Do the pros really pay 0 in taxes?

Member since 2024 · 16 posts · 1 vote

Hi all - Dave Matthews here. I've got two properties now, townhome and single family, both rented. This will be my first year where I will be reporting ALL the rental income (some 60k or so). My question to you all is how in the world do folks deduct deduct deduct so that their tax burden on rental income is zero or close to it? I am worried that I will owe big in 2026...

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Chris SeveneyBusiness Member

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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

Quote from @David Matthews:

Just remember its not that they are not paying taxes - its they are deferring them.

As an example (not a CPA), lets say you have $10,000 in income and you depreciate your property by $10,000 - your net gain is zero BUT your cost basis (lets say you paid $250,000 for the property) is now $240,000. So if you sell it for $300,000 - the property now has a $60k gain (not $50k). Hope that makes some sense.

You can 1031 to defer it but a 1031 is typically done by institutional investors and its rare for individuals to do it.

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Dylan Brown
MN · Member since 2025 · 107 posts · 97 votes
1y
The key here is to understand how depreciation can be utilized in your situation.

in your position, you may benefit from doing cost segregation studies on your properties which can increase the depreciation expense enough to potentially offset your rental income.

investors who pay no taxes on their real estate earnings all do so through taking advantage of opportunities to maximize or accelerate depreciation.

if you end up generating a tax loss by using depreciation, you can also carry forward any additional losses you are not able to use into future years when you might to show gains.

My suggestion is you start by finding a good advisor who can walk you through how to understand depreciation of fixed assets and what levers you can pull to maximize your depreciation.

if you are doing real estate full time, I also suggest that you look into REPS and sec. 469.
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- David Matthews
  OP
  Member since 2024 · 16 posts · 1 vote
  1y
  @Dylan Brown my two properties total about 900k in asset value. I should be able to depreciate 1/27th of that per year correct? So about 33k? Then tacking on interest, insurance, taxes... I'd be pretty close to net zero.
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- JD MartinBusiness Member
  Moderator
  Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
  1y
  Quote from @David Matthews:
  
  @Dylan Brown my two properties total about 900k in asset value. I should be able to depreciate 1/27th of that per year correct? So about 33k? Then tacking on interest, insurance, taxes... I'd be pretty close to net zero.
  
  Don't forget - you *have* to include depreciation, because the IRS is going to include it for you eventually whether you took the deduction or not. Example: You have a house with a cost basis of $275,000. Your depreciation is going to be $10k per year (27.5 years). If you sell that house 5 years from now, the IRS is going to recapture $50k of depreciation from you even if you didn't take the deduction every year.
  
  Taxes are a huge part of real estate, and if it's not your forte definitely find yourself a good RE tax accountant because you do not want to miss out - or worse, pay on benefits you didn't even take.
  
  PS: You're not this Dave Matthews, are you?:
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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
1y
Quote from @David Matthews:

Hi all - Dave Matthews here. I've got two properties now, townhome and single family, both rented. This will be my first year where I will be reporting ALL the rental income (some 60k or so). My question to you all is how in the world do folks deduct deduct deduct so that their tax burden on rental income is zero or close to it? I am worried that I will owe big in 2026...

Just remember its not that they are not paying taxes - its they are deferring them.
As an example (not a CPA), lets say you have $10,000 in income and you depreciate your property by $10,000 - your net gain is zero BUT your cost basis (lets say you paid $250,000 for the property) is now $240,000. So if you sell it for $300,000 - the property now has a $60k gain (not $50k). Hope that makes some sense.
You can 1031 to defer it but a 1031 is typically done by institutional investors and its rare for individuals to do it.
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- David Matthews
  OP
  Member since 2024 · 16 posts · 1 vote
  1y
  @Chris Seveney that is plenty fine by me 10k now is worth a lot more than 10k in 30 years. That's a win in my book.
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- Calvin Thomas
  Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
  1y
  Quote from @Chris Seveney:
  
  Quote from @David Matthews:
  
  Hi all - Dave Matthews here. I've got two properties now, townhome and single family, both rented. This will be my first year where I will be reporting ALL the rental income (some 60k or so). My question to you all is how in the world do folks deduct deduct deduct so that their tax burden on rental income is zero or close to it? I am worried that I will owe big in 2026...
  
