rental until death is often the most tax-efficient exit, because heirs generally receive a basis equal to the property's fair market value at the date of death. That step-up wipes out the built-up gain and the depreciation recapture. Property you give away during your life keeps your adjusted basis instead.

For 2026 the federal estate tax applies only above a $15 million basic exclusion per person, and you can give up to $19,000 per recipient a year without using any of it. A revocable living trust lets property pass without probate, but it doesn't lower income or estate tax on its own. Speak to an estate planning attorney before changing ownership.

When should a landlord bring in a CPA?

Bring one in before a decision, not after it: when you buy or sell, when you consider a cost segregation study or a 1031 exchange, when you think you might qualify as a real estate professional, or when rental losses start to exceed what you can use. A CPA or enrolled agent who works with landlords can also check that your depreciation schedule is right. See why landlords need a real estate tax accountant.

Frequently asked questions

What is the difference between tax planning and tax preparation?

Tax planning happens before the year ends: deciding when to repair, buy, sell and how to keep records. Tax preparation happens after: reporting what already happened on Schedule E and Form 1040. Planning is where most savings are made, because preparation can only report choices you already made.

Does the SALT cap limit my rental property tax deduction?

No. The cap on state and local tax deductions applies to itemized deductions on Schedule A. Property tax on a rental is a rental expense on Schedule E, so it is deducted in full.

Does putting my rental in an LLC lower my taxes?

Not on its own. A single-member LLC is ignored for federal income tax by default, so you still report the rental on Schedule E. An LLC's main benefit is liability protection; any tax change comes from electing a different tax treatment, which a CPA should weigh first.

Make tax planning a monthly habit, not a last minute scramble

Every decision in this guide depends on clean records: your basis, every expense on the right Schedule E line, your mileage and your hours. Landlord Studio connects to your bank accounts, categorizes rental income and expenses, scans and stores receipts and tracks mileage. At year end, run the tax reports and hand your accountant a profit and loss statement and expense summary instead of a shoebox.

This guide covers US federal income tax for owners of long-term residential rentals. It explains the rules; it is not tax advice for your situation.