When it comes to building wealth through real estate, tax efficiency is often just as important as strong investment selection. When a taxpayer sells an investment property, they are typically required to pay taxes on the gain at the time of the sale. However, under Section 1031 of the Internal Revenue Code, real estate investors can defer paying these taxes if they reinvest the sale proceeds in similar—or “like-kind”—property. This is known as a “like-kind exchange.” There are several rules governing like-kind exchanges, including criteria dictating who and what kinds of properties qualify for Section 1031 treatment.

While many investors are familiar with the basic concept, few fully appreciate how 1031 exchanges can be used as a strategic long-term planning mechanism—not just a tax deferral tactic. Below are some key points regarding 1031 like-kind exchanges.

Section 1031 Highlights

• Tax Deferral: A like-kind exchange allows a real estate investor to defer capital gains taxes that would typically be due upon the sale of a property. Note that a 1031 exchange does not eliminate taxes on gains, but delays them. This deferral preserves capital that would otherwise be lost to taxes, enabling investors to leverage more equity into new properties, enhancing cash flow, appreciation potential, and portfolio diversification.
• Qualified taxpayers: Owners of investment and business property—including individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts, and other taxpaying entities—may qualify for a Section 1031 deferral.
• Qualifying properties: Both properties in the exchange (the relinquished property and the replacement property) must be held for use in a trade or business or for investment. Properties used primarily for personal use do not qualify. In addition, both properties must be similar enough to be considered “like-kind”—meaning they are of the same nature, character, or class. Most real estate is considered like-kind to other real estate. However, property within the United States is not considered like-kind to property outside of the U.S. Furthermore, real property (land and anything attached to it, such as buildings and natural resources) can never be like-kind to personal property (movable non-fixed possessions, such as vehicles, furniture, and jewelry). Certain types of property are completely excluded from treatment under Section 1031, including:

• • Inventory or stock in trade
  • Stocks, bonds, or notes
  • Other securities or debt
  • Partnership interests
  • Certificates of trust

• Use of an Exchange Facilitator: To maintain eligibility, sale proceeds must be held by a qualified intermediary (QI) or other exchange facilitator until the exchange is complete. The seller may not receive the proceeds directly. The QI manages the exchange process, prepares required documentation, and ensures compliance with IRS regulations. In certain situations, the QI may hold temporary title of a property until the exchange is completed.
• Strict Timelines: The seller has 45 calendar days from the sale of the original property to identify a replacement property or properties (up to three), and must complete the purchase of the replacement property within 180 days. These timelines are firm and may not be extended.
• Equal or Greater Value: For full tax deferral, the replacement property must be of equal or greater value, and the taxpayer must reinvest all net proceeds and replace or exceed the amount of debt on the relinquished property. Any “boot” (remaining cash or debt reduction) will trigger capital gains taxation.
• Reporting Requirements: Like-kind exchanges must be reported on IRS Form 8824 with the seller’s tax return for the year in which the exchange occurred.

Other Considerations

• Construction or Improvement Exchange: A taxpayer intending to purchase replacement property requiring improvements or new construction to be part of the 1031 exchange will need to plan in advance to structure accordingly as a Construction or Improvement Exchange. In this scenario, a QI who acts as an Exchange Accommodation Titleholder (EAT) is immediately assigned temporary title to the replacement property while the improvements are made. This structuring allows the proceeds from the replacement property to be included in the value of the replacement property.
• Reverse Exchange: This process is when the replacement property is purchased before the relinquished property is sold. This requires extra careful planning and the title to the replacement property must be immediately assigned to the QI in order for the exchange to qualify.

Strategic Uses of 1031 Exchanges

While the immediate tax deferral benefit is well-known, sophisticated investors and advisors use 1031 exchanges to pursue a variety of broader financial and operational objectives:

• Portfolio Optimization: Shift from management-intensive assets (like multi-family buildings) to passive investments (such as triple-net lease properties).
• Geographic Diversification: Reallocate capital from one market to another to balance exposure and risk.
• Wealth Transfer Planning: Utilize exchanges in conjunction with estate planning strategies. Heirs who inherit 1031-held property receive a step-up in basis, effectively eliminating deferred gains.
• Depreciation Reset: Investors can exchange into properties with new depreciation schedules, maximizing current deductions.
• Consolidation or Fractionalization: Move from multiple small assets into one larger property—or vice versa—to better align with cash flow or liquidity goals.

These strategic applications require thoughtful coordination between tax professionals, legal advisors, and financial planners to optimize both short- and long-term benefits.

