What Year-End Tax Planning and Entity Structuring Strategies Work Best for Real Estate Investors?

Whether you’re managing a single rental property or a growing real estate portfolio, proactive planning can uncover opportunities to maximize deductions, defer taxes, and position your investments for continued growth.

At Froehling Anderson, we work with real estate investors to navigate complex tax rules and identify planning opportunities before year-end arrives. As experienced professionals serving investors throughout Minnesota and beyond, our team helps clients make informed decisions that align with both their tax situation and long-term investment goals.

Tax planning shouldn’t begin when it’s time to file your return.

Many of the most effective tax-saving strategies must be implemented before year-end. Waiting until tax season often means valuable planning opportunities have already passed.

Three areas deserve particular attention:

• Determining whether rental losses can offset other income
• Evaluating whether a 1031 exchange makes sense for upcoming transactions
• Understanding how placed-in-service dates affect depreciation deductions

Let’s take a closer look at each.

One of the most common questions real estate investors ask is whether rental property losses can reduce taxable income.

Under Internal Revenue Code Section 469, rental activities are generally considered passive, which means losses often cannot offset wages or other nonpassive income. Instead, unused losses are typically carried forward until they can be used in a future year.

However, there are important exceptions.

Real Estate Professional Status

Some investors may qualify for Real Estate Professional Status (REPS), allowing rental activities to be treated differently for tax purposes.

To qualify, an individual generally must satisfy both of these requirements during the tax year:

• More than half of all personal service hours must be performed in real property trades or businesses in which the taxpayer materially participates.
• The taxpayer must perform more than 750 hours of services in qualifying real property trades or businesses during the year.

It’s important to note that for married couples filing jointly, one spouse must independently meet both tests. The required hours cannot be combined between spouses to qualify.

The Special Rental Real Estate Allowance

Even if an investor doesn’t qualify as a real estate professional, another opportunity may exist.

Taxpayers who actively participate in rental real estate may qualify to deduct up to $25,000 of rental losses against nonpassive income, subject to income limitations. This allowance begins to phase out when adjusted gross income exceeds $100,000 and is eliminated at $150,000 for many taxpayers.

Reviewing these rules before year-end can help investors understand whether additional planning opportunities exist.

Planning to sell one investment property and purchase another?

A 1031 exchange may allow you to defer recognizing taxable gains by exchanging one qualifying investment or business property for another qualifying property, provided IRS requirements are met.

To qualify, several requirements generally apply:

• The properties must be held for investment or business purposes.
• The transaction must be structured as an exchange rather than a simple sale and later purchase.
• Deferred exchanges must satisfy the 45-day identification period and 180-day exchange period.

There are two common exchange structures:

• Forward Exchange
  The current property is sold before acquiring the replacement property.
• Reverse Exchange
  The replacement property is acquired before the existing property is sold. Because timing and documentation are critical, planning ahead is essential.

Many investors assume purchasing a property before year-end automatically creates a depreciation deduction. That’s not always the case.

Depreciation generally begins only when a property is placed in service, meaning it is ready and available for its intended use, not simply because the transaction has closed.

For example:

• Purchasing a building in December doesn’t automatically allow depreciation if it isn’t ready for rental or business use before year-end.
• Real estate placed in service during December generally receives only a half-month of depreciation under the mid-month convention.
• The month the property is placed in service matters more than the specific day within that month.

Understanding these timing rules can help investors avoid unexpected tax outcomes.

As your real estate portfolio grows, your entity structure may deserve another look.

While the right structure depends on your specific goals, ownership arrangements, financing needs, liability considerations, and tax situation, year-end provides an excellent opportunity to evaluate whether your current entity continues to support your investment strategy.

Reviewing entity structure alongside tax planning can help ensure your business remains positioned for future growth while supporting efficient tax reporting.

Successful real estate investing involves more than buying and selling properties. It requires thoughtful planning throughout the year.

At Froehling Anderson, we help real estate investors evaluate year-end tax planning opportunities, understand complex tax rules, and make informed decisions before important deadlines arrive.

Whether reviewing passive activity rules, discussing the potential benefits of a 1031 exchange, or planning around depreciation timing, our team focuses on helping clients understand their options so they can make confident decisions. We also work closely with investors to provide practical guidance tailored to their individual circumstances, helping simplify complex tax issues while supporting long-term investment success.

The best year-end tax strategies are proactive, not reactive.

If you’re a real estate investor preparing for year-end, now is the ideal time to evaluate your tax position, investment plans, and overall strategy before opportunities expire. Let’s start planning for a stronger financial future, today.

Disclaimer: This content is for informational purposes only and does not constitute legal, tax, or audit advice. Please consult with your plan advisor or CPA for guidance tailored to your situation.