  Just remember its not that they are not paying taxes - its they are deferring them.
  As an example (not a CPA), lets say you have $10,000 in income and you depreciate your property by $10,000 - your net gain is zero BUT your cost basis (lets say you paid $250,000 for the property) is now $240,000. So if you sell it for $300,000 - the property now has a $60k gain (not $50k). Hope that makes some sense.
  You can 1031 to defer it but a 1031 is typically done by institutional investors and its rare for individuals to do it.
  
  We do it all the time. When it's left to my children, it's a step up basis for taxes. I have properties I've 1031'd for decades. Makes a lot of sense and more people should look into it.
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- Chris SeveneyBusiness Member
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  Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
  1y
  Quote from @Calvin Thomas:
  
  Quote from @Chris Seveney:
  
  Quote from @David Matthews:
  
  Hi all - Dave Matthews here. I've got two properties now, townhome and single family, both rented. This will be my first year where I will be reporting ALL the rental income (some 60k or so). My question to you all is how in the world do folks deduct deduct deduct so that their tax burden on rental income is zero or close to it? I am worried that I will owe big in 2026...
  
  Just remember its not that they are not paying taxes - its they are deferring them.
  As an example (not a CPA), lets say you have $10,000 in income and you depreciate your property by $10,000 - your net gain is zero BUT your cost basis (lets say you paid $250,000 for the property) is now $240,000. So if you sell it for $300,000 - the property now has a $60k gain (not $50k). Hope that makes some sense.
  You can 1031 to defer it but a 1031 is typically done by institutional investors and its rare for individuals to do it.
  
  We do it all the time. When it's left to my children, it's a step up basis for taxes. I have properties I've 1031'd for decades. Makes a lot of sense and more people should look into it.
  I agree more people should do it but its very rare for individuals and more common for larger / institutional investors. I believe the stat for individual investors was like 0.3% of real estate transactions on single family homes that were investment properties are done via a 1031
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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
1y
You get to deduct 1/27.5th of the value of the structures. (You don’t get to depreciate the land value.)
It took about 7-8 years before I started paying taxes as my rental income went up and my interest expenses went down. You carry forward any “losses” exceeding your income plus an allowance up to $25k depending on your other income.
1031s are more common than Chris let on. I did one in 2023 and I’m VERY far from an institutional investor. They are a good way to get out of a property you’ve owned for 20+ years, has reached the age where capex starts popping up, has appreciated to the point where ROE is minuscule, or you want to escape a state with income tax.
Ps. There’s another sweet little 20% income discount I hope people are using but nobody seems to be talking about…
What Is the 20% Qualified Business Income (QBI) Deduction? Pass-through owners who qualify can deduct up to 20% of their net business income from their income taxes, reducing their effective income tax rate by 20%. This deduction is commonly known as the "qualified business income deduction" or "QBI deduction."

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- David Matthews
  OP
  Member since 2024 · 16 posts · 1 vote
  1y
  @Bill B. Bill, I'm a buy and hold man, unless I'd 1031 into a fourplex or small townhome complex. I ran quick numbers and it appears I'll be negative or zero for some time... should've crunched those before :) anywho.. QBI deduction? I have heard of it but its Been a while since I did my research on it.
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Eric Gerakos
Investor · Costa Mesa, CA · Member since 2016 · 1k+ posts · 1k+ votes
1y
Yes.
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Allan C.
Rental Property Investor · Member since 2018 · 826 posts · 810 votes
1y
Is $60k your gross rental income or net income after expense deductions? Are you paying interest expenses, taxes, etc? $60k net income for LTR units seem very high.

