The Tax Advantages of Passive Real Estate

One of the quiet advantages of real estate is that paper losses from depreciation can offset real income, which is why distributions are often partly or fully sheltered in the early years of a hold.

Depreciation and cost segregation

Depreciation lets you deduct a portion of a property’s value each year, even as the asset appreciates. A cost-segregation study front-loads those deductions by reclassifying components onto faster schedules, and bonus depreciation can accelerate them further.

What shows up on your K-1

Each year you receive a Schedule K-1 reflecting your share of income, deductions, and depreciation. In many deals the depreciation passed through exceeds the cash distributed in the early years, which is what shelters those distributions. We are not tax advisors; your CPA should confirm how this applies to you.