Meet with Our Experts

Due to the complex nature of 1031 exchanges, it is highly recommended that you work with a team of trusted advisors, including a CPA, when taking advantage of this tax deferral strategy. Our real estate accounting team at RBT CPAs is here to answer your questions regarding like-kind exchanges and to guide you through the exchange process. Give us a call today and find out how we can be Remarkably Better Together.

The Qualified Opportunity Zone (QOZ) program, established in 2017 as part of the Tax Cuts and Jobs Act (TCJA), is a federal tax incentive designed to encourage investment in distressed areas of the United States. The designation of “Opportunity Zone” is given to low-income communities nominated by state governors and certified by the Treasury Department. The QOZ program was initially set to expire at the end of 2026. However, the One Big Beautiful Bill Act (OBBBA), passed on July 4, has permanently extended and modified the program.

How it works: taxpayers can choose to reinvest eligible capital gains into a Qualified Opportunity Fund (QOF), which then invests in Opportunity Zone properties. Eligible capital gains include those from the sale of stock and bonds, cryptocurrency, real estate, and private business interests, to name a few. These taxpayers can then claim a deferral for those capital gains on their federal income tax return. Further, a taxpayer could reduce those capital gains with a basis step-up if the qualifying investment is held for a certain duration of time. The signature benefit of the program, however, is the exclusion of tax on any new capital gains in the QOF, as long as the investment is held for at least 10 years. 

Let’s take a look at the key changes made to the Opportunity Zone program by the One Big Beautiful Bill Act.

1. New QOZs designated every 10 years.

Under the OBBBA, new Qualified Opportunity Zones will be proposed by state governors every 10 years, beginning on July 1, 2026. These designations must be approved by the Treasury secretary. Current QOZ designations are set to sunset at the end of 2026.

2. Updated eligibility criteria.

The OBBBA has created a new, narrower definition of a “low-income community.” Now, to qualify as a QOZ, census tracts must meet one of the following criteria for a low-income community: (1) the median family income does not exceed 70% of the state or metropolitan median family income (reduced from 80% under the TCJA) or (2) the poverty rate is at least 20% and median family income does not exceed 125% of the applicable median. The OBBBA also eliminates the ability of governors to designate contiguous tracts (that would otherwise be ineligible) as Opportunity Zones.

3. New Deferral Timeline – 5 Years

Under the OBBBA, gains invested into a QOF after December 31, 2026 are deferred until 5 years after the initial investment, or earlier if the investment is sold before 5 years. The pre-OBBBA rules had established a set deferral date of December 31, 2026.

4. Simplified basis step-up.

The OBBBA creates a single 10% basis step-up for investments made in Qualified Opportunity Funds after December 31, 2026, and held for at least five years (30% for rural QOZs). The law removes the previous 5% and 10% incremental step-ups at five and seven years. This basis step-up reduces the deferred capital gain recognized after year 5.

5. New incentives for rural QOZs.

The OBBBA establishes a new fund for rural areas, known as the Qualified Rural Opportunity Fund (QROF), which provides a 30% basis step-up (compared to the standard 10%) for investments held for at least five years. The new law also reduces the substantial improvement requirement for rural Opportunity Zones from 100% to 50%, making it easier for investors to finance redevelopment projects in rural areas.

6. New reporting requirements.

The OBBBA establishes new information reporting requirements for QOFs and QROFs, as well as updated penalties for failure to comply with these requirements.

7. New end date to exclusion of capital gains.

The OBBBA establishes a new end date for the exclusion of new capital gains on a qualifying investment held at 10 years. Previously, investments held at least 10 years would be permanently excluded from capital gains on any of the appreciation of the QOF investment. Under the OBBBA, the same 10-year minimum stays in place, but after the 30^th year, the basis will be stepped up and locked in at the fair-market-value as of that 30-year date.

Example of Timeline:

1. Realize eligible capital gain (e.g. sell stock or real estate at a gain).
2. Invest eligible capital gain in a QOF (can be a portion or all of total gain).
3. Defer capital gain via reporting on that year’s tax return.
4. Year 5 → receive a 10% basis step-up (reduce deferred capital gain by 10%).
5. Year 5 tax return → recognize deferred capital gain.
6. Years 10-29 → automatic basis step-up to fair market value. Option to exit QOF tax-free via a sale or exchange during this time.
7. Year 30 → Basis step-up freezes at fair market value. Any gain accumulated after this date will be subject to capital gains tax.

Looking Forward

Now that the Opportunity Zone program has been enhanced and made permanent, real estate developers and investors can plan to use this incentive as a part of their long-term business strategy. Keep in mind that the new reporting requirements will demand increased attention to information tracking and compliance. For further guidance on navigating the new Qualified Opportunity Zone changes, please don’t hesitate to reach out to our real estate accounting professionals at RBT CPAs. Our team is here to support all of your accounting, tax, audit, and advisory needs. Give us a call today to learn more.