I haven't paid taxes on my net rental income ever. And even though taxes are deferred, that's as good as paying no taxes when you factor time value of money. A 15% return on investment means 2x principal over 5 years. If I defer taxes for 5 years, I still walk away with more money than paying taxes today. If I defer 10+ years then I walk away with a LOT more.
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- David Matthews
  OP
  Member since 2024 · 16 posts · 1 vote
  1y
  @Allan C. 60k gross. I am in the Denver area. 2 units that are rent by room so 6 total leases. It is 60,300/yr in rental income (about an average of 800 per room).
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- David Matthews
  OP
  Member since 2024 · 16 posts · 1 vote
  1y
  @Allan C. Just ran quick numbers, looks like interest, insurance (including PMI too???), taxes, plus depreciation on the structure value ... I will net zero or negative.
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- Allan C.
  Rental Property Investor · Member since 2018 · 826 posts · 810 votes
  1y
  there you have it - expense deductions for legitimate business needs are powerful to minimize your tax burden. Don't get creative and claim family food and vacation expenses as deductions, but legitimate items that help you run your business (ie cell carrier, internet, etc).
  1 Reply
Julio GonzalezPro Member
Specialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
1y
Yes—many investors dramatically reduce their tax liability using strategies like cost segregation paired with bonus depreciation. By accelerating depreciation on certain components of a property, they can create large paper losses that offset rental income. Here's a helpful article on cost segregation to give you some more insights https://www.biggerpockets.com/forums/311/topics/948757-cost-...
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- David Matthews
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  Member since 2024 · 16 posts · 1 vote
  1y
  @Julio Gonzalez thank Julio, and thanks for your message. I reached out to a cost seg company, it was about 3500$ and I didn't pull the trigger. My real question is... do I NEED a cost segregation study in order to depreciate? Or can I just use my structure value that was on the property appraisal? Both recently appraised in 2025.
  0 Reply
- Michael PlaksPro Member
  Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
  1y
  Quote from @David Matthews:
  
  My real question is... do I NEED a cost segregation study in order to depreciate?
  
  Here is your start:
  https://www.biggerpockets.com/forums/51/topics/1121063-expla...
  2 Reply
- David Matthews
  OP
  Member since 2024 · 16 posts · 1 vote
  1y
  @Michael Plaks thanks Michael that summed it up quite well.
  0 Reply
- John Clark
  Member since 2018 · 1k+ posts · 1k+ votes
  1y
  Quote from @David Matthews:
  
  @Julio Gonzalez thank Julio, and thanks for your message. I reached out to a cost seg company, it was about 3500$ and I didn't pull the trigger. My real question is... do I NEED a cost segregation study in order to depreciate? Or can I just use my structure value that was on the property appraisal? Both recently appraised in 2025.
  A down and dirty way to estimate amounts to allocate to building and to land is to use the values determined by your county assessor for the year the property was placed in service. That ratio is applied to the purchase price to determine the value of the building that you will depreciate. Works if there hasn’t been much appreciation between date of purchase and date of putting into service.
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- Julio GonzalezPro Member
  Specialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
  1y
  Quote from @David Matthews:
  
  @Julio Gonzalez thank Julio, and thanks for your message. I reached out to a cost seg company, it was about 3500$ and I didn't pull the trigger. My real question is... do I NEED a cost segregation study in order to depreciate? Or can I just use my structure value that was on the property appraisal? Both recently appraised in 2025.
  A cost segregation study can help accelerate depreciation. It's typically most beneficial if you're looking to maximize tax savings sooner rather than later. However, you don't need a cost seg study to depreciate in general.
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- Sean GrahamBusiness Member
  Investor , CPA · Detroit, MI · Member since 2016 · 583 posts · 248 votes
  1y
  Quote from @John Clark:
  
  Quote from @David Matthews:
  
  @Julio Gonzalez thank Julio, and thanks for your message. I reached out to a cost seg company, it was about 3500$ and I didn't pull the trigger. My real question is... do I NEED a cost segregation study in order to depreciate? Or can I just use my structure value that was on the property appraisal? Both recently appraised in 2025.
  A down and dirty way to estimate amounts to allocate to building and to land is to use the values determined by your county assessor for the year the property was placed in service. That ratio is applied to the purchase price to determine the value of the building that you will depreciate. Works if there hasn’t been much appreciation between date of purchase and date of putting into service.
  
