The Numbers That Matter in 2026
The One Big Beautiful Bill Act, signed into law in 2025, reshaped the federal tax landscape for property owners in ways that range from modest to transformative. The SALT deduction cap quadrupled from $10,000 to $40,000. Private mortgage insurance premiums became deductible as mortgage interest for the first time since 2021. And 100% bonus depreciation was permanently restored for qualifying property, giving real estate investors one of the most powerful write-offs in the tax code.
For Texas property owners specifically, the tax picture looks even better. No state income tax means every dollar of rental income, capital gains, and retirement distributions avoids state-level taxation. According to the Tax Foundation’s 2026 State Tax Competitiveness Index, Texas ranks among the top five states for individual tax burden, a competitive advantage that compounds over decades of ownership.
Ed Neuhaus, broker of Neuhaus Realty Group, points out that many Austin-area buyers underestimate how much the tax code rewards property ownership. “When you add up the mortgage interest deduction, property tax benefits, and the $250,000 to $500,000 capital gains exclusion, owning a home in Texas is one of the most tax-advantaged positions you can be in,” he notes.
This guide breaks down every major tax benefit available to homeowners, sellers, and real estate investors in 2026, with specific dollar amounts, IRS thresholds, and strategies that apply in Texas and the Austin market.
Mortgage Interest Deduction: The Cornerstone Tax Break
The mortgage interest deduction remains the single largest tax benefit for most homeowners. Under current law (made permanent by the One Big Beautiful Bill Act), you can deduct interest paid on up to $750,000 of qualified home acquisition debt ($375,000 if married filing separately).
What Qualifies as Acquisition Debt
Acquisition debt is a mortgage you took out to buy, build, or substantially improve your main home or a second home. Refinanced debt qualifies up to the remaining balance of the original acquisition debt. Cash-out refinance amounts above the original balance do not qualify for the mortgage interest deduction (though the interest may be deductible if used for home improvements).
What the Deduction Is Worth
On a $500,000 mortgage at 6.5% interest, you would pay roughly $32,300 in interest during the first year. At the 24% marginal tax bracket, that translates to approximately $7,752 in federal tax savings. Over the first five years of a 30-year mortgage, cumulative interest deductions could reduce your federal tax bill by more than $35,000.
| Mortgage Amount | Rate | Year 1 Interest | Tax Savings (24% Bracket) |
|---|---|---|---|
| $300,000 | 6.5% | $19,380 | $4,651 |
| $400,000 | 6.5% | $25,840 | $6,202 |
| $500,000 | 6.5% | $32,300 | $7,752 |
| $650,000 | 6.5% | $41,990 | $10,078 |
| $750,000 | 6.5% | $48,450 | $11,628 |
The Itemizing Threshold
The mortgage interest deduction only helps if you itemize. For 2026, the standard deduction is $16,750 for single filers and $33,500 for married couples filing jointly. Your combined itemized deductions (mortgage interest, SALT, charitable contributions, and other qualifying expenses) must exceed those amounts for itemizing to make sense.
For a married couple with a $400,000 mortgage at 6.5%, their $25,840 in mortgage interest plus $10,000 or more in property taxes puts them well above the $33,500 standard deduction threshold.
PMI Deduction: Back After a Five-Year Gap
The One Big Beautiful Bill Act restored the private mortgage insurance deduction beginning in 2026. PMI premiums are now treated as deductible qualified residence interest, flowing through Schedule A alongside traditional mortgage interest.
The deduction is subject to an income phase-out: it begins to reduce when adjusted gross income exceeds $100,000 ($50,000 for married filing separately) and disappears entirely at $109,000 ($54,500 MFS).
For a buyer putting 5% down on a $425,000 home in Cedar Park or Round Rock, annual PMI costs typically run $1,800 to $3,000. At the 22% bracket, that is $396 to $660 in additional tax savings.
