The Tax-Savvy Real Estate Investor
Tax Tips & Wealth Building Insights
APRIL 2025
Overview
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OBJECTIVE
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PROBLEM
Staying current with ever-evolving tax codes, accounting standards, and market shifts is challenging and time-consuming, especially for busy real estate investors and entrepreneurs. Mistimed acquisitions, missed deductions, and lack of awareness about impending legislative changes can erode profits and stall growth. Our playbook solves this problem by providing timely, curated, and expert-driven guidance—all in one place—so you can confidently take proactive action rather than react late to tax and regulatory changes.
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CONTACT US
At Aiola CPA, we measure our success by your results. By combining technical expertise, industry specialization, personal investment experience, and a client-centered approach, we aim to help you reduce tax liabilities, streamline operations, and ultimately build long-term wealth through real estate.
Ready to Take the Next Step?
Contact Us Today
CPA Insights
Welcome to the April 2025 edition of CPA Insights, your go-to resource for tax and economic updates tailored to real estate professionals. As a CPA firm dedicated to the real estate industry, we’re here to keep you informed about the changes that matter most to your business and investments. This month, we’re diving into updates on Trump’s tax proposals—specifically the SALT deduction and capital gains tax adjustments—along with key economic factors like interest rates, labor market shifts, and emerging market trends. Let’s explore what’s new and how you can stay ahead.
A. Trump Tax Proposals: SALT Deduction and Capital Gains Updates
What’s Happening Now
- SALT Deduction Cap Relief: On April 5, 2025, a bipartisan bill was introduced to permanently eliminate the $10,000 cap on State and Local Tax (SALT) deductions, effective retroactively from January 1, 2025. Experts predict passage by June, offering significant tax relief in high-tax states.
- Capital Gains Tax Cut: On April 15, 2025, President Trump proposed reducing the capital gains tax rate from 20% to 15% for real estate investors holding properties for over five years. A vote is scheduled for late May, aiming to boost long-term investment.
- 1031 Exchange Stability: After speculation about potential curbs, Trump confirmed on April 20, 2025, that 1031 like-kind exchanges will remain unchanged, preserving a key tax deferral tool for real estate transactions.
Your Next Steps
- If the SALT bill passes retroactively, accelerate year-end property tax and estimated tax payments into 2025 to maximize your 2025 deductions.
- Consider holding properties until the five-year mark to benefit from the potential 15% capital gains rate, especially if the proposal becomes law.
- Move forward with 1031 exchanges where beneficial, using this tool to defer taxes and reinvest in higher-value properties.
B. Economic Factors: Navigating Tariffs and Social Security
What’s Happening Now
- Labor Market Shifts: The construction industry is grappling with a significant labor shortage, worsened by intensified deportation policies and a lack of skilled workers. In key markets like Florida and Texas, project delays have surged by 20% since the start of 2025, with labor costs up by 15%. Multifamily and commercial projects are hit hardest, facing delays of up to three months.
- Inflation: The Consumer Price Index (CPI) spiked by 4.5% in March 2025, the sharpest rise since 2008. Driven by a 10% tariff on imports effective April 1, 2025, material costs have soared—steel up 25% and lumber up 30%—squeezing margins for construction and renovation projects.
- Housing Trends: Demand for affordable housing continues to outpace supply, with vacancy rates in major cities dropping. This has driven a 10% increase in rental prices over the past six months, particularly in markets like Miami, Austin, and Denver, fueled by remote work and migration shifts.
Your Next Steps
- Invest in local workforce training or partner with vocational schools to build a skilled labor pipeline. Use prefabricated materials to cut on-site labor needs and keep projects on track.
- Lock in fixed-price supplier contracts or source tariff-exempt materials to control costs. Where feasible, adjust rents to offset rising expenses.
- Target acquisitions or developments in high-demand affordable housing markets. Offer flexible leases or rent-to-own options to attract tenants and boost rental income stability.
Staying Informed and Proactive:
While no resource can predict future legislative outcomes with complete certainty, awareness of these current and impending changes empowers you to pivot your strategies accordingly.
At Aiola CPA, we emphasize proactive planning—running “what-if” scenarios, monitoring legislative updates, and collaborating closely with your legal and financial team—to ensure you remain agile, compliant, and poised to capitalize on opportunities in 2025 and beyond.
