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The Tax-Savvy Real Estate Investor

Tax Tips & Wealth Building Insights

JANUARY 2025

Overview

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OBJECTIVE

Our playbook aims to distill the complexities of real estate taxation, financial planning, and market dynamics into actionable insights. We want to ensure you are not only informed of upcoming changes but also empowered to leverage strategic opportunities. Over time, this publication will serve as your go-to guide for optimizing tax outcomes, improving operational efficiencies, and making sound investment decisions.  

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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

Welcome & Firm Introduction

Welcome to the inaugural edition of Aiola CPA’s The Tax-Savvy Real Estate Investor: Tax Tips & Wealth Building Insights!

We are delighted that you’ve chosen to embark on this journey with us as we strive to demystify complex tax codes, clarify regulatory requirements, and deliver actionable strategies tailored specifically for the real estate industry.

 

Who We Are

Aiola CPA is not your traditional CPA firm. While we bring decades of combined experience in tax advisory, tax preparation, accounting, and audit support, our practice is intentionally dedicated to serving real estate investors.

Our team members come from diverse backgrounds within the industry – we have specialized real estate tax advisors, certified tax professionals, accountants with property management experience, staff with real estate investing experience, and more. This collective expertise gives us a unique vantage point: we understand the real-world pressures you face and the interplay of market forces, financing trends, and evolving legislation that shape your investment decisions. 

 

What We Do

Though we remain firmly grounded in tax compliance and accounting services, our firm’s true passion lies in proactive advisory work. We help our clients look beyond yearly filings to see the bigger picture – strategizing for portfolio growth, optimizing entity structures, timing acquisitions for maximum tax efficiency, and guiding you through complex transactions like cost segregation studies, bonus depreciation, or 1031 exchanges. Our mission is to ensure that when opportunities arise, you are well-prepared to capitalize on them. 

 

Our Commitment to You

  • Clarity: We break down complicated tax laws and regulations into clear, understandable guidance. 
  • Proactivity: Instead of reacting to change after the fact, we create a strategic tax plan to help you achieve your goals, and alert you to upcoming legislative shifts, IRS pronouncements, and market conditions, so you can plan accordingly. 
  • Customization: Every real estate investor’s situation is unique. We tailor strategies to your specific portfolio, investment horizon, risk tolerance, and goals. 
  • Integrity & Trust: In a landscape where regulations shift frequently, you need a trusted advisor who places your short- and long-term interests at the forefront. We pride ourselves on our honesty, transparency, and dedication to protecting your financial well-being. 

 

The Bigger Picture

Real estate is constantly evolving, influenced by tax reforms, interest rate movements, demographic shifts, and technological advancements. Amid this complexity, too many investors leave money on the table – either through missed deductions, poorly timed transactions, or incomplete awareness of the tools at their disposal.

At Aiola CPA, we see it as our responsibility to bridge that knowledge gap. This playbook is one of the many ways we equip you with the insights, foresight, and confidence you need to thrive. 

 

Looking Ahead

In future editions, expect deeper dives into complex topics such as tax reduction strategies, best practices in accounting for scaling investment portfolios, and Q&A sessions addressing your most pressing questions. Over time, this playbook will become a resource you can rely on to navigate uncertainty, identify opportunities, and ultimately enjoy the full financial benefits of your real estate endeavors. 

 

Welcome aboard, and thank you for joining us at the start of this new chapter. We look forward to serving as your trusted advisor in the dynamic world of taxes and real estate investing, both today and for many years to come.

↑ Back to Table of Contents

Market Outlook

Impact of the Recent Election on the Real Estate Market

The recent election of President Donald Trump and a Republican majority in both houses of Congress is expected to significantly impact the real estate market. With the potential for tax law changes, real estate investors should prepare for a dynamic year ahead. President Trump has proposed making the Tax Cuts and Jobs Act (TCJA) provisions permanent, which could stabilize certain tax benefits for real estate investors. However, the potential expiration of these provisions at the end of 2025 introduces volatility. 

