Tax Strategy 101: Everything Investors Need to Know for Tax Season

Tax season is one of the most active periods for real estate investors. During this time, investors should be planning to evaluate their portfolios, plan acquisitions, and reconsider financing strategies. At the same time, evolving tax legislation and complex investment structures can leave investors feeling uncertain about their tax strategy.

It’s important to know what’s changing for this tax season and the options you should consider before filing your taxes. Changes for this season includes bonus depreciation, cost-segregation improvements and more. These updates may allow investors to accelerate deductions, reduce taxable income, and strengthen long-term portfolio strategies. 

What is Bonus Depreciation and How Does it Impact Tax Strategy?  

Recent updates to bonus depreciation introduced by the One Big Beautiful Bill Act have created new planning opportunities for investors. After years of phase-down, qualifying properties placed in service after January 19th, 2025, will now be eligible for 100% first-year bonus depreciation. This means that investors can now:  

• Fully deduct qualifying short-life assets in year one.  
• Accelerate depreciation through cost-segregation.  
• Create significant paper losses in the first year of ownership.  

Bonus depreciation plays a key role in accelerating deductions. And it does so without affecting financing, as depreciation improves liquidity without impacting underwriting, appraisal, LTV, or the structure of your loans. These key pieces all remain the same, while still offering full deduction. With 100% bonus depreciation restored, cost segregation studies are once again a powerful strategy for accelerating deductions. 

How to Incorporate Cost Segregation into your Tax Strategy 

A cost segregation is a process that separates aspects of a property so taxes for everything can be filed appropriately. Traditionally, residential investment properties depreciate over 27.5 years (or 39 years for commercial properties). Shorter recovery periods fall into the range of 5-year, 7-year, and 15-year properties.  

However, now that 100% bonus depreciation has been restored, shorter-life assets can now be fully deducted in year one. And while cost segregation has been often used by larger, commercial investors, it’s become more accessible option to small-medium investors over time. If you’ve purchased a STR in the past year, you might benefit from incorporating cost segregation into your tax strategy.  

And remember to always consult a tax professional, like a certified public accountant who understands real estate, to make sure you’re making the most informed decisions possible.  

Choosing Between Cost Segregation and 1031 Exchanges for Your Tax Strategy 

Section 1031 of the Internal Revenue Code enables like-kind exchanges, where real property held for productive use in a trade or business or for investment is exchanged solely for other real property of like kind, without recognizing gain or loss at the time of the exchange (26 U.S. Code § 1031). This exchange defers capital gains taxes, giving investors the opportunity to then invest the proceeds into a new property, thus increasing equity and investment growth.  

While 1031 exchanges remain a popular tool for deferring capital gains, they are not always the most flexible strategy for investors looking to access capital. 1031 exchanges involve stricter timelines, and any capital gain would be locked into the next property after the one that was deferred. Meanwhile bonus depreciation accelerates deductions but does not defer the capital gains from a sale.  

Whether you’re implementing cost segregation or a 1031 in your tax strategies, it’s important to the weigh the benefits of tax deferral against the preservation of liquidity and optionality.  

However, if you’re interested in accessing equity without selling your property or triggering capital gains, you can look into the option of cash-out refinancing.  

Understanding The Overlooked Tax Strategy: Cash-Out Refinance  

Perhaps one of the most underutilized liquidity tools in real estate is cash-out refinance. Instead of selling property or triggering capital gains, refinancing allows investors to access equity and provide a way to fund new investments while still maintaining ownership of their existing assets.

Refinancing could be an excellent choice for anyone looking to deploy capital into new opportunities while maintaining existing projects. For investors seeking flexibility without the rigidity of a 1031 timeline, a cash-out refinance can preserve optionality while unlocking capital.  

If you’re looking into refinancing options, Asset Based lending offers streamlined underwriting process and quick approvals to ensure you get the funding you need, when you need it. Our short-term bridge loans provide fast, flexible capital for investors who need to acquire or refinance a property without delays from traditional lenders. 

Talk to Tax Professionals About Your Strategy for Tax Season 

Ultimately, however you decide to approach the tax season is your own choice to make. Speaking with a trusted tax professional ensures that you’re making smart capital decisions that aligns with your goals and strategies.  

ABL strives to ensure that our borrowers can make informed decisions by working alongside investors and their tax teams. This allows us to structure financing that supports long-term tax strategy.  

Whether you’re looking to speak with one of our loan officers for support on your current loans, ABL is here. Or if you’re ready to take on your next project right in time for tax season, you can fill out our pre-qualification form now. Let’s get started and connect you with a real estate professional today.