  Yes, I'd say you do need a cost segregation study if you want those benefits
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Jason MalabuteBusiness Member
Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 902 votes
1y
There are several ways real estate investors significantly reduce their tax liability, but it really depends on your specific situation. Strategies include things like cost segregation, bonus depreciation, regular depreciation, qualifying as a real estate professional to offset active income with passive losses, and short-term rental tax strategies.

It’s hard to list everything without knowing your income mix, goals, and how involved you are in the properties. I’d recommend looking into becoming a tax strategist developer—someone who understands how to structure real estate investments specifically for tax efficiency. It can make a major difference.
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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
1y
Some things to consider
- real estate professional: maximizes the deductions
- high leverage reduces cash flow: cash flow is taxed annually, the other RE sources of return are tax free or tax deferred
- depreciation: cost segregation/accelerated depreciation, regular depreciation
- STR "loophole"
- 1031 exchange: transfer into next property the gains deferring the gain taxes
- property value basis readjusts at death To me this is a crazy law, but as long as it exists there is no reason to ever pay taxes on gains including your heirs.
- 2 of 5 rule for owner occupied allows $20k/$500k gains to be exempt from gains tax.
with the current rules there is no reason for RE investors to pay taxes on RE profits.
Good luck

1 Reply
Marcus Auerbach
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
1y
Quote from @David Matthews:

Hi all - Dave Matthews here. I've got two properties now, townhome and single family, both rented. This will be my first year where I will be reporting ALL the rental income (some 60k or so). My question to you all is how in the world do folks deduct deduct deduct so that their tax burden on rental income is zero or close to it? I am worried that I will owe big in 2026...

The fact that you are worried about how much you will owe tells me you need to learn a bit about taxes. This is the part of REI that nobody wants to talk about: as an investor, you need a working understanding about how the tax system works.
You don't need to become an expert in all the details, just like you don't need to be a contractor. But it is very helpful to know what a handyman can do vs a plumber and what it takes to replace some pipes. But you don't need to become a plumber!
Understaning the main tax principles will allow you to ballpark your tax liability. And it allows you to chart a course for yourself that also considers taxes.
Pros work work with 3 different services:
1.) an accounting service to manage and record income and expenses monthly
2.) a CPA to prepare your taxes based on your accounting records
3.) a tax planner to help you project your tax liabilities for the future
A CPA can only report what already happened to the IRS, you can't change the past. A tax planner can help you design your future taxes. Until you hire a tax planner, you need to learn to be your own
Here are two books you should read from the BP book store
4 Reply
- David Matthews
  OP
  Member since 2024 · 16 posts · 1 vote
  1y
  @Marcus Auerbach thanks Marcus I will check those out. Learning is why I'm here :)!
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Dylan Brown
MN · Member since 2025 · 107 posts · 97 votes
1y
Great post @Marcus Auerbach - I second it!

I will also add that often times the same person/team can be capable of all three (accounting, tax filing, and tax advisory) - however that doesn't mean that if you have them do your tax return they will automatically do the other two.

I can't tell you how many times I have been someone's tax preparer and they were surprised to find out that the actual planning and year-round support is a separate engagement.