 

Residential Real Estate 

Mortgage Rates: 

As of January 2025, the average mortgage rate for a 30-year fixed-rate mortgage stands at 6.5%, reflecting a slight increase from the previous quarter’s 6.3%. The 15-year fixed-rate mortgage averages 5.8%, up from 5.6% in the last quarter of 2024. These rates are influenced by the Federal Reserve’s ongoing efforts to manage inflation and stabilize the economy.

New Home Purchases: 

The number of new homes purchased in the last quarter of 2024 saw a significant uptick, with 1.2 million new homes sold, a 10% increase from the same period in 2023. This surge is attributed to a combination of factors, including a robust job market and increased consumer confidence.

Home Prices: 

Home prices continue to rise, albeit at a slower pace than in previous years. The national median home price reached $410,000 in December 2024, marking a 5% year-over-year increase. This growth is driven by high demand and limited inventory, particularly in metropolitan areas. 

Regional Variations: 

  • West Coast: The West Coast remains one of the most expensive regions, with median home prices in cities like San Francisco and Los Angeles exceeding $1.3 million. 
  • Midwest: The Midwest offers more affordable options, with median prices around $280,000, making it an attractive market for first-time buyers. 
  • Northeast: The Northeast continues to experience steady home price growth, driven by strong demand in metropolitan hubs such as Boston and New York City. The median home price in the region rose to $470,000 in December 2024, reflecting a 6% year-over-year increase. 
  • South: The Southern states, particularly Texas and Florida, continue to see strong growth in home prices, driven by population influx and economic opportunities.

Commercial Real Estate 

Office Space: 

The commercial real estate market, particularly office spaces, is experiencing a mixed recovery. The national office vacancy rate stands at 16%, a slight improvement from 17% in the previous quarter. Major cities like New York and San Francisco still face higher vacancy rates, around 20%, due to the shift towards remote and hybrid work models. 

Rental Rates: 

Office rental rates have stabilized, with the national average at $35 per square foot annually. However, prime locations in cities like New York and San Francisco command higher rates, averaging $70 per square foot. Suburban office spaces are seeing increased demand, with rental rates rising to $25 per square foot, reflecting a 3% increase from the previous quarter. 

Investment Trends 

  • Multifamily Properties: Investment in multifamily properties remains strong, driven by high demand for rental properties. The average cap rate for multifamily investments is 5.2%, slightly down from 5.4% in the previous year, indicating strong investor confidence. 
  • Industrial Properties: The industrial sector continues to thrive, with vacancy rates at a historic low of 4%. Rental rates for industrial spaces have increased to $8 per square foot annually, up from $7.5 in the last quarter. This growth is fueled by the ongoing expansion of e-commerce and the need for logistics and distribution centers. 

Retail Sector: 

The retail sector shows signs of stabilization, with vacancy rates holding steady at 10%. High-street retail locations in major cities are recovering, with rental rates averaging $50 per square foot annually. Suburban retail spaces are also seeing renewed interest, particularly in mixed-use developments that combine residential, retail, and office spaces. 

Future Outlook: 

Looking ahead, the real estate market is expected to remain dynamic, with continued growth in residential prices and a gradual recovery in the commercial sector. Key factors to watch include interest rate movements, economic policies, and shifts in consumer behavior. Investors are advised to stay informed and agile, capitalizing on emerging opportunities in both retail and commercial markets.

CPA Insights

The tax landscape for real estate owners and investors continues to evolve, influenced by legislative reforms, administrative guidance, and shifting political priorities. Keeping abreast of these developments is essential for optimizing your investment strategies, timing significant acquisitions or improvements, and ensuring compliance.