Summer is upon us, which means that we are entering peak season for short-term rental (STR) investors. Millions of traveling families and friends will be flocking throughout the country for summer getaways, many booked at STR properties on digital platforms like Airbnb and Vrbo. STRs are popular year-round; however, depending on a property’s location and proximity to nearby attractions. According to Consumer Affairs, guest demand for STRs in the US has increased in recent years, surpassing pre-COVID levels, and is estimated to have an annual compound growth of 11% through 2033.

You may be considering jumping in on the short-term rental game or capitalizing on missed opportunities. If so, you should know the basics of the short-term rental tax loophole, a strategy that can significantly reduce your taxes. Let’s talk about it.

What is the short-term rental tax loophole?

The short-term rental tax loophole is a tax strategy allowing short-term rental property investors to classify short-term rental activities as non-passive, therefore enabling them to deduct these losses against their active income, such as W-2 and business income. Note that you do not need Real Estate Professional Status (REPS) to take advantage of this loophole. This means that an investor can have a day job and still legitimately qualify and benefit from this strategy, if done correctly.

What is considered a short-term rental?

A rental property is considered a “short-term rental” for tax purposes when:

1. The average period of customer use of the property is 7 days or less.
2. The average period of customer use of the property is 30 days or less, and you provide significant personal services for rentals.

How do you calculate the average customer stay?

Divide the total number of days in all rental periods by the number of rentals during the tax year.

How does this loophole reduce your taxes?

A well-executed STR tax strategy has two components:

Losses Treated as Non-Passive

STRs are exempt from the passive activity loss rules typically applied to rental properties. This is because, according to the IRS, STRs do not actually fall under the category of “rental activity” (see section entitled “Rental Activities”).  Rental activities are normally subject to passive activity loss rules which dictate that passive losses can only be used to offset passive income, and cannot be used to reduce an individual’s active income for tax purposes. However, since STRs are not considered “rental activities” for tax purposes, they are not classified as passive.

This means that owners of STRs, if they meet certain material participation criteria below and other rules, can use STR losses to reduce their overall taxable income without the same limitations as typical rentals.

Accelerated Depreciation & Cost Segregation

Having RBT CPAs conduct a cost segregation study on your property can yield significant benefits by reclassifying certain building components that can either be deducted immediately via accelerated depreciation, such as bonus or Section 179, or over a shorter time frame of 5 or 15 years as compared to ratably over a much longer 39-year period. strategy.  If you bought your property in a previous year, it’s not too late to take advantage of this method.

What is material participation?

Material participation requires active involvement in the operation of the STR. To qualify for the STR tax loophole, you must satisfy at least one of the material participation criteria outlined by the IRS. You will need to prove your participation using documentation such as time reports, logs, appointment books, calendars, or narrative summaries. Some examples of material participation include performing maintenance work on the rental property, managing bookings, and communicating with guests.

Have questions?

Need help navigating the short-term rental tax loophole? RBT CPAs has you covered. Our real estate industry accounting experts can help you determine how you qualify for this loophole, key considerations to get and stay qualified, and work with you to formulate a highly effective tax strategy that works for you. Give us a call today to learn more and to find out how we can be Remarkably Better Together.

If you are a real estate professional purchasing, constructing, renovating, or expanding a property, you may be able to maximize your tax deductions through a cost segregation study. With bonus depreciation set to phase out fully by 2027, you might want to consider conducting a cost segregation study sooner rather than later in order to make the most of current tax-saving opportunities.

What is a cost segregation study?

Cost segregation is a tax strategy that can be combined with bonus depreciation to maximize tax deductions for property owners. The standard depreciation period for real estate is 39 years for commercial properties and 27.5 years for residential rental properties. However, many building components depreciate at a faster rate than the building structure itself, and can therefore be written off sooner. A cost segregation study assesses various components of a building or property and categorizes them based on their depreciation periods. Building components (i.e., carpets, cabinetry, countertops, electrical components, etc.) are separated into groups of 5-year assets, 7-year assets, and 15-year assets. Segregating depreciable building components into 5, 7, and 15-year assets allows property owners to deduct more in the short-term, rather than over the course of 27.5 or 39 years.

What is bonus depreciation?

Bonus depreciation is a tax incentive that allows property owners to take an immediate deduction for investments in depreciable assets, rather than spreading deductions out over the course of several years. The Tax Cuts and Jobs Act (TCJA) of 2017 established a bonus depreciation rate of 100%, meaning 100% of the costs of qualifying property could be written off in the first year of purchase. Since 2023, the bonus depreciation rate has decreased by 20% per year until it is due to completely phase out in 2027. The bonus depreciation rate for 2025 is 40%, and the rate for 2026 will be 20%. Real estate professionals planning to invest in new property may benefit from doing so before bonus depreciation phases out in 2027. Efforts to restore 100% bonus depreciation are currently underway in Congress.

