This article was co-authored by Austin Wendt and Zack Spoonamore 

Whether you own one Airbnb/VRBO or manage a growing real estate portfolio, understanding real estate tax strategies can help you unlock meaningful savings. If you manage or invest in real estate, keep these key tax planning strategies in mind to help you make smarter financial decisions. Our real estate pros share industry-specific tax insights in a clear, digestible way below. 

Short-Term Rentals: A Tax Planning Opportunity

Short-term rentals (STRs) are a powerful tax planning tool because they offer unique flexibility under the tax code. Unlike traditional long-term rentals, STRs can be treated as an active business rather than a passive activity. This opens the door to using rental losses to offset other income, such as W-2 wages or business earnings, especially when the owner materially participates. With the right structure, STRs can generate significant tax deductions, including accelerated depreciation, while also creating strong cash flow. If exploring STRs, keep these key points in mind: 

• They are not always passive. If your average rental period is seven days or less, the IRS may treat it as a business, not a rental. That means your income might avoid passive activity limits and allow you to deduct losses against your other income.
• Material participation matters. If you materially participate (i.e., spend significant time managing the property), you may be able to treat the activity as non-passive, unlocking more deductions.
• Avoiding the self-Employment tax trap. Renting with significant services (e.g., daily cleaning or meals) might trigger self-employment taxes. Structuring services carefully can help manage this risk.

Tip: Keep a time log of your involvement in property operations to support material participation if ever audited.

Real Estate Professional Status and Long-Term Rentals

For many real estate investors, rental losses are often limited by passive activity rules. However, the IRS allows an exception for those who qualify as a Real Estate Professional (REP), making it one of the most powerful tax-saving designations. This status allows eligible taxpayers to convert passive rental losses into non-passive losses, which can be used to offset other forms of income, such as wages, business profits or capital gains. To qualify, you must:

• Spend over 750 hours per year in real estate activities.
• Spend more time in real estate than any other profession.

If you meet these criteria and materially participate in your rental properties, then:

• Losses become non-passive and can offset other income (e.g., W-2 wages or business income).
• The benefits compound when combined with a cost segregation study.

Tip: REP status is especially powerful for married couples where one spouse qualifies, and the other is a high-income earner. 

Self-Rental and Owner-Occupied Strategies – Section 469 Rules

If you rent property to a business, you materially participate in (such as your own), that income is generally non-passive under Section 469. However, losses are typically still treated as passive unless you elect to group the rental and business activities. With proper planning and elections, these self-rental arrangements can still yield valuable deductions.

Tip: Document participation and consider consulting with your CPA on grouping elections for compliance and strategy.

Qualified Opportunity Zones: Deferring and Reducing Capital Gains

Qualified Opportunity Zones (QOZs) were created to encourage long-term investment in economically distressed communities by offering substantial tax benefits. For taxpayers with capital gains from the sale of stocks, businesses or real estate, reinvesting those gains into a QOZ fund can allow for tax deferral, partial reduction and even full exclusion of new gains if held for 10 years. This makes QOZs a compelling planning tool for investors seeking both tax advantages and long-term growth opportunities.

If you recently sold stock, real estate or a business, and realized a capital gain, investing that gain in a QOZ fund could deliver major tax savings. Benefits include:

• Deferral of your original capital gain until as late as 2026.
• Reduction of that gain if certain holding periods are met (if deadlines were met before 2021).
• Exclusion of new gain on QOZ investment if held for more than 10 years.

Note: Opportunity Zone funds must meet certain compliance requirements to qualify, so working with an experienced advisor is key. While the deferral window is closing, the 10-year capital gains exclusion remains a powerful incentive for long-term investors.

Cost Segregation Studies: Accelerated Depreciation = Immediate Savings

Cost segregation is one of the most effective strategies for unlocking front-loaded tax deductions in real estate. By accelerating depreciation on certain components of a property, investors can reduce their taxable income in the years where cash flow and tax savings are most valuable. This method not only improves after-tax returns but also creates flexibility for reinvestment or debt reduction. Cost segregation is especially impactful for high earners, real estate professionals and owners of newly acquired or improved properties.

When you purchase real estate, the IRS typically allows depreciation over 27.5 or 39 years. But not everything in a property wears out that slowly. That’s where cost segregation comes in. This strategy involves breaking your property down into components that can be depreciated more quickly—often 5, 7 or 15 years.

The benefits of cost segregation include:

• Front-loads depreciation deductions in the early years.
• Reduces current-year taxable income.
• Frees up cash flow for reinvestment.

The ideal candidates are:

• Newly purchased or renovated properties.
• STRs where the taxpayer materially participates.
• Properties with significant interior build-out, appliances or exterior improvements.

Even a single-family home used as a short-term rental can benefit from a cost segregation study if handled correctly.

Small Steps, Big Savings

You don’t have to be a large-scale investor to take advantage of real estate tax strategies. Whether it’s running a short-term rental, qualifying as a Real Estate Professional, doing a cost segregation study or exploring QOZ funds, the right approach can lead to significant financial benefits. Some simple ways to get started include:

• Keeping detailed records of your involvement in managing property.
• Evaluating whether you qualify for Real Estate Professional status.
• Considering a cost segregation study for your next property.
• Asking your advisor if QOZ investments fit your long-term goals.

Here to Guide You

Smart planning isn’t about loopholes—it’s about using the tax code the way it was designed. Need help navigating these strategies? Contact our dedicated team of real estate CPAs who can help.