In real estate, your returns aren’t just built on smart investments—they’re protected through smart tax strategies. For experienced investors, tax planning isn’t a once-a-year task. It’s an ongoing part of your investment process.
With 2025 underway, there’s still plenty of opportunity to make strategicdecisions that will reduce your tax liability and increase your cash flow when it’s time to file next year. From tracking deductions to leveraging IRS rules,here’s how to take control of your finances now—and come out ahead.
Track and Categorize Repairs vs. Improvements
One of the most common pitfalls in real estate accounting is failing to properly distinguish between repairs and capital improvements. The IRS treats these two types of expenses very differently:
- Repairs are immediate, deductible expenses that maintain the condition of the property (like fixing a leaking faucet or repainting walls).
- Improvements increase the property's value or extend its useful life (like replacing the roof or installing energy-efficient windows), and must be capitalized and depreciated over time.
Failing to categorize these accurately can result in missed tax savings—or worse, a flag on your return.
Action Step:
Set up a property-by-property expense tracking system now. Use accounting software or a spreadsheet to tag each cost as a repair or improvement, and retain supporting documents like receipts, invoices, and even before/after photos. This documentation is your first defense in an audit.
Here’s a helpful IRS guide to capital vs. repair expenses to further clarify the distinction.
Accelerate Depreciation Through Cost Segregation
Real estate depreciation is a cornerstone of tax planning—but many investors overlook the potential of cost segregation. Instead ofdepreciating an entire building over 27.5 or 39 years, cost segregation allowsyou to identify specific components (like appliances, carpet, and lighting) that can be depreciated over 5, 7, or 15 years.
This strategy can dramatically increase your upfront tax deductions,improving your cash flow early in a project’s lifecycle.
When it’s worth it:
- You’ve acquired or built a property worth $500,000 or more
- You’re planning to hold the property long enough to benefit from the accelerated depreciation
- You want to offset income from flips or high-cash-flow rentals
Action Step:
Ask your CPA or a tax engineer whether a cost segregation study is right for your properties. The cost of the study is often more than offset by theresulting deductions.
Deduct Construction and Loan Interest Properly
Interest from real estate loans is often one of the largest deductible expenses investors can take. This includes:
- Interest on construction loans
- Interest on bridge financing
- Origination points and loan fees (usually amortized over the life of the loan)
But there’s a catch—only interest tied directly to income-producing properties is deductible. Personal loans or interest accrued duringnon-investment activities aren’t eligible.
Action Step:
Keep detailed records of all interest paid. Label each loan clearly accordingto the property or project it supports, and save lender-provided year-endinterest summaries when available.
Learn more about Anchor’s ground-up construction loans and how they can align with smart tax strategies forlong-term investors.
Qualify for the QBI Deduction
The Qualified Business Income (QBI) deduction allows certain real estate investors to deduct up to 20% of their net rental income under IRS Section 199A. But it’s not automatic.
To qualify:
- Your real estate activity must constitute a “trade or business” under IRS standards.
- You may need to maintain time logs proving 250+ hours of property management annually (or have a system in place for handling rentals).
- You should keep financials completely separate from personal income and expenses
Action Step:
If you're unsure whether your rental income qualifies, consult your CPA. They can help you structure your real estate holdings as a formal business and maintain compliance.
Use a 1031 Exchange to Defer CapitalGains
A 1031 exchange allows real estate investors to defer paying capital gains taxes when they sell one investment property and reinvest the proceeds into another “like-kind” property.
Used correctly, this strategy helps investors grow wealth faster by keeping their capital working in the market, rather than paying a large taxbill up front.
Key rules:
- You must identify a replacement property within 45 days
- You must close on the new property within 180 days
- Both properties must be held for investment or business purposes
Action Step:
Start the process early. Engage with a qualified intermediary andfinancing partner the moment you consider selling a property. Delays indocumentation or closing can invalidate the exchange.
Don’t Miss Deductible “Extras”
Many real estate investors focus on the big-ticket deductions and forget about the everyday expenses that add up. These include:
- Travel and mileage to and from your investment properties
- A home office deduction if you manage your business from home
- Educational expenses for workshops or courses related to real estate investing
- Legal, accounting, and consulting fees tied to your investment activities
Action Step:
Use cloud accounting tools like QuickBooks, Stessa, or Expensify to logexpenses in real time. Attach receipts, categorize by property, and review monthly.
Plan Your Year-End Moves Early
The final quarter of the year is your last window to execute key tax-saving strategies. Waiting until December is often too late to make animpact.
Key moves to consider in Q4:
- Complete planned improvements by December 31 to begin depreciation
- Prepay mortgage interest or property taxes for immediate deductions
- Make retirement contributions to a SEP IRA or Solo 401(k)
Action Step:
Schedule a year-end review with your tax professional by early Q4. A 30-minute call could save you thousands come tax season.
Ready to Make Your Investments Work Harder?
If you’re serious about real estate investing, your tax strategy should work just as hard as your capital. A few smart decisions now can unlock major savings—and help fund your next deal.
At Anchor Loans, we partner with experienced investors nationwide, offering financing solutions that support both short-term goals and long-term growth. Whether you’re flipping, building, or expanding a rental portfolio,we’re here to help you succeed—with financing that’s designed for scale, speed,and smart tax alignment.
Let’s build something profitable together. Explore our real estate investment financing options today.