What is the benefit of a cost segregation study?

Accelerating depreciation deductions through a cost segregation study reduces the property owner’s taxable income, thus reducing tax liability and increasing cash flow. Cost segregation studies can be conducted for newly purchased or constructed properties, but can also be applied retroactively for properties previously acquired or constructed. Cost segregation studies are a valuable tax-saving tool on their own, but can lead to even more tax savings when combined with bonus depreciation.

Interested in a cost segregation study?

RBT CPAs’ experts are available to conduct a cost segregation study of your property, identifying accelerated depreciation opportunities and helping you to improve your cash flow. In addition to cost segregation studies, we also assist clients in real estate tax planning, financial reporting, budgeting and forecasting, property management accounting, Low-Income Housing Tax Credits, and other accounting services. Our team of skilled accountants possesses the expertise and industry insights needed to optimize your financial performance. Give us a call today to learn more.

The Low-Income Housing Tax Credit (LIHTC) offers tax credits to real estate developers for constructing, purchasing, or renovating rental housing for low-income individuals and families. A LIHTC-certified professional determines whether applicants are eligible for the Low-Income Housing Tax Credit and ensures that tax credit properties remain in compliance with IRS, State Housing Finance Agencies, and HUD (Housing and Urban Development) regulations. RBT CPAs, a leading accounting firm in the Hudson Valley, can provide this service to real estate developers with LIHTC properties or those looking to apply for the program.

What is the Low-Income Housing Tax Credit?

The Low-Income Housing Tax Credit (LIHTC) program is used to create affordable housing for low-income families via residential rental real estate development. The project can be solely low-income, or combined with market rate units as part of a mixed-income development. The LIHTC can be used for new construction, rehabilitation, or acquisition of rental properties. The program benefits families seeking quality affordable housing while also creating opportunities for developers and investors to achieve a profit. For every dollar of credit received, investors can deduct a dollar from their tax liability over a 10-year period.

Due to the ongoing nationwide housing crisis, the LIHTC program is arguably more important now than ever. According to recent U.S. Census data, nearly 50% of all renters are considered “cost-burdened,” meaning they spend more than 30% of their income on housing; over 25% are deemed “severely cost-burdened,” spending more than 50% of their income on housing. The Low-Income Housing Tax Credit program is the primary source of affordable housing creation in the United States.

What is the CPA’s Role?

The LIHTC program is very complex, presenting many administrative hurdles and compliance requirements. If LIHTC properties do not remain in compliance, previously received tax credits may be recaptured, meaning the recipient must pay at least a portion of the credits back, plus interest. To avoid the recapture of tax credits, it is imperative to work with a Certified Public Accountant (CPA) versed in all stages of a LIHTC project who can ensure proper planning and review.

LIHTC-certified professionals complete a comprehensive certification course followed by a five-hour examination. CPAs with this certification possess a thorough knowledge of the LIHTC program including eligibility requirements, IRS and HUD regulations and guidance, occupancy requirements, calculations, annual recertification processes, and more. Using their specialized knowledge and training, a LIHTC-certified CPA will ensure that LIHTC properties remain in compliance with the program’s many complex and ongoing regulations.

That’s where we can help.

RBT CPAs is prepared to guide our real estate clients through the complexities and requirements of the LIHTC program. We offer specialized accounting, audit, tax, and consulting services for the affordable housing industry, including: annual financial statement audits, reviews and compilations and annual tax filings; due diligence; project final cost and eligible basis certifications; 95/5 test; 10% and 50% tests; capital account analysis; tenant file agreed-upon-procedures; financial forecasts; tax planning; and HUD audits and compliance.

Learn More

To learn more about how we can help you with your LIHTC project, get in touch with one of our experts. RBT CPAs Client Advisory Partner Ross Trapani, CPA is a certified Tax Credit Specialist. Ross earned his certification through the National Center for Housing Management, an industry leader in providing high-quality specialized certifications to professionals serving the housing industry. To learn more about the Tax Credit Specialist certification, you can visit the NCHM website. For information regarding the LIHTC and how RBT can help, email Ross Trapani at rtrapani@rbtcpas.com.

RBT CPAs, a leading accounting firm in the Hudson Valley, has been proudly serving businesses in the Hudson Valley for over 50 years. To learn more about our expert accounting, tax, audit, and advisory services, contact us today.