SALT Deduction: The $40,000 Cap
The state and local tax (SALT) deduction took the biggest leap in the One Big Beautiful Bill Act. The cap increased from $10,000 to $40,000 for 2025 through 2029, with 1% annual inflation adjustments. For 2026, the IRS set the cap at $40,400 ($20,200 for married filing separately).
What Counts Toward SALT
The SALT deduction includes state and local property taxes plus either state and local income taxes or state and local sales taxes (your choice). In Texas, there is no state income tax, so the entire SALT cap is available for property taxes and sales taxes.
Why This Matters More in Texas Than You Think
With a combined effective property tax rate of roughly 1.8% to 2.1% inside Austin city limits, a $500,000 home generates $9,000 to $10,500 in annual property taxes. A $750,000 home in Lakeway with MUD taxes might hit $15,000 or more. Under the old $10,000 cap, higher-value homeowners lost significant deductions. The $40,400 cap now accommodates most Austin-area property owners comfortably.
| Home Value | Effective Tax Rate | Annual Property Tax | Deductible Under Old Cap | Deductible Under New Cap |
|---|---|---|---|---|
| $400,000 | 1.9% | $7,600 | $7,600 | $7,600 |
| $600,000 | 2.0% | $12,000 | $10,000 | $12,000 |
| $800,000 | 2.0% | $16,000 | $10,000 | $16,000 |
| $1,200,000 | 1.8% | $21,600 | $10,000 | $21,600 |
| $2,000,000 | 1.7% | $34,000 | $10,000 | $34,000 |
Income Phase-Out
The new $40,400 cap begins to phase down when modified adjusted gross income exceeds $505,000 ($252,500 MFS). The cap cannot be reduced below $10,000 regardless of income. For most Austin homeowners, this phase-out is not a factor. For luxury property owners in Westlake or Barton Creek with high incomes, consult a CPA to calculate your effective cap.
Property Tax Deduction and Texas Homestead Exemption
Property taxes are the primary ongoing tax expense for Texas homeowners, and the deduction works through the SALT cap described above. But Texas also provides direct property tax relief through the homestead exemption system.
2026 Homestead Exemption Values
- General homestead exemption: $140,000 off school district assessed value (raised by Proposition 4 in 2023 and Proposition 13 in 2025)
- Over-65 additional exemption: $60,000 off school district assessed value
- Disabled veteran (100%): Full property tax exemption on homestead
- School tax ceiling: Frozen at the amount owed when you turn 65 or become disabled
For a $500,000 home in Bee Cave, the $140,000 general homestead exemption reduces the school-taxable value to $360,000. At a school tax rate of roughly $0.86 per $100, that is approximately $1,204 in annual school tax savings.
For homeowners 65 and older, the combined $200,000 exemption ($140,000 general + $60,000 over-65) reduces the school-taxable value of a $500,000 home to $300,000, and the school tax amount freezes permanently. For more detail, see the Complete Guide to Property Taxes in Austin.
Capital Gains Exclusion on Home Sales (Section 121)
Section 121 of the Internal Revenue Code provides one of the most generous tax breaks in federal law: the ability to exclude up to $250,000 in capital gains ($500,000 for married couples filing jointly) when you sell your primary residence. No other asset class receives this treatment.
Ownership and Use Tests
To qualify for the full exclusion, you must meet both tests within the five-year period ending on the date of sale:
- Ownership test: You owned the home for at least 24 months (aggregated, not consecutive)
- Use test: You used the home as your principal residence for at least 24 months
You can meet these tests during different two-year periods. For example, you could own a home for five years, rent it out for the first two, live in it for the last three, and still qualify.
What the Exclusion Is Worth
Suppose you bought a home in Dripping Springs for $400,000 in 2021 and sell it for $575,000 in 2026. Your $175,000 gain is fully excluded from federal income tax. Without the exclusion, a married couple in the 22% bracket would owe $26,250 in capital gains tax (at the 15% long-term rate) plus potential net investment income tax.
For a deeper dive into calculating basis, partial exclusions, and divorce scenarios, see the Complete Guide to Capital Gains Tax on Home Sales.