A. Bonus Depreciation Phase-Down & Timing Considerations

 

Current Status

The Tax Cuts and Jobs Act (TCJA) introduced 100% bonus depreciation for qualified property placed in service after September 27, 2017, but this benefit has begun to phase down. In 2024, the bonus depreciation percentage dropped to 60%. In 2025, it is set to decline again to 40%. It is scheduled to decrease further to 20% in 2026 and 0% in 2027 and onward unless Congress intervenes.

 

What Qualifies?

Bonus depreciation generally applies to property with a recovery period of 20 years or less, such as certain improvements, appliances, and equipment. It has been particularly beneficial for short-term rental operators, real estate professionals, and commercial landlords making significant property upgrades.

 

Practical Considerations & Action Steps:

  • Cost Segregation Studies: While bonus depreciation is phasing down, pairing cost segregation with bonus depreciation can still yield substantial initial-year deductions. Identifying short-life assets within your property can maximize the benefit before it diminishes further.
  • Accelerate Purchases: If you’re planning to invest in improvements—like new flooring, HVAC units, or appliances—aim to place these assets in service before the bonus depreciation percentage declines next year. This approach ensures a higher first-year write-off.
  • Scenario Planning: Work with your CPA to run models comparing the benefits of placing assets in service in 2025 (with 40% bonus depreciation) versus waiting until 2026 or beyond. Time-sensitive decision-making can materially affect your bottom line.

B. Opportunity Zone Developments & Potential Renewals

Background:

The Opportunity Zone (OZ) program introduced by the TCJA provided capital gains tax deferral and, in some cases, partial forgiveness for investments in designated low-income communities. While certain key deadlines for maximum benefits have passed, discussions in Congress have centered on extending or revamping OZ incentives to promote ongoing economic development.

Why Pay Attention Now?

  • Pending Legislation: If Congress renews or extends OZ benefits, investors may have new windows to defer or reduce capital gains by investing in Qualified Opportunity Funds (QOFs).
  • Market Dynamics: Communities designated as OZs have seen increased capital inflow. Monitoring these areas for legislative updates can position you to quickly deploy capital should new incentives emerge.
  • Strategic Hold Periods: If you currently hold OZ investments, stay informed about regulatory updates that might affect your required holding period or qualification for capital gains forgiveness.

C. Future Outlook: Capital Gains & Estate Tax Discussions

Capital Gains Rate Changes:

As of late 2024, there are ongoing discussions in policy circles about adjusting capital gains tax rates, particularly for high-income earners. If passed, these changes might increase the long-term capital gains rate, making it more expensive to sell appreciated property. While no immediate changes are legislated, staying informed and flexible is essential.

Estate & Gift Tax Reversion Post-2025:

Current high estate and gift tax exemptions—set to sunset after 2025—may revert to lower thresholds. This reversion could bring significantly more real estate wealth under the estate tax umbrella.

Planning Strategies:

  • Capital Gains Timing: If you anticipate selling appreciated property in the next few years, consulting with your CPA to potentially lock in current, more favorable rates may prove beneficial.
  • Wealth Transfer & Gifting: For high-net-worth investors, consider gifting fractional interests in real estate or establishing trusts before exemptions shrink. Such proactive estate planning can preserve more wealth for future generations and avoid hefty tax bills.

Tip:

Proactive discussions with your CPA and estate attorney in 2025 can help you structure transactions, trusts, or family limited partnerships to minimize exposure if the tax environment becomes less favorable.

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 a tax environment where regulations shift and incentives evolve, certain strategies remain consistently powerful for real estate investors. These “evergreen” techniques help you reduce taxable income, defer gains, and enhance long-term wealth building. Leveraging them wisely, often in combination, can lead to significant and sustained tax savings.

A. Cost Segregation

 

What It Is

Cost segregation is a tax-deferral strategy that involves breaking down a real property asset into its various depreciable components. Instead of treating the entire property as having a 27.5-year (residential) or 39-year (commercial) life, you identify components—such as fixtures, flooring, cabinetry, and specialty wiring—that qualify for shorter depreciation periods (5, 7, or 15 years).