Not everyone needs all three right off the bat - but you should strive to have a working understanding of all three as soon as possible.
1 Reply
Allan C.
Rental Property Investor · Member since 2018 · 826 posts · 810 votes
1y
One other point to consider as a small landlord, work with your accountant to maximize expense deductions through safe harbor elections (SHST and de minimus). You shouldn't ever need to capitalize any spend, and this is a powerful tool.
0 Reply
Christopher Robert Noland
Investor · Seattle, WA · Member since 2023 · 87 posts · 44 votes
1y
Yes. You live off of borrowed money and reinvest all your cash before it’s taxable in many different ways essentially.
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Calvin Thomas
Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
1y
Quote from @David Matthews:

Hi all - Dave Matthews here. I've got two properties now, townhome and single family, both rented. This will be my first year where I will be reporting ALL the rental income (some 60k or so). My question to you all is how in the world do folks deduct deduct deduct so that their tax burden on rental income is zero or close to it? I am worried that I will owe big in 2026...

Love your music by the way ;'p

Not necessarily. You have min. state taxes that you cannot get around (some states, not all NY/NJ/CT). You also has FICA and the dreaded AMT. However, in theory, if your expenses are more than your income, then you'd be able to, on paper, lose money and not have to worry about too many taxes. You need a good CPA who knows a lot about real estate. This isn't really possible unless you have a lot of properties or several expensive properties.

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John MorganPro Member
Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
1y
Turbo tax walks you through everything. And you won’t be paying taxes on your mailbox money for over a decade. If you are, then you’re not doing something right. lol
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Dylan Brown
MN · Member since 2025 · 107 posts · 97 votes
1y
Jumping in here with some key clarifications on a few of the replies above. You all are fantastic and I love the energy - I want to just make sure all the info here is as useful as possible.

1. I am not positive about the exact statistics, but I do see individual investors using 1031x all the time. Just be mindful that the economics of a 1031 break down a bit with the smaller properties since the fixed costs of doing a 1031 are somewhat high. It's a couple grand for the qualified intermediary to facilitate the transaction and it usually adds 500-1,000 to the cost of your tax return. Many people simply opt out and instead maximize their depreciation on the newly acquired property to offset the gain from the sold property instead.

2. It is true that depreciation is just a deferral of taxes. However keep in mind that often the recapture of depreciation (I.e. the repayment of the loan) is often at a lower tax rate than the tax rate on the income it initially helped shield - therefore beyond just the time value of money, it does result in real tax savings.

3. Cost segregation studies allow you to take a building that you would normally need to depreciate over 27.5 years (or 39 years if it is a commercial property) and selectively convert percentage of the purchase price over 5 or 15 years instead. There is also an opportunity for some of that reclassified property in the 5/15 year buckets to receive bonus depreciation as well. Recently, I saw a building purchase of 3M with only 1M of equity that yielded a total depreciation amount of $530k after the cost segregation study was applied (which amounts to a first-year deduction of 53% of the invested equity to the owners).

4. "Cash Flow" is not taxable. Cash flow does not actually factor into your taxable income calculation at all. What matters is the net profit and loss is for your property. Common ways where cash flow and net profit and loss differ: (1) principal payments on loan reduce cash flow but not net profit, (2) depreciation expense reduces net profit but not cash flow, (3) capex may reduce cash flow but not net profit, (4) depreciation recapture may increase net profit but not cash flow. There are more examples of this but those are the main ones. This is why having a solid set of books that are reconciled monthly or quarterly are essential.

5. Real estate professional status does not alter the amount of deductions you are able to take. The only thing it alters is what other sources of income those deductions are available to offset. If you are not a real estate professional for tax purposes, your still able to take all the same deductions, your deduction may just not have anything to offset. In that case, they are not lost, they just carry forward to either a year where you can use them or they are freed up to offset any type of income if you sell or otherwise dispose of the investment that generated the losses. This is the part that is most commonly missed by DIY tax return filers - you desperately need a CPA if this applies to you and you are attempting to file your own taxes. I saw this cost a lady 67k in taxes one time - her reasoning was she wanted to use TurboTax to save ~$700 on her tax return... you can do the math on that.

6. Though I agree that de minimus and SHST are both great examples of ways to expense costs that may otherwise be capitalized, it is very risky to take an "all expense" approach to capex spending. You ultimately need to find a CPA that understands the finalized repair regs from 2014 and knows how to apply the betterment/restoration/adaptation of an economic unit of property test to maximize your repair expense and avoid capitalizing assets in a way that is supportable under the scrutiny of an audit.