Partial Exclusion
If you do not meet the full two-year requirement due to a job relocation, health issue, or certain unforeseen circumstances, you may qualify for a partial exclusion based on the fraction of the two-year period you did satisfy.
Depreciation: The Rental Property Tax Shield
Depreciation is arguably the most powerful tax benefit available to real estate investors. The IRS allows you to deduct the cost of a rental property’s structure (not the land) over 27.5 years for residential property or 39 years for commercial property, even as the property may be appreciating in market value.
How Straight-Line Depreciation Works
For a rental home purchased for $350,000 where the land is valued at $70,000, the depreciable basis is $280,000. Divided over 27.5 years, the annual depreciation deduction is $10,182. That is a non-cash deduction that reduces your taxable rental income dollar for dollar.
| Purchase Price | Land Value (20%) | Depreciable Basis | Annual Depreciation | Tax Savings (24% Bracket) |
|---|---|---|---|---|
| $300,000 | $60,000 | $240,000 | $8,727 | $2,095 |
| $400,000 | $80,000 | $320,000 | $11,636 | $2,793 |
| $500,000 | $100,000 | $400,000 | $14,545 | $3,491 |
| $750,000 | $150,000 | $600,000 | $21,818 | $5,236 |
Even if your rental property generates positive cash flow, depreciation can create a paper loss that offsets other income (subject to passive activity rules discussed below).
Cost Segregation and Bonus Depreciation
A cost segregation study is an engineering-based analysis that reclassifies components of a building into shorter depreciation categories. Carpet, appliances, landscaping, parking lots, and certain electrical and plumbing components can be reclassified from 27.5-year or 39-year property to 5-year, 7-year, or 15-year property.
The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualifying property placed in service after January 19, 2025. This means the reclassified components can be deducted entirely in the first year.
For a $500,000 rental property where a cost segregation study reclassifies 25% of the depreciable basis ($100,000) into short-lived categories, the investor could claim $100,000 in first-year depreciation on those components, plus the regular straight-line depreciation on the remaining $300,000 over 27.5 years. The combined first-year deduction could approach $110,909.
A cost segregation study typically costs $5,000 to $15,000 and is generally worth pursuing on any property valued at $500,000 or more. For detailed strategies on combining cost segregation with other tools, see the Complete Guide to STR Investing in Austin.
Depreciation Recapture: The Bill That Comes Due
Depreciation is a deferral, not a permanent elimination, of taxes. When you sell a rental property, the IRS recaptures the depreciation you claimed (or should have claimed) through a tax called unrecaptured Section 1250 gain.
How Recapture Is Taxed
Unrecaptured Section 1250 gain is taxed at a maximum federal rate of 25%. If your ordinary income tax bracket is below 25%, you pay at your lower rate. The recapture applies to the total depreciation claimed over your holding period.
For an investor who held a $400,000 rental property for 10 years and claimed $116,364 in total depreciation, the recapture tax at 25% would be $29,091. Any remaining gain above the depreciation amount is taxed at long-term capital gains rates (0%, 15%, or 20% depending on income).
How to Avoid or Defer Recapture
- 1031 exchange: Defer both capital gains and depreciation recapture by exchanging into a like-kind property. See the Complete Guide to 1031 Exchanges in Texas.
- Die holding the property: Heirs receive a stepped-up basis, eliminating both capital gains and depreciation recapture permanently.
- Installment sale: Spread the gain over multiple tax years to manage the tax impact.
Even if you never actually claimed depreciation deductions, the IRS reduces your basis as if you did. You owe recapture either way. This makes it essential to claim every depreciation deduction you are entitled to. For more on this, see the Depreciation Recapture Tax guide.
Passive Activity Loss Rules and the $25,000 Allowance
The IRS classifies rental real estate as a passive activity by default, which limits your ability to use rental losses to offset wages, business income, and other active income.