Evergreen Tax Strategies for Real Estate Investors
In the ever-shifting tax landscape, certain strategies consistently deliver value to real estate investors, helping minimize tax burdens and build wealth. Below are two evergreen approaches to optimize your tax position.
A. Maximizing Deductions for Rental Property Expenses
What It Is
Rental property owners can deduct a variety of expenses associated with managing and maintaining their properties. These deductions can include mortgage interest, property taxes, insurance, repairs, property management fees, and even travel expenses for property visits.
Why It Matters
By fully leveraging these deductions, investors can significantly reduce their taxable rental income, thereby lowering their overall tax liability and increasing cash flow.
Key Consideration
Accurate record-keeping is essential to substantiate these deductions. Additionally, understanding the distinction between repairs (expensed) and improvements (capitalized) is crucial for compliance. Consult with a tax professional to ensure you’re maximizing allowable deductions.
B. Using Self-Directed Retirement Accounts for Real Estate Investing
What It Is
Self-Directed Retirement Accounts, such as Self-Directed IRAs (SDIRAs) and Self-Directed 401(k)s (SD401ks), let you invest retirement funds in real estate, with gains growing tax-deferred or tax-free (Roth accounts).
Why It Matters
This allows you to defer or eliminate taxes on rental income and capital gains, and adds stability to your retirement portfolio.
Key Consideration
Self-directed 401(k)s are best for self-employed or small business owners. Higher contribution limits ($69,000 in 2025, or $76,500 if 50+) and loan options make them flexible for real estate. SDIRAs are more accessible, but watch for Unrelated Business Income Tax (UBIT) and Unrelated Debt-Financed Income (UDFI) if using leverage. Avoid debt to reduce tax risks.
Putting It All Together
These strategies provide powerful ways to manage taxes and grow wealth. For tailored advice on integrating them into your 2025 plans, reach out to Aiola CPA, your real estate-specialized CPA.
Case Study: Leveraging the STR Loophole with an ADU, Cost Segregation, and Bonus Depreciation
Note: For client confidentiality, the names and certain details in this case study have been altered.
Client Background
“Homeowner A,” a resident of California, decided to build an Accessory Dwelling Unit (ADU) on their primary residence lot. The goal was to generate additional income through short-term rentals while maximizing tax benefits. The ADU, a 600-square-foot detached unit, was completed in Fenruary 2022 at a cost of $200,000.
Initial Situation (Early 2022)
Homeowner A was aware of the tax advantages tied to short-term rentals (STRs) and the potential to accelerate deductions using cost segregation and bonus depreciation. With 100% bonus depreciation in 2022, they saw an opportunity to significantly reduce their tax liability while generating rental income.
Challenges Identified
- Ensuring the ADU qualified as a business asset for tax purposes by meeting short-term rental and material participation requirements.
- Conducting a cost segregation study to identify components eligible for accelerated depreciation.
- Managing cash flow during the construction phase while balancing upfront costs.
Strategic Actions Taken
- Short-Term Rental Setup: Homeowner A listed the ADU on platforms like Airbnb, ensuring the average rental period was less than 7 days. They actively managed the property—handling bookings, cleaning, and guest communications—to meet the IRS’s material participation standards.
- Cost Segregation Study: They hired a specialist to perform a cost segregation study, which identified $50,000 in 5-year property (e.g., appliances, flooring) and $30,000 in 15-year property (e.g., landscaping). The remaining $120,000 was classified as 39-year nonresidential rental property.
- Bonus Depreciation Application: Homeowner A applied 100% bonus depreciation to the $80,000 in qualifying components, allowing them to deduct the entire amount in 2022. They also began depreciating the $120,000 building portion over 39 years, claiming $3,000 in standard depreciation for the year.
- Cash Flow Management: To fund the construction, they used a combination of savings and a home equity line of credit, planning to offset the costs with rental income and tax savings.
Quantifying the Impact
- Tax Savings: In 2022, Homeowner A claimed $83,000 in depreciation deductions ($80,000 bonus + $3,000 standard). With $40,000 in rental income and $10,000 in expenses, they reported a nonpassive tax loss of $53,000. This loss offset other income, saving approximately $19,000 in taxes (assuming a 35% tax rate).
- Ongoing Benefits: The ADU generated $40,000 in annual rental income, providing a steady cash flow stream. Additionally, the property’s value was expected to appreciate over time.
Conclusion & Lessons Learned
Homeowner A successfully transformed their primary residence into a tax-efficient income generator by building an ADU and leveraging the STR loophole with cost segregation and bonus depreciation. Key takeaways include:
- Understand Tax Rules: Familiarize yourself with short-term rental requirements and material participation to unlock business-related tax benefits.
