Real estate and tax
Property is taxed differently depending on how it is held, how long it is held, and how much time you spend on it. Those three questions decide most of the bill.
1031 exchanges
A like-kind exchange under Section 1031 defers gain on investment property when the proceeds are reinvested through a qualified intermediary. Two deadlines govern it and neither is extendable in ordinary circumstances: replacement property must be identified within 45 days of the sale, and the purchase must close within 180 days.
California adds a step that catches people who move money out of state. When California property is exchanged for property elsewhere, the state requires an annual information return — Form 3840 — for as long as the deferred gain remains unrecognized. Miss it and California can assess the deferred gain.
Cost segregation
A cost segregation study separates a building into its components so that shorter-lived assets are depreciated over shorter schedules instead of the full 27.5 or 39 years. It is an engineering exercise as much as a tax one, and it is worth modelling before commissioning rather than after.
The study interacts with bonus depreciation and with the passive activity rules, which is where the planning actually happens. Accelerating a deduction does nothing for you if the loss it creates is suspended.
Real estate professional status
Rental losses are passive by default, which limits what they can offset. Real estate professional status changes that treatment, but the threshold is specific: more than half of your personal services during the year must be in real property trades or businesses, and more than 750 hours.
Meeting it is a question of records, not intentions. Contemporaneous logs are what defend the position if it is examined, and they are far easier to keep during the year than to reconstruct afterwards.
When losses stay passive
For investors who do not qualify, a special allowance permits up to $25,000 of rental losses against other income. It phases out as modified adjusted gross income rises between $100,000 and $150,000, and disappears entirely above that.
Grouping elections, disposition planning, and the order in which properties are sold all affect when suspended losses are finally released.
Common questions
- What does a real estate tax accountant do?
- A real estate tax accountant handles the questions that arise specifically from owning property: depreciation and cost recovery, passive activity rules, basis tracking across improvements and refinancing, gain deferral on sale, and the entity structure the property is held in. The work is mostly planning done before a transaction, because most property tax outcomes are fixed at the moment of purchase or sale.
- Do accountants help with property taxes?
- Property tax is assessed by the county, not reported on an income tax return, so it is a separate system. An accountant is involved where property tax intersects with income tax — deductibility, reassessment on a transfer, and what happens when property passes between family members.
- Is it better to pay capital gains or do a 1031 exchange?
- It depends on what you plan to do with the proceeds. An exchange defers the gain but commits you to reinvesting within 45 and 180 days, and it carries your old basis forward into the new property. Paying the tax ends the obligation and frees the cash. The comparison turns on your holding horizon, your California rate, whether the 3.8% net investment income tax applies, and whether the estate plan expects a step-up in basis later.
- What is the 95% rule in a 1031 exchange?
- It is one of three identification rules. You may identify three properties of any value, or any number of properties whose combined value does not exceed 200% of what you sold, or any number of properties of any value provided you actually acquire at least 95% of the total value identified. The 95% rule is the fallback when an identification list exceeds the first two limits.
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