The $25,000 Special Allowance
If you actively participate in your rental activity (make management decisions, approve tenants, set rents), you can deduct up to $25,000 of passive rental losses against non-passive income. This allowance phases out between $100,000 and $150,000 of adjusted gross income.
| Adjusted Gross Income | Allowable Rental Loss Deduction |
|---|---|
| Under $100,000 | Up to $25,000 |
| $110,000 | Up to $20,000 |
| $120,000 | Up to $15,000 |
| $130,000 | Up to $10,000 |
| $140,000 | Up to $5,000 |
| $150,000+ | $0 |
Disallowed passive losses are not lost. They carry forward indefinitely and can be used against future passive income or fully deducted when you sell the property in a taxable transaction to an unrelated party.
Short-Term Rental Loophole
Rentals with an average stay of seven days or fewer (such as Airbnb properties) are not automatically classified as passive activities. If the owner materially participates in the rental activity, losses can offset active income without the $25,000 cap and without qualifying as a real estate professional. This is a significant planning opportunity for short-term rental investors in Austin, particularly when combined with cost segregation and bonus depreciation.
Real Estate Professional Status: Unlocking Unlimited Loss Deductions
Real estate professional status (REPS) is the most powerful tax classification available to real estate investors. It converts rental losses from passive to non-passive, enabling them to offset W-2 income, business profits, and all other types of income without limit.
Qualification Requirements
To qualify as a real estate professional, you must meet both tests in the same tax year:
- 750-hour test: You must spend more than 750 hours during the year in real property trades or businesses in which you materially participate
- Majority test: More than half of your total personal service hours for the year must be in real estate activities
Qualifying real property trades or businesses include development, construction, acquisition, conversion, rental, operation, management, leasing, and brokerage. One spouse must qualify individually; you cannot combine spousal hours for these tests.
Material Participation in Each Activity
Even with REPS status, you must also materially participate in each rental activity to treat its losses as non-passive. The easiest test to meet: you spent more than 500 hours on the activity during the year. You can also elect to group all rental activities as a single activity for this purpose.
Who REPS Works Best For
REPS is most valuable for households where one spouse is a real estate agent, property manager, developer, or full-time investor, and the other spouse has high W-2 income. The real estate spouse qualifies for REPS, and the rental losses offset the couple’s combined income on a joint return.
For Austin investors building a portfolio, the entity structure guide covers how to organize properties for maximum tax efficiency alongside REPS. For a deeper look at REPS qualification, see the blog post on Real Estate Professional Tax Status.
1031 Exchanges: Defer Taxes Indefinitely
Section 1031 of the Internal Revenue Code allows investors to defer capital gains taxes, depreciation recapture, and net investment income tax when exchanging one investment property for another of like-kind.
Key Rules
- 45-day identification period: You must identify up to three potential replacement properties within 45 calendar days of selling
- 180-day closing deadline: You must close on the replacement property within 180 calendar days
- Qualified intermediary (QI): A third-party QI must hold the proceeds; you cannot touch the money
- Like-kind: Any real property held for investment or business use qualifies (a rental house can be exchanged for commercial property, raw land, or another rental)
Texas has no state capital gains tax, so a 1031 exchange in Texas defers only federal taxes. But those federal taxes can be substantial. On a $200,000 gain, an investor might defer $30,000 to $50,000 in combined capital gains and recapture taxes.
For the complete playbook on Texas exchanges, see the Complete Guide to 1031 Exchanges in Texas.
Opportunity Zones: OZ 2.0 Changes Everything
The One Big Beautiful Bill Act permanently extended and enhanced the Qualified Opportunity Zone (QOZ) program, creating what tax professionals are calling OZ 2.0.
How Opportunity Zones Work
Investors who realize capital gains from any source can defer those gains by investing in a Qualified Opportunity Fund (QOF) that deploys capital in designated low-income census tracts. Austin has several designated Opportunity Zones, primarily in East Austin, Riverside, and portions of North Austin.