- Use Cost Segregation: Accelerate depreciation deductions by identifying components eligible for shorter recovery periods.
- Plan for Cash Flow: Balance upfront construction costs with projected rental income and tax savings.
- Stay Compliant: Document your involvement in the rental activity to substantiate material participation and avoid IRS scrutiny.
By implementing these strategies, Homeowner A not only generated rental income but also achieved substantial tax savings, demonstrating the power of proactive tax planning in real estate.
Avoid These Common Accounting Errors
Accurate accounting is crucial for real estate investors, especially in a dynamic tax environment like 2025. Mistakes can lead to missed deductions, cash flow disruptions, or even IRS audits. Below are two common accounting errors to avoid as you navigate the year’s evolving tax landscape.
A. Incorrectly Calculating Depreciation on Rental Properties
- Why It Matters: Depreciation is a valuable tax deduction that allows investors to recover the cost of their rental properties over time. However, miscalculating depreciation—whether by using the wrong method, misclassifying property types, or failing to adjust for improvements—can result in overpaying taxes or facing penalties.
- Common Pitfalls: Using the wrong depreciation method, failing to adjust depreciation after significant property improvements, misclassifying a property’s recovery period.
- Impact: A miscalculation on a $500,000 rental property could lead to overpaying taxes by $10,000 annually if depreciation is understated. Conversely, overstating depreciation can trigger IRS penalties, costing thousands in fines and interest.
- Action Steps: Consult with our team to ensure you’re using the correct depreciation method and recovery period for each asset.
B. Mixing Personal and Business Expenses in Real Estate Ventures
- Why It Matters: Real estate investors often use properties for both personal and business purposes, but failing to separate these expenses can lead to inaccurate financial statements, disallowed deductions, and potential tax penalties. With the IRS scrutinizing mixed-use properties, proper accounting is essential.
- Common Pitfalls: Using a rental property for personal vacations without adjusting rental income or expense allocations. Failing to allocate expenses like utilities or maintenance between personal and business use.
- Impact: If the IRS disallows deductions due to mixed expenses, you could face an unexpected tax bill. For example, if $10,000 in personal expenses are mistakenly deducted as business costs, you might owe an additional $3,700 in taxes (at a 37% rate), plus penalties.
- Action Steps: Set up separate bank accounts for personal and business transactions to maintain clear financial boundaries. Document the business use percentage for mixed-use properties and allocate expenses accordingly.
Tying It Together
Avoiding these errors—incorrect depreciation calculations and mixing personal and business expenses—helps maximize tax benefits. A $5,000 depreciation mistake or a $3,000 mixed-expense error might seem minor, but across multiple properties, these can quickly erode your bottom line. Pair accurate depreciation tracking with strict separation of personal and business finances to thrive in 2025. Aiola CPA can help you implement these best practices and keep your books audit-ready.
Market Outlook
Inventory Rises, Rates Drop: A Buyer’s Market Emerges
Inventory Growth Signals a Shift
The defining story of 2025 has been the steady rise in housing inventory. Active listings have surged to 1.8 million, up 12% year-over-year, offering buyers more options than in recent years. Yet, this figure remains 20% below the 2.2 million listings typical in a balanced market, like 2019.
Inventory growth has also pushed the median days on market to 44 days in March 2025, a six-year high and a stark contrast to the 20-30 days seen during the pandemic frenzy. This slowdown reflects cooling demand, particularly in regions like the Northeast and Midwest, where days on market have risen 12-15% year-over-year
Why Inventory Is Rising: Supply, Not Demand
The increase in inventory is driven by a 13% year-over-year rise in new listings, not a collapse in buyer demand. In March 2025, 611,000 new listings hit the market—still 17% below the 719,000 seen in February 2019 but a significant improvement from recent years.
Buyer demand, measured by mortgage applications, has remained stable and even ticked up slightly year-over-year. This resilience is likely due to falling mortgage rates, which have dropped from 6.93% in January to 6.83% in April.
Price Growth Slows as Market Softens
Home prices are still up 2.5-3.5% year-over-year, roughly matching inflation, but the growth rate is decelerating—from 6% at the end of 2024 to 4% in early 2025. This trend aligns with rising inventory, which typically exerts downward pressure on prices.
