Maximize Your Rental Real Estate Tax Deductions: What Property Owners Need to Know

One of the most common and effective ways to build long-term wealth is through investing in rental real estate. But if you're new to the game, you may be missing out on valuable tax deductions, misclassifying expenses, or incorrectly valuing your property — all of which can cost you big time, especially if you're ever audited by the IRS or plan to sell the property in the future.

Whether you're managing a single-family home, short-term rentals, or multi-family, understanding these key tax strategies for real estate investors can help you maximize your returns and stay compliant.

Bonus Depreciation

Under the Tax Cuts and Jobs Act (TCJA), real estate investors can take advantage of bonus depreciation, up until the end of 2026 when the bonus depreciation sunsets. This tax break allows property owners to immediately deduct a percentage of qualifying assets in the year they're placed in service.

• What qualifies? New appliances, carpeting, and furniture used in rental properties.

• Current rate (2025): 40% of the asset’s purchase price.

• Important state note: Some states, including Illinois and New York, do not conform to this federal deduction, so be prepared for adjustments on your state return.

If the TCJA is extended by the current administration, bonus depreciation could remain a powerful tool for real estate owners looking to accelerate deductions and improve cash flow.

Section 199A Deduction for Rental Real Estate Owners

Many small landlords overlook the Section 199A deduction, which allows for up to 20% of qualified rental income to be deducted, even if you’re not a real estate professional. You only need to qualify and make an IRS safe harbor electon.

To qualify under the IRS Safe Harbor provision, you must:

• Keep separate books and records for each rental property or enterprise.

• Perform at least 250 hours of rental services per year.

• Maintain a detailed log of work performed, including dates, hours, tasks, and participants.

  
  

Even if you only own one or two units, this deduction can significantly reduce your tax burden if managed correctly.

Don’t Overlook Rental Property Valuation for Tax Purposes

Properly Allocating Land vs. Building Value

When purchasing a rental property, it’s crucial to allocate the purchase price between land and building. Why?

• The land portion is not depreciable.

• The building portion is, and depreciation can drastically reduce your taxable income over time.

• When selling, the proper allocation can help not only reduce capital gains tax exposure, but depreciation recapture as well.

Work with a CPA to ensure your cost basis is correctly established and documented.

Expense vs. Capitalize: Real Estate Improvement Rules

Under current IRS rules:

• Projects under $2,500 can generally be expensed immediately.

• Anything above this threshold must be capitalized and depreciated over its useful life.

Misclassifying these improvements can lead to disallowed deductions and complications in the event of an audit. Keeping clear records and understanding what qualifies for expensing vs. capitalization is key to staying compliant and optimizing your tax benefits.

Why Work With a CPA for Your Rental Real Estate Taxes?

From new investors buying their first property to seasoned landlords managing multi-family units, working with a knowledgeable tax professional is one of the best decisions you can make.

At Pathfinder Accounting & Tax, we specialize in helping rental property owners:

• Maximize real estate tax deductions

• Navigate complex IRS rules for depreciation and capitalization

• Ensure accurate property valuations

• Claim valuable deductions like 199A and bonus depreciation

Ready to Maximize Your Rental Real Estate Deductions?

Don’t leave money on the table. Work with a tax professional who understands real estate. Contact Pathfinder Accounting & Tax today to make sure you're maximizing your rental real estate tax benefits.