 

Why It Matters

Accelerated depreciation front-loads your depreciation deduction, reducing taxable income and freeing up capital early in the ownership cycle. This can fund property upgrades, pay down debt, or fuel additional investments.

 

Example

Consider a newly acquired short-term rental property. A cost segregation study might find that $300,000 of the property’s purchase price can be depreciated over 5 or 15 years rather than 39 years. The resulting increased first-year depreciation expense could save tens of thousands in taxes, significantly improving initial ROI.

 

Action Steps

  • Consult a real estate specialized CPA to analyze the impact of this tax strategy for you.
  • Engage a reputable cost segregation firm with engineering expertise.
  • Combine cost segregation with bonus depreciation when possible to maximize upfront deductions.
  • Revisit older properties after major renovations to capture additional accelerated depreciation if improvements were previously lumped into a single long-life asset.

B. Passive Activity Loss Planning & Real Estate Professional Status

 

What It Is

Rental real estate often generates “passive” losses due to depreciation and other deductions. Generally, these passive losses can only offset passive income, not nonpassive income, like wages or business profits. However, investors who materially participate in short-term rental (STR) activities or qualify for Real Estate Professional Status (REPS) can treat rental activities as nonpassive, enabling them to offset unlimited rental losses against other income sources.

 

Why It Matters

For high-income earners, achieving REPS can turn otherwise “trapped” passive losses into valuable tax shields, significantly lowering overall tax liability. This can be transformative, often turning a real estate portfolio into a powerful tax-minimization engine.

 

Example

A married couple, one of whom is a physician with a high W-2 salary, acquires several rental properties. By having the other spouse materially participate in a short-term rental or qualify as a real estate professional, they can use rental losses to offset the physician’s income, potentially saving tens of thousands (or more) annually.

Action Steps

  • Consult a real estate specialized CPA to advise you on the specific and rigid requirements to successfully implement this tax strategy.
  • Rigorously track hours spent in real estate tasks. Maintain detailed logs and receipts.
  • Combine REP status with cost segregation for an even greater tax impact.

C. 1031 Exchanges

What It Is

A like-kind exchange (also called a 1031 exchange, after Section 1031 of the Internal Revenue Code) allows you to defer capital gains taxes when you sell an investment property and reinvest the proceeds into another “like-kind” property within established timelines.

Why It Matters

Deferring capital gains tax enables you to reinvest 100% of your equity—rather than paying a portion to the IRS—thus compounding returns and accelerating portfolio growth. Over time, a series of 1031 exchanges can convert a modest initial investment into a substantial real estate empire, all while deferring significant tax liabilities.

Example

An investor sells a rental property with $500,000 in accrued gains. By executing a proper 1031 exchange, they roll that entire gain into a larger multifamily complex. Without the exchange, the investor might have owed six figures in immediate capital gains tax, reducing their reinvestment capital.

Action Steps

  • Consult a real estate specialized CPA to run a cost/benefit analysis to determine the viability of this tax strategy for you.
  • Engage a qualified intermediary to hold the proceeds from the sale to maintain compliance.
  • Strictly adhere to the identification (45 days) and closing (180 days) deadlines.
  • Stay informed about the potential legislative changes to 1031 rules, ensuring you act while deferral opportunities remain favorable.

Putting It All Together

While each of these strategies stands on its own, combining them is often the most effective approach. For instance, an investor might use cost segregation to enhance deductions, qualify as a Real Estate Professional to unlock those deductions against high W-2 income, then deploy saved capital into a 1031 exchange property—ultimately placing the replacement property into a self-directed retirement account over time. Strategic layering of these evergreen tools, with the guidance of Aiola CPA, can transform your tax profile and fuel sustainable, tax-efficient portfolio growth year after year.

Case Study: Multifamily Portfolio Expansion Through Tax Strategy

Note: For client confidentiality, the names and certain details in this case study have been altered.