OZ 2.0 Benefits (Post-OBBBA)
- Rolling 5-year deferral: Capital gains invested in a QOF are deferred for five years from the investment date (replacing the previous fixed December 31, 2026 deadline)
- 10% basis step-up: If the QOF investment is held for at least five years, 10% of the original deferred gain is excluded
- 30% basis step-up for rural zones: Investments through a Qualified Rural Opportunity Fund (QROF) in rural Opportunity Zones receive a 30% basis step-up at five years
- New gains exclusion: If the QOF investment is held for 10+ years, any appreciation in the QOF investment itself is permanently excluded from federal income tax
For investors looking at Austin-area Opportunity Zones, read the Opportunity Zones overview. The permanent extension removes the sunset risk that deterred many investors from participating in OZ 1.0.
Home Office Deduction
The home office deduction remains available exclusively to self-employed individuals, freelancers, and small business owners. W-2 employees cannot claim this deduction (the TCJA suspension was made permanent by the One Big Beautiful Bill Act).
Two Calculation Methods
| Method | How It Works | 2026 Maximum |
|---|---|---|
| Simplified | $6 per square foot of dedicated office space (up from $5 in 2025) | $1,800 (300 sq ft max) |
| Actual Expense | Percentage of home expenses (rent/mortgage interest, utilities, insurance, repairs) based on office’s share of total square footage | No fixed cap |
The actual expense method requires more record-keeping but typically produces a larger deduction, especially for homeowners with significant mortgage interest and property tax payments. A 200-square-foot office in a 2,000-square-foot home represents 10% of the home, allowing deduction of 10% of qualifying expenses.
For remote workers in Austin considering a dedicated home office, the Complete Guide to Working from Home in Austin covers setup, internet providers, and workspace design.
Points Deduction on Mortgage Origination
Mortgage points (also called origination fees or discount points) are prepaid interest charged by the lender at closing. Each point equals 1% of the loan amount. Points paid when purchasing a primary residence are generally fully deductible in the year of purchase.
Purchase vs. Refinance Rules
- Purchase: Points are fully deductible in the year you close, provided the points are an established practice in the area and the amount is reasonable
- Refinance: Points must be amortized (deducted ratably) over the life of the new loan
- Refinance exception: If you refinance to a shorter term and use part of the proceeds for home improvements, a portion of the points may be immediately deductible
On a $500,000 mortgage with one discount point ($5,000), the buyer receives a full $5,000 deduction in year one. At the 24% bracket, that is $1,200 in immediate tax savings, on top of the lower interest rate the point purchased. See the Complete Guide to Closing Costs in Texas for how points factor into overall closing expenses.
Energy Efficiency Credits: What Expired and What Remains
The Inflation Reduction Act energy credits took a significant hit at the end of 2025. Both Section 25C (Energy Efficient Home Improvement Credit) and Section 25D (Residential Clean Energy Credit) expired for new property placed in service after December 31, 2025.
What This Means for 2026
- Solar panels installed in 2026: No federal tax credit available (the 30% credit applied only through 2025)
- Heat pumps, windows, insulation installed in 2026: No Section 25C credit
- Section 25D carryforward: If you installed solar or geothermal before 2026 and had unused 25D credits, those carry forward indefinitely
- Section 25C: No carryforward. Unused credits from 2025 are lost
Austin Energy still offers local rebates for certain energy improvements, including up to $50 for qualifying smart thermostats and weatherization rebates up to $1,800 through the Power Partner program. These are not tax credits but direct rebates. For Austin-specific solar economics without the federal credit, see the Complete Guide to Solar Panels in Austin.
Texas-Specific Tax Advantages for Property Owners
Texas provides several structural tax advantages that benefit every property owner in the state, regardless of property type.
No State Income Tax
Texas is one of nine states with no individual income tax. This means:
- Rental income is taxed only at federal rates
- Capital gains from property sales are taxed only at federal rates
- 1031 exchange deferrals only need to address federal taxes
- Retirement income (including rental income in retirement) faces no state taxation
- Real estate professional status losses offset income with no state tax implications
For an investor with $50,000 in annual rental income, the difference between Texas and a state like California (13.3% top rate) is roughly $5,000 to $6,650 in annual state tax savings.
