There’s plenty to consider when buying an investment property. Like whether that mid-century pink and mustard palette will make your listing “pop”, as promised by the paint store clerk. Or if the neighbor’s new death metal obsession might scare off potential tenants.

But beyond aesthetics and potential auditory nightmares, the real deal-breaker — ordeal-maker — is how you manage your real estate taxes. Whether you’re acquiring property, managing rentals, or considering a sale, these five strategies, provided by Ascend’s Melanie Prieger, will help you make informed decisions to optimize your tax benefits.

1. Get an appraisal to optimize tax benefits

When purchasing an investment property, obtaining a detailed appraisal that separates land value from building value is crucial. Since land can’t be depreciated, while buildings can, allocating as much value as reasonably possible to the building increases your depreciation deductions, reducing taxable income.

Property tax assessments often attribute a disproportionate amount to land, especially in high land-value areas like Los Angeles or New York, limiting depreciation benefits. Many investors default to using county property tax statements for valuation, but these may not act in your favor. Requesting a breakdown of land and building values in the appraisal can provide a more tax-efficient allocation. Since appraisals are typically conducted during the purchase process, ensuring this level of detail early on could enhance long-term tax savings.

2. Take advantage of cost segregation for faster depreciation

For owners of commercial properties, a cost segregation study allows you to breakdown a building into individual components, such as lighting, flooring, HVAC systems and other furniture and fixtures, that depreciate at a faster rate than the standard 39 years for commercial properties. Unfortunately, residential rentals don’t qualify for this type of tax treatment; however the depreciation period is also significantly shorter (27.5 years vs 39 years).

Conducting a cost segregation study at the time of purchase rather than years later prevents the need for complex IRS filings, such as Form 3115 (Change in Accounting Method). Many investors delay this step, only to realize later that they could have accelerated their tax savings. Investors can lower taxable income sooner and improve cash flow by identifying assets eligible for shorter depreciation schedules (such as five, seven, or 15 years). However, a cost segregation study can be complex, so speak to your tax accountant to ensure it suits your circumstances.

3. Utilize a 1031 exchange to defer capital gains tax

A 1031 exchange enables investors to defer capital gains tax when selling an investment property by reinvesting the proceeds into another like-kind property. However, many people mistakenly believe ‘like-kind’ means the new property must be identical in size and type — that’s not the case. As long as the replacement property is also for investment or business use, it qualifies, whether it’s a single-family rental exchanged for a commercial building or vice versa.

As with much of the tax system, strict IRS rules govern these transactions, such as:

• A qualified intermediary must handle the proceeds. Sorry, you can’t receive the funds directly.
• A replacement property must be identified within 45 days and acquired within 180 days of the sale.
• A personal residence does not qualify for a 1031 exchange.

One common mistake investors make is assuming that simply buying a new property within a short timeframe qualifies as an exchange. However, failing to use a qualified intermediary or missing deadlines can disqualify the transaction, resulting in an immediate tax liability. Planning ahead and working with an experienced tax advisor can help investors fully leverage this tax-deferral strategy.

4. Keep detailed records to support tax deductions

Does your tax record-keeping method resemble an archeological dig, with layers of paperwork from years past and the occasional fossilized coffee stain? Or does your filing system involve a random assortment of notebooks, napkins, and mental notes you’re convinced you’ll remember later? (Spoiler alert: you won’t.) If so, we can’t stress enough that you need to lift your game.

Organized and detailed record-keeping is essential for real estate tax efficiency, whether you’ve purchased an investment/rental property, or simply use a personal residence for rental purposes. If a property was rented out at any point, depreciation deductions must be accounted for, and failing to track these can lead to costly tax consequences when selling.

For example, homeowners who temporarily rent their primary residence may later need to recapture depreciation upon sale, potentially at higher ordinary income tax rates rather than lower capital gains rates. Additionally, keeping records of home improvements, such as renovations, window replacements, or solar panel installations, can increase the property’s cost basis and reduce taxable gain at the time of sale.

Side note: a homeowner who rents their home for fewer than 14 days in any calendar year does not need to report either the income or the expenses. So if you plan to rent out your home for a special event (such as the Super Bowl or the Olympics), this is a fairly simple strategy to pocket a bit of extra cash.

Unlike general tax records, which should be kept for seven years, real estate documentation should be maintained for the entire period of ownership and beyond. A lack of records can result in lost deductions, increased tax liability, and a big headache.

5. Understand mortgage interest deductions

Whether you’re a homeowner or investor, mortgage interest deductions offer a valuable tax break. The IRS allows you to deduct interest on mortgages for personal residences up to $750,000 ($375,000 if married filing separately) on your primary residence and one additional home. However, if your mortgage was taken before December 15, 2017, the higher limit of $1 million still applies.

For rental properties, mortgage interest is deductible against rental income. However, if a property is both a rental and a vacation home, the deduction must be allocated proportionally between personal and rental use.

Investors should also be aware of how mortgage interest deductions fit within their overall tax strategy. There are certain requirements for a property to qualify for this tax benefit. Speak to your tax advisor to understand the limits and allocation rules and ensure compliance.

Do it right and seek advice

When done right and strategically, real estate can yield capital and tax-break benefits to help build long-term wealth.

Working with a knowledgeable tax professional ensures you’re not leaving money on the table, or worse, handing it over to the IRS unnecessarily. Plan, play it smart, and maybe, just maybe, you’ll be rolling up to your next investment property in a brand-new Porsche, courtesy of your tax savings. Or, at least, turning your Pinterest board into a real-life renovation.

Contact us for your tax strategy: info@ascendadvisors.com