 

Client Background

The “Davis Group” is a family-owned real estate investment operation that began modestly in the early 2010s by acquiring small rental properties. Over the years, they expanded their holdings to include several multifamily properties in the Southeast, with a focus on high-growth markets like Charlotte, NC, and Atlanta, GA. While their portfolio appreciated steadily, they recognized untapped opportunities to optimize tax efficiency and accelerate their growth.

Initial Situation (Late 2023)

The Davis Group had recently purchased a 50-unit Class B apartment complex in a rapidly developing suburb of Charlotte for $7 million. The property had significant value-add potential through light renovations, modernized amenities, and green energy upgrades. However, the family faced challenges in minimizing near-term tax liabilities to free up cash flow for another planned acquisition in early 2025.

Challenges Identified

  1. Underutilized Depreciation:
    The Davis Group’s previous approach relied on standard straight-line depreciation, leaving substantial first-year deductions untapped without a cost segregation study.
  2. Passive Loss Limitations:
    Mr. and Mrs. Davis had significant W-2 income from another business, creating a high tax burden. Their rental losses were classified as passive, limiting their ability to offset these profits.
  3. Bonus Depreciation Phase-Down:
    With bonus depreciation set to drop to 60% in 2024 and phase out entirely by 2027, time was critical to maximize deductions.

Strategic Actions Taken

A. Conducting a Cost Segregation Study

Process: The Davis Group engaged a cost segregation specialist to analyze architectural plans, contractor invoices, and engineering reports for their 50-unit property.
Findings: Approximately $1.2 million of the $7 million purchase price was reclassified into shorter-life assets (5-, 7-, and 15-year property), enabling significantly accelerated depreciation.
Result: In 2024, the Davis Group claimed over $200,000 in additional first-year depreciation, reducing their taxable income substantially.

 

B. Real Estate Professional Status (REPS) Planning

Qualification Steps: Mr. Davis reorganized his schedule to spend over 750 hours annually on real estate activities, including overseeing property improvements, managing operations, and evaluating new acquisitions. Detailed time logs and task descriptions supported his claim.
Outcome: By qualifying as a Real Estate Professional, the Davis Group treated rental losses as non-passive, offsetting significant W-2 income and reducing their overall tax liability.

 

C. Timing Renovations & Acquisitions

Renovation Timing: Capital expenditures for HVAC upgrades and fixtures were accelerated to maximize deductions under the 60% bonus depreciation regime in 2024.
Acquisition Strategy: Tax savings and improved cash flow provided additional liquidity, enabling the family to bid competitively on a 40-unit multifamily property in Atlanta, closing in early 2025.

 

D. Energy-Efficient Improvements

Energy Upgrades: The Davis Group installed high-efficiency lighting and improved insulation, qualifying for Section 179D deductions and reducing operating costs.
Long-Term Benefits: These improvements enhanced tenant satisfaction, increased occupancy rates, and justified modest rent increases.

Quantifying the Impact

  1. Immediate Tax Savings:
    The Davis Group saved over $200,000 in federal and state taxes in 2024 through cost segregation and REPS qualification.
  2. Enhanced Cash Flow:
    The tax savings and reduced operating expenses funded part of the down payment for the Atlanta property.
  3. Accelerated Portfolio Growth:
    Strategic tax planning and liquidity improvements allowed the Davis Group to expand their portfolio faster than traditional methods would have permitted.

Conclusion & Lessons Learned

The Davis Group’s success highlights how proactive tax planning, cost segregation, and timing investments strategically can transform a portfolio. By reducing tax burdens, improving cash flow, and leveraging bonus depreciation windows, they achieved significant growth while maintaining financial flexibility.

This case demonstrates that with a thoughtful, forward-looking approach, real estate investors can unlock substantial value and position themselves for sustained success in competitive markets.