No State Capital Gains Tax
When you sell a property for a profit that exceeds the Section 121 exclusion (or sell an investment property), Texas imposes zero state tax on the gain. In California, that same gain would face up to 13.3% in state tax.
No Estate or Inheritance Tax
Texas has no state-level estate or inheritance tax. Combined with the federal stepped-up basis at death (which eliminates accumulated depreciation and capital gains), Texas is one of the most favorable states for passing real estate wealth to the next generation.
Solar Property Tax Exemption
Texas Tax Code Section 11.27 exempts the appraised value added by solar panels and wind-powered energy devices from property taxes. If solar panels add $30,000 to your home’s value, your property tax bill does not increase.
Agricultural Exemption
Rural and Hill Country properties may qualify for agricultural (ag) valuation, which taxes land based on its agricultural productivity rather than market value. A 10-acre tract in Dripping Springs might have a market value of $500,000 but an ag-use value of $15,000, reducing school taxes from roughly $4,300 to about $129 annually. See the Complete Guide to Buying Land in the Hill Country for ag exemption details.
Tax Benefits Summary by Owner Type
| Tax Benefit | Primary Homeowner | Rental Investor | STR Owner | Land Owner |
|---|---|---|---|---|
| Mortgage Interest Deduction | Yes (up to $750K) | Yes (Schedule E) | Yes (Schedule E) | If financed |
| SALT Deduction ($40,400) | Yes (Schedule A) | Schedule E (no cap) | Schedule E (no cap) | Yes |
| Section 121 Exclusion | Yes ($250K/$500K) | No (unless converted) | Partial (nonqualified use) | No |
| Depreciation (27.5 yr) | No | Yes | Yes | No (land only) |
| Bonus Depreciation (100%) | No | Yes (via cost seg) | Yes (via cost seg) | No |
| 1031 Exchange | No | Yes | Yes | Yes |
| REPS Losses | No | Yes (if qualified) | Yes (if qualified) | No |
| STR Loophole (non-passive) | No | No | Yes (avg stay <7 days) | No |
| Opportunity Zones | No | Yes | Yes | Yes |
| Home Office | Self-employed only | Self-employed only | Self-employed only | Self-employed only |
| Homestead Exemption (TX) | Yes | No | No (unless primary) | No |
| Ag Valuation (TX) | If qualifying | No | No | Yes |
Installment Sales: Spreading Capital Gains Over Time
An installment sale allows a seller to receive payments over multiple years and recognize capital gains proportionally as payments arrive, rather than recognizing the entire gain in the year of sale.
When Installment Sales Make Sense
- Selling a high-value investment property where the gain would push you into the 20% capital gains bracket or trigger the 3.8% net investment income tax
- Seller financing to a buyer who cannot qualify for traditional lending
- Retirement planning where spreading income across years keeps you in lower brackets
The IRS requires installment sale reporting on Form 6252. Interest charged on the installment note is taxed as ordinary income to the seller. Depreciation recapture, however, must be recognized in the year of sale regardless of when payments are received.
Stepped-Up Basis: The Ultimate Estate Planning Tool
When a property owner dies, their heirs receive the property with a tax basis equal to its fair market value at the date of death, rather than the original purchase price. This “stepped-up basis” eliminates all accumulated capital gains and depreciation recapture in a single stroke.
The Impact in Practice
Consider an investor who purchased a rental property in Austin for $200,000 in 2005 and claimed $150,000 in total depreciation. The property is worth $600,000 at death. Without the step-up, selling would trigger $400,000 in capital gains plus $150,000 in depreciation recapture. With the step-up, the heir’s basis becomes $600,000, and both obligations are eliminated.
This is why many real estate investors follow a “buy, borrow, die” strategy: accumulate properties, refinance to access equity tax-free (via the HELOC or home equity route), and hold until death to step up the basis for heirs.
