Every rental property generates ordinary deductions: mortgage interest, property tax, insurance, repairs, maintenance, property management, supplies, vehicle expense (if traveling between properties), home office (if managing remotely), professional fees (CPA, attorney), and travel for property inspections. These flow through Schedule E.

These deductions reduce taxable rental income. If they exceed rental income (common in early ownership years), the property generates a "tax loss" - useful if you can absorb it via real estate professional status or active participation rules.

Key principle: separate "repairs" (deductible immediately) from "improvements" (capitalized and depreciated over 27.5 years). A new roof = improvement. Patching a roof = repair. Replacing a stove = repair. Adding a new room = improvement. Misclassification leaves money on the table.

Residential rental property depreciates over 27.5 years straight-line. The property's purchase price is allocated between land (does not depreciate, typically 15-25% of total) and improvements (depreciable building shell + structural). Annual depreciation = depreciable basis / 27.5.

Example: $400K purchase, 80% allocation to building = $320K depreciable basis. Annual depreciation = $320K / 27.5 = $11,636/year. This deduction flows through Schedule E and offsets rental income.

Depreciation is a paper deduction - you don't write a check for it. It typically converts a rental that would otherwise show $5-10K in taxable profit into a tax loss. The cash flow stays positive; the tax loss carries forward (or offsets ordinary income if you qualify for REPS).

Recapture at sale: when you eventually sell, accumulated depreciation is "recaptured" at a 25% federal rate (plus state). 1031 exchange defers recapture to the next property; sale without 1031 triggers it.

Cost segregation breaks the building purchase into component asset classes: 5-year (carpet, appliances, removable equipment), 7-year (specific items), 15-year (parking lots, landscape, fences), and 27.5-year (the building shell). Without cost seg, the entire building depreciates over 27.5 years. With cost seg, 15-25% of basis typically moves into shorter-lived classes.

Combined with bonus depreciation, cost seg produces front-loaded deductions. Bonus depreciation (currently 60% in 2024, phasing down) lets you deduct a portion of qualifying short-life property in year one. Example: $400K residential rental, $320K depreciable basis, 20% reclassified to short-life ($64K). 60% bonus = $38K front-loaded deduction in year one - on top of the regular $11,636 straight-line on the remaining basis.

Cost seg study cost: typically $5-10K for residential, $15-30K+ for commercial. Worth it once basis exceeds ~$300K, especially if you have REPS or other passive income to absorb the deductions.

Look-back cost seg: studies can be done years after acquisition. Catch-up depreciation flows through Form 3115 Change in Accounting Method.

Without REPS, rental losses are passive and can only offset passive income. Excess passive losses suspend until you have passive income to absorb them or until you sell the property. With REPS, rental losses become non-passive and offset W-2 income, business income, or any other ordinary income.

Two tests must both be met: (1) 750-hour test - more than 750 hours per year in real estate trades or businesses (acquiring, managing, leasing, brokering, etc.). (2) 50% test - more than half of your total working time is in real estate. Both tests must be met EVERY year.

For married couples filing jointly, only one spouse needs to qualify. A common high-income optimization: spouse with substantial W-2 income works full-time at a non-real-estate job; other spouse manages the rental portfolio and qualifies for REPS. The W-2 spouse's income gets offset by rental losses.

Material participation in the rental activity (separate 500-hour test) is required to deduct losses against ordinary income, even with REPS. Documentation matters - keep contemporaneous time logs.

When you sell a rental property, capital gains tax + depreciation recapture often consume 25-35% of equity. 1031 exchange defers all of it. Sell the relinquished property and reinvest the proceeds into "like-kind" replacement property within 180 days. Tax stays deferred until you eventually sell out of the cycle.

Strict timeline: 45 days to identify replacement, 180 days to close. Use a Qualified Intermediary to hold the proceeds. If you touch the money, the exchange invalidates.

1031 strategies: (1) consolidation - exchange multiple smaller properties into one larger, (2) market rotation - exchange property in declining market into property in growing market, (3) property type pivot - exchange SFR rentals into commercial multifamily or vice versa, (4) exit timing - 1031 into a long-term hold property where you plan to step-up basis at death.

The "buy and never sell" strategy: hold the property through your lifetime, let heirs inherit. Under current US tax law, inherited property gets a "stepped-up basis" - the heir's cost basis becomes the fair market value at date of death. Decades of accumulated capital gains and depreciation recapture are erased.

Math example: $200K original cost, $1M value at death. Without step-up, $800K gain triggers $200K+ in tax at sale. With step-up, basis becomes $1M; heir can sell with no gain.

Combined with 1031 chain: take properties through 30+ years of 1031 exchanges to defer all gain, then step-up basis at death erases everything. The most powerful tax strategy in real estate.

Caveat: step-up basis is subject to political risk - tax law changes could eliminate or modify it. Discuss with an estate attorney for current planning.

Q1-Q2: review prior year tax filings; identify missed deductions; consider look-back cost seg if applicable.

Mid-year: estimate annual rental income and expenses; project taxable position; identify tax-advantaged moves to make before year-end (cost seg study, REPS hour documentation, 1031 sequencing).

Q4: execute year-end moves. Pre-pay any deductible expenses if it materially helps; harvest losses on any property you intended to sell anyway.

Year-end: file extension if 1031 exchange spans into the following year. Confirm all REPS time logs and cost seg documentation is complete.

Ongoing: work with a CPA who specializes in real estate. The tax strategy delta between a real-estate-experienced CPA and a generic CPA can easily be $10-50K/year for active investors.