Best Accounting Practices 

Robust financial management is a cornerstone of a successful real estate enterprise. Accurate and timely bookkeeping not only streamlines tax preparation but also informs better investment decisions, reveals inefficiencies, and highlights cash flow optimization opportunities. By employing the right tools, structures, and advisory relationships, you create a financial framework that supports sustainable growth.

 

A. Embrace Integrated, Cloud-Based Systems

Why It Matters

Modern property management and accounting software solutions provide seamless integration, allowing you to track income, expenses, and tenant information in real time. This integration reduces manual data entry errors, ensures timely rent collection, and simplifies monthly and annual financial reviews.

 

Practical Tools

  • Property Management Software: Platforms like AppFolio, Buildium, or Yardi streamline rent collection, maintenance requests, and tenant screening.
  • Cloud Accounting Software: Solutions like QuickBooks Online sync with your property management platform, automatically categorizing transactions and producing real-time financial reports.

 

Outcome

When these systems communicate seamlessly, you not only improve efficiency but also enhance the quality of financial data. Over time, better data leads to more informed strategic decisions, smoother tax filings, and fewer surprises.

 

B. Maintain Separate Accounting for Each Property or Entity

Why It Matters

Real estate investors often hold multiple properties, each with distinct financing terms, expense structures, and operating characteristics. Failing to isolate financials for each property or LLC can obscure performance metrics, complicate tax reporting, and risk legal entanglements if you unintentionally commingle funds.

 

Action Steps

  • Dedicated Accounts: Open separate bank and credit card accounts for each property or legal entity.
  • Entity Structures: Consider LLCs and revocable trusts for your real estate portfolio to shield liability and streamline tax treatment. Ensure each entity’s books and records remain self-contained.

 

Outcome

Clear, separate accounting records for each property or entity make it easier to evaluate individual asset performance, identify underperforming units, and present well-organized financials for lenders, investors, and prospective buyers.

 

C. Categorize Expenses Correctly

Why It Matters

Proper expense categorization ensures you claim the maximum allowable deductions and maintain IRS-compliant records. For example, the distinction between deductible repairs and capitalized improvements can significantly affect your tax bill. Repairs are immediately deductible, reducing taxable income in the year incurred, while improvements must be depreciated over multiple years.

 

Examples

  • Repairs (Deductible): Replacing a broken windowpane, fixing a leaky faucet, patching a small roof leak.
  • Capital Improvements (Depreciable): Installing a new roof, upgrading HVAC systems, completing major remodels that increase the property’s value or extend its useful life.

 

Outcome

Accurate expense classification avoids missed deductions, reduces the likelihood of IRS adjustments, and ensures you capture all legitimate tax benefits. With detailed records, you can substantiate your positions if audited.

 

D. Conduct Periodic Financial Reviews

Why It Matters

Monthly, quarterly, or semi-annual financial reviews help you detect trends, identify cost overruns, monitor rental income consistency, and anticipate tax liabilities. This proactive approach enables timely corrective actions—whether that means adjusting rents, cutting expenses, or planning capital investments to align with bonus depreciation schedules.

 

What to Review

  • Income Statements & Balance Sheets: Evaluate NOI (Net Operating Income), cash flow, and equity positions.
  • Budget vs. Actual Performance: Compare planned expenses and revenue projections to actual results to spot variances and address inefficiencies promptly.
  • Debt Service Coverage Ratios (DSCRs): Monitor DSCRs to ensure that properties generate sufficient income to cover debt payments, which helps maintain lender confidence and favorable financing terms.

 

Outcome

Regular financial health checks support steady growth, prevents small issues from becoming major problems, and allow for strategic decision-making rather than crisis management.

 

E. Work Closely with Aiola CPA for Strategic Guidance

Why It Matters

While robust internal bookkeeping processes form the foundation of sound financial management, partnering with a specialized accounting firm like Aiola CPA ensures you fully leverage available tax benefits, comply with changing regulations, and capitalize on strategic planning opportunities.