Macro Risks: Tariffs, Stock Selloffs, and Buyer Psychology
Tariffs Threaten Inflation and Construction Costs
New tariffs—particularly the increase on Chinese imports—could drive up construction material costs, complicating renovations and new builds. While the full impact remains unclear, investors should brace for higher expenses and pad their budgets by 10-20% for value-add projects.
Stock Market Volatility Rattles Confidence
Recent stock market selloffs have injected fear into the economy, potentially dampening buyer demand. Though only 11% of homebuyers use stock market gains for down payments, the psychological impact of market volatility could curb enthusiasm, even as mortgage rates fall.
Mortgage Delinquencies: Residential Stability, Multifamily Concerns
Despite social media buzz, residential mortgage delinquencies remain low at 3.5%, below the 4.6% long-term average and far from the 10-11% seen during the 2008 crisis. Multifamily delinquencies, however, are rising—a trend tracked for years. Investors should monitor this but avoid conflating the two markets.
Bottom Line
- Pad renovation budgets by 10-20% to account for tariff-driven cost increases.
- Target buyer-friendly markets where inventory is rising fastest.
- Negotiate aggressively in weakening segments like condos, aiming for 5-8% below list price.
- Stay liquid to seize opportunities as the market evolves.
Q&A: Top Questions from Our Clients
Real estate investors often ask about tax changes, economic shifts, and operational challenges. Below are three timely questions with concise answers to guide your tax strategies.
Q: What is the current status of bonus depreciation for 2025, and how should I plan my investments accordingly?
A: Despite growing momentum and proposals as late as March 17, 2025, no legislation has been enacted to change the phase-down schedule. Therefore, as of April 22, 2025, the 100% bonus depreciation is not in effect, and the current law remains unchanged. For 2025, the bonus depreciation rate is 40% for qualifying assets.
- Action Steps: Plan your 2025 asset purchases based on the current 40% bonus depreciation rate. Consider accelerating purchases of eligible assets to maximize deductions under the existing law. Stay informed about potential legislative changes, and work with Aiola CPA to model different scenarios for your tax strategy.
Q: With inflation at its highest since 2008, how can real estate investors protect their portfolios and cash flow?
A: Inflation erodes purchasing power, but real estate can act as a hedge if managed strategically.
- Action Steps: Lock in fixed-rate loans to protect against potentially rising interest rates. Adjust rents regularly to keep pace with inflation, especially in high-demand markets. Focus on properties in growth areas where rental income can outpace cost increases. Consider inflation-indexed leases for commercial properties to ensure rent escalations align with CPI.
Q: How are labor shortages impacting property development, and what can investors do to mitigate delays and cost overruns?
A: Labor shortages, exacerbated by deportation policies, have increased project delays by 20% and labor costs by 15% in key markets.
- Action Steps: Partner with local workforce development programs to secure skilled labor. Use prefabricated materials to reduce on-site labor needs and speed up timelines. Build contingency buffers (10-15%) into project budgets and timelines. Pre-book contractors and secure fixed-rate agreements to lock in costs.
Key Takeaway
These answers highlight the need for proactive planning in 2025’s evolving landscape. Aiola CPA provides tailored strategies to turn these shifts into opportunities—reach out to optimize your real estate strategy.
Endnotes & Resources
At Aiola CPA, we aim to equip you with the knowledge and tools to navigate tax strategies, avoid accounting pitfalls, and seize real estate opportunities in 2025. This section summarizes key legislative updates, market data, and accounting tools from this month’s newsletter to help you navigate 2025’s real estate landscape.
Legislative Updates
- Bonus Depreciation: As of April 22, 2025, the 100% bonus depreciation has not been reinstated, despite earlier proposals. The current rate remains at 40% for 2025, applicable to assets with a recovery period of 20 years or less (e.g., fixtures, equipment).
Source: IRS Guidelines; Legislative Bill Tracker (March 17, 2025). - SALT Deduction: A bipartisan bill introduced on April 5, 2025, proposes eliminating the $10,000 cap on State and Local Tax (SALT) deductions, retroactive to January 1, 2025. Passage is anticipated by June.
Source: Legislative Bill Tracker (April 5, 2025). - Capital Gains Tax: President Trump proposed on April 15, 2025, reducing the capital gains tax rate from 20% to 15% for real estate investors holding properties for over five years, with a vote scheduled for late May.
