Tax Tips & Wealth Building Insights
JANUARY 2025
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
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.
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
Note: For client confidentiality, the names and certain details in this case study have been altered.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Regular financial health checks support steady growth, prevents small issues from becoming major problems, and allow for strategic decision-making rather than crisis management.
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.
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.
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:
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:
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:
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.
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.
Stay informed with these key legislative references and tax code sections to support this month’s topics:
The following market data and trends provide context for our strategic insights this month:
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
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.
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.
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.
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.
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