 

What Aiola CPA Provides

  • Tax-Efficient Entity Structuring Advice: We help you choose and maintain entity structures that minimize tax burdens and mitigate liability risks.
  • Real-Time Tax Advisory: Rather than waiting until year-end, we encourage ongoing dialogues to adjust strategies and timing. For example, if bonus depreciation percentages are changing, we’ll guide you in deciding when to make improvements or new asset acquisitions.
  • Compliance & Audit Support: Should an IRS audit occur, having well-organized books and the backing of experienced professionals is invaluable. Aiola CPA can represent your interests, ensure proper documentation, and defend your position.
  • Advanced Planning Tools: Our firm employs scenario analysis and multi-year forecasting to advise on tax planning, cash flow management, and investment forecasting.

 

Outcome

With Aiola CPA as your strategic partner, your bookkeeping evolves from a reactive record-keeping exercise into a proactive component of long-term strategy. You gain insights that help you reduce taxes, streamline operations, and continuously reposition your portfolio for greater resilience and profitability.

In essence, best-in-class bookkeeping and accounting practices do more than simplify tax filings. They lay a foundation of clarity, control, and strategic foresight. By integrating technology, maintaining clean records, scheduling regular financial reviews, and collaborating closely with Aiola CPA, you transform routine accounting chores into a competitive advantage that fuels sustainable growth and strengthens your bottom line.

Q&A: Top Questions from Our Clients

Over the years, we’ve fielded countless inquiries from real estate investors looking to optimize their tax strategies, clarify regulatory requirements, or improve their operational efficiency. Below are some of the most frequently asked questions, along with our detailed insights and recommendations. These responses are designed to be informative starting points—individual circumstances vary, and personalized advice from Aiola CPA can ensure optimal outcomes.

Q: What is Real Estate Professional Status (REPS), and how can it benefit me?

A: Real Estate Professional Status (REPS) is a tax designation that allows real estate professionals to offset their nonpassive income with losses from real estate activities. To qualify, you must:

  1. Spend more than 750 hours annually on real estate activities in which you materially participate.
  2. Dedicate more than 50% of your total working hours to real estate activities in which you materially participate.

 

If you meet these criteria, you can use depreciation and other deductions from rental properties to reduce your taxable income, potentially saving tens of thousands in taxes.

Q: What is the short-term rental (STR) loophole, and how does it work?

A: The STR loophole allows short-term rental income to be classified as nonpassive, even if you don’t qualify for REPS. This means you can offset W-2 wages or business income with STR losses. To qualify:

  1. The average rental period for the year must be seven days or less.
  2. You must materially participate in the STR activity.
  3. You cannot use the STR personally for more than the greater of 14 days or 10% of the days rented during the year.

 

If you actively manage a STR and meet the material participation requirements, you may offset your earned income with tax losses generated from that property, providing significant tax savings.

Q: How should I log my time to qualify for REPS or the STR loophole?

A: Proper time logging is critical to substantiate your real estate activities. Follow these best practices:

  1. Use a time-tracking app or a dedicated spreadsheet.
  2. Record the date, hours worked, and description of the activity (e.g., property management, tenant communication, repairs, etc.).
  3. Collect substantiation for each time log entry as proof (receipts, photos, mileage log, call/text/email records, calendar events, etc.)
  4. Be consistent and detailed; avoid rounding off hours excessively.

 

Example: Instead of logging “3 hours – property work,” specify “90 minutes – landscaping, 20 minutes – guest communication, 1 hour – reviewing rental agreements.”

Q: Should I consider a 1031 exchange now, or is it better to pay the capital gains tax on a property sale?

A: A 1031 exchange allows you to defer capital gains taxes and reinvest the full proceeds into another income-producing property. This deferral can fuel portfolio expansion and enhance compounding returns. However, a 1031 exchange comes with strict identification and closing deadlines, and you must find a suitable replacement property that aligns with your investment strategy.