7. TurboTax is the most sure fire way to miss deductions or mid-report income. Admittedly, one of my guilty pleasures is reviewing a prior return of a RE investor who used TurboTax to file and noting all the mistakes. I have done this about 2 dozen times and in all those reviews I have only found one return where all the real estate investing activity was reported correctly, and they had to contact TurboTax to override the software functionality to report it the way it was reported. Ironically, they also used a CPA in a consulting capacity to make sure they were filing correctly using TurboTax - at that point I feel like they should have just had the CPA do the return!

That is all for now - DM me if you want to ask more specific questions about any of the above!
3 Reply
Kevin Jo
Member since 2025 · 26 posts · 22 votes
1y
You can only "write off" so much. At the end of the day if your rental income outpaces your depreciation and other expenses then you pay taxes. Very simple. If your making money then you don't worry about taxes. Example: I have one property that generates $86k gross income a year but cost me only $450k to purchase. Depreciation, expenses, repairs, etc. do not cover the income. Therefore I pay taxes on whats left. Im not going to lower the rents to "break even". It is always a good problem to make money my CPA says.
0 Reply
Dylan Brown
MN · Member since 2025 · 107 posts · 97 votes
1y
Amen to that @Kevin Jo!
0 Reply
Aaron ZimmermanBusiness Member
Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
1y
This post has a lot of great information. From my experience, with my clients that have higher priced building @David Matthews mentioned, there is likely a loss on a tax basis unless the property is newly rehabbed AND in its third or fourth year being placed in service, assuming it's a long term rental. Mid term and short term rentals are different stories as they produce more income.

For my clients, the big three that are must gets are easy and verifiable: mortgage interest, property taxes, and insurance. This comes on the 1098.

Then, you should focus on capex and repairs. See @Dylan Brown's great comment above that nicely summarizes as well as the safe harbor methods.
Beyond that, there are other expenses such as software, education, networking, etc, that can be deducted.
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Amanda Breck
Attorney · UT · Member since 2025 · 33 posts · 59 votes
1y
There are tons of strategies out there for reducing your tax burden, especially in the real estate world. Navigating these strategies can be difficult and overwhelming. You are in a good place to get some good advice. Working with a CPA who knows real estate and the associated strategies is also invaluable. A strategy my clients often use is to set up a corporation as a management company for their real estate portfolio. A management agreement is established between this corporation and the property owner, whether that is you personally or if you use LLCs. The corporation can then take a management fee for the work it does (either the work you would typically think of a property manager doing, or even contracting out the work to a 3rd party manager). This management fee can then be used for reimbursements to you from the corporation for business expenses and even things like medical care. The goal is to break even in the corp at the end of the tax year in terms of income from management fees and reimbursements. Not only does this reduce your personal tax burden, but it allows you to get some money back out of the corp tax-free.
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
1y
@David Matthews Great question, Dave. Many real estate investors reduce or eliminate rental income taxes through depreciation, which lets you deduct the value of the building over 27.5 years—often creating a large paper loss. Add in deductions for mortgage interest, property taxes, insurance, repairs, and management fees, and your taxable income can shrink fast. If your income is under $100K, you may also deduct up to $25K of passive losses against other income. More advanced strategies like cost segregation and bonus depreciation can supercharge these benefits. It’s not just for the pros—it’s about using the tax code strategically.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.
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Sean GrahamBusiness Member
Investor , CPA · Detroit, MI · Member since 2016 · 583 posts · 248 votes
1y
Quote from @David Matthews:

Hi all - Dave Matthews here. I've got two properties now, townhome and single family, both rented. This will be my first year where I will be reporting ALL the rental income (some 60k or so). My question to you all is how in the world do folks deduct deduct deduct so that their tax burden on rental income is zero or close to it? I am worried that I will owe big in 2026...

The key is getting enough active depreciation to offset your taxable income. It's doable.
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