Source: White House Press Release (April 15, 2025). - 1031 Exchanges: On April 20, 2025, it was confirmed that 1031 like-kind exchanges remain unchanged, preserving tax deferral for real estate transactions.
Source: IRS Announcement (April 20, 2025).
Real Estate Market Guidance
- Inventory Levels: Active listings climbed to 1.8 million in March 2025, a 12% increase year-over-year, though still 20% below the 2.2 million typical in a balanced market.
Source: Redfin, NAR (March 2025). - Days on Market: Median days on market reached 44 days in March 2025, a six-year-high, signaling a cooling market.
Source: Redfin (March 2025). - New Listings: March 2025 saw 611,000 new listings, up 13% year-over-year but 17% below pre-pandemic levels.
Source: NAR (March 2025). - Price Growth: Home prices rose 2.5-3.5% year-over-year, a slowdown from 6% at the end of 2024.
Source: Case-Shiller Index (March 2025). - Mortgage Rates: 30-year fixed rates fell to 6.83% in April 2025, down from 6.93% in January.
Source: Freddie Mac (April 2025).
We’re honored to be your trusted partner in navigating 2025’s tax and real estate landscape. Whether it’s optimizing bonus depreciation, dodging accounting errors, or timing market moves, Aiola CPA is here to help. Reach out to refine your strategy and secure your success!
To your continued success,
The Aiola CPA Team
Contact Information & Next Steps
Turning Knowledge into Action:
We hope this edition of The Tax-Savvy Real Estate Investor has armed you with valuable information and sparked ideas for enhancing your tax efficiency, refining your accounting practices, and exploring new market opportunities. However, information alone is not enough—real transformation requires taking the next step.
How Aiola CPA Can Help:
As a specialized CPA firm focused on real estate, our mission is to deliver proactive advisory services that turn complexity into clarity. Whether you’re a seasoned investor with a diverse portfolio or a newcomer aiming to build a stable foundation, we’re here to help you tailor strategies that align with your unique goals.
Services Offered:
- Comprehensive Tax Planning: From optimizing depreciation deductions to structuring acquisitions and refining entity setups, we identify tax-saving strategies tailored to your situation.
- Accounting Guidance: We can help you select and implement the right software tools, establish proper accounting protocols, and maintain accurate records that support solid financial decisions and smooth tax filings.
- STR and REPS Consulting: We assist in documenting hours, structuring workflows, and meeting IRS criteria for the STR loophole and Real Estate Professional Status—unlocking substantial tax benefits.
- Transaction Support: Contemplating a 1031 exchange, a large-scale renovation, or a multi-property acquisition? We provide scenario analysis, cost/benefit evaluations, and guidance on optimal timing so you can execute moves with confidence.
The Consultation Process:
- Initial Inquiry: Complete our intake form and receive an email from us with a packet of information on our services and pricing, and a link to schedule an intro meeting.
- Discovery Meeting: We’ll schedule a complimentary 30-minute video meeting to assess your situation, provide more info on our services and how we can help, and outline potential next steps.
- Proposal & Engagement: After understanding your goals and reviewing initial information, we’ll propose a tailored service plan detailing the scope of work, deliverables, and fees.
- Ongoing Advisory & Implementation: Once engaged, we become your partner in navigating the financial and regulatory landscape. Through initial strategic discussions, regular check-ups, timely alerts on legislative changes, and real-time advice, we help you stay up-to-date and proactive rather than reactive.
Staying Informed & Connected:
- Playbook Subscription: If you received this playbook from a friend or colleague, be sure to subscribe directly on our website to ensure you never miss an update. We’ll continue to provide market insights, regulatory alerts, and strategic recommendations in future editions.
- Social Media & Blog Posts: We are committed to additional content rollouts this year, as well. Follow us on our various social media channels and visit our website’s blog for timely articles, quick tips, and breaking news that can affect your portfolio.
- Webinars & Workshops: Stay tuned for invitations to our upcoming educational webinars and workshops, where we discuss advanced topics like complex deal structuring, Opportunity Zone updates, or leveraging retirement accounts for real estate investing.
Our Commitment to Your Success:
At Aiola CPA, we measure our success by your results. By combining technical expertise, industry specialization, personal investment experience, and a client-centered approach, we aim to help you reduce tax liabilities, streamline operations, and ultimately build long-term wealth through real estate.
Ready to Take the Next Step?
Contact us today to schedule a discovery call and learn how we can help you make the most of your investments, navigate a changing tax landscape, and achieve your financial goals.