 

If you anticipate higher capital gains rates in the future, or if you prefer to simplify your portfolio rather than grow it, paying taxes now might be strategic. Aiola CPA can model various scenarios, forecasting potential tax outcomes, and advise you on whether a 1031 exchange or a taxable sale best suits your personal and financial objectives.

Key Takeaway

These common questions highlight the complexity of real estate tax and investment decisions. By working closely with Aiola CPA, you gain tailored advice that transforms confusion into clarity and uncertainty into strategic advantage. Whether optimizing tax treatments, timing acquisitions, or refining operational efficiencies, we help you move forward confidently in a continually evolving real estate landscape.

Endnotes & Resources

At Aiola CPA, we’re committed to providing not only reliable insights but also the tools and connections to help you take actionable steps toward your real estate goals. Below, you’ll find legislative references to support the strategies shared in this issue, as well as market data to keep you informed and assist you in every aspect of your investment journey.

Legislative Guidance

Stay informed with these key legislative references and tax code sections to support this month’s topics:

 

  1. Real Estate Professional Status (REPS):
    • IRS Code Section: 26 U.S. Code § 469 – Passive Activity Loss Rules
    • Key Rule: REPS allows taxpayers to offset active income with rental losses if they meet the 750-hour requirement and more than 50% of their work hours are in real estate activities.
  2. Cost Segregation Studies:
    • IRS Code Section: 26 U.S. Code § 168 – Accelerated Cost Recovery System
    • Key Rule: Allows property owners to depreciate specific components over shorter lives (5, 7, or 15 years) instead of the standard 27.5 or 39 years.
  3. 1031 Exchanges:
    • IRS Code Section: 26 U.S. Code § 1031 – Exchange of Real Property Held for Productive Use or Investment
    • Key Rule: Taxpayers can defer recognition of capital gains when reinvesting proceeds into like-kind properties within 45 days for identification and 180 days for closing.
  4. Bonus Depreciation:
    • IRS Code Section: 26 U.S. Code § 168(k) – Special Allowance for Certain Property
    • Current Status: Bonus depreciation is 40% in 2025 and will phase out entirely by 2027, unless extended by Congress.
  5. Opportunity Zones (OZ):
    • IRS Code Section: 26 U.S. Code § 1400Z-1 & 1400Z-2 – Opportunity Zones and Qualified Opportunity Funds
    • Key Rule: Provides tax deferral and reduction benefits for capital gains invested in designated Opportunity Zones.

Real Estate Market Guidance

The following market data and trends provide context for our strategic insights this month:

  1. Mortgage Rates:
    • Source: Freddie Mac Primary Mortgage Market Survey (PMMS)
    • As of January 2025, the 30-year fixed-rate mortgage averages 6.5%, and the 15-year fixed-rate mortgage averages 5.8%.
  2. Home Price Trends:
    • Source: National Association of Realtors (NAR)
    • The national median home price reached $410,000 in December 2024, a 5% year-over-year increase.
  3. Commercial Real Estate Recovery:
    • Office Space Vacancies: National office vacancy rate is 16%, with major cities like New York and San Francisco still experiencing higher rates (~20%).
    • Source: CBRE Market Insights, Q4 2024
  4. Multifamily Investment Trends:
    • Source: CoStar Multifamily Market Report
    • Cap rates for multifamily investments average 5.2%, reflecting strong investor confidence in rental markets.
  5. Industrial Real Estate Growth:
    • Source: JLL Industrial Market Trends
    • Industrial property vacancy rates are at a historic low of 4%, driven by e-commerce demand.
  6. Opportunity Zone Developments:
    • Source: Economic Innovation Group
    • Pending legislation could extend or expand the Opportunity Zone program to encourage further investment in underserved areas.

Thank you for trusting Aiola CPA as your tax partner in real estate success. If there’s anything we can do to support your financial or investment journey, please don’t hesitate to reach out!

 

To your continued success,
The Aiola CPA Team

Contact Information & Next Steps

Turning Knowledge into Action:

We hope this inaugural 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.