The federal estate tax exemption is approximately $7 million per individual for 2026 (down from $13.61 million in 2025 after the TCJA sunset). Texas imposes no state estate or inheritance tax, so estates below the federal threshold pass entirely tax-free.
Investor Tax Strategy Combinations
The most sophisticated real estate investors do not use individual tax benefits in isolation. They stack strategies for compounding effect.
Strategy 1: Buy, Cost Seg, Bonus Depreciate
Purchase a $500,000 rental property. Commission a cost segregation study to reclassify 25% of the depreciable basis. Claim approximately $100,000 in first-year bonus depreciation on the reclassified components plus $14,545 in standard depreciation on the remaining basis. Combined first-year paper loss approaches $115,000, potentially wiping out other taxable income (if REPS or STR material participation applies).
Strategy 2: STR Loophole + Cost Segregation
Purchase a property in the Lakeway or Spicewood area. Operate it as a short-term rental with average stays under seven days. Materially participate in management. Run a cost segregation study and claim bonus depreciation. Because the STR is not a passive activity, the paper losses offset W-2 or business income directly, with no $25,000 cap and no REPS requirement.
Strategy 3: 1031 Exchange Chain + Die
Sell investment Property A, exchange into Property B via 1031. Years later, exchange Property B into Property C. Each exchange defers all taxes and carries the original basis forward. Hold Property C until death, and heirs receive a stepped-up basis to current market value. Decades of deferred capital gains and depreciation recapture disappear permanently.
Ed Neuhaus of Neuhaus Realty Group works with Austin investors who combine these strategies, connecting them with CPAs and qualified intermediaries who specialize in real estate taxation. The right combination of entity structure, depreciation, and exchange strategy can reduce effective tax rates on real estate income to single digits.
Common Mistakes That Cost Property Owners Money
1. Failing to Itemize When It Makes Sense
With the 2026 standard deduction at $33,500 for married couples, some homeowners assume they cannot benefit from itemizing. But a $500,000 mortgage at 6.5% ($32,300 interest) plus $10,000 in property taxes already totals $42,300, nearly $9,000 above the standard deduction.
2. Not Claiming Depreciation on Rental Property
Some landlords skip depreciation because they do not want to deal with recapture at sale. This is a costly mistake. The IRS reduces your basis by the amount of depreciation you should have claimed, so you owe recapture regardless. Claim the deduction now and defer the tax.
3. Missing the Cost Segregation Window
Cost segregation studies can be performed retroactively. If you bought a rental property three years ago and never did a cost segregation study, you can file a “catch-up” depreciation deduction in the current year using Form 3115 (Change in Accounting Method). No amended returns required.
4. Ignoring Passive Loss Carryforwards
Investors who accumulate suspended passive losses over years sometimes forget to claim them when they sell the property. Upon a fully taxable disposition to an unrelated party, all accumulated passive losses become deductible in that year.
5. Not Planning for the Estate Tax Exemption Reduction
The federal estate tax exemption dropped from $13.61 million to approximately $7 million per individual after the TCJA provisions expired. Investors with portfolios approaching this threshold should work with an estate planning attorney to leverage strategies like irrevocable trusts, family limited partnerships, or valuation discounts.
Frequently Asked Questions
Working with Tax Professionals
Real estate taxation is one of the most complex areas of the tax code. The strategies in this guide intersect across multiple IRS publications, code sections, and state laws. A qualified CPA who specializes in real estate can identify deductions you are missing, structure acquisitions for optimal tax treatment, and navigate the interaction between passive loss rules, cost segregation, 1031 exchanges, and entity structure.
When selecting a tax professional, look for a CPA or enrolled agent with specific real estate experience. Ask how many real estate clients they serve, whether they have handled cost segregation studies and 1031 exchanges, and whether they are familiar with Texas property tax law and the homestead exemption system.
For buyers and investors in the Austin and Hill Country market, Neuhaus Realty Group maintains a network of recommended CPAs, real estate attorneys, and qualified intermediaries who work specifically with property owners in this area.
