The IRS allows you to deduct the cost of a residential rental building (excluding land) over 27.5 years. This creates a non-cash deduction each year — meaning you get a tax write-off without spending any money. A $300,000 building generates $10,909/year in depreciation deductions automatically.

Yes. Depreciation is based on the property's cost basis, not your equity. You can deduct the full depreciation amount regardless of how much you owe on the mortgage.

Depreciation taken during ownership is subject to recapture at a 25% rate when you sell. However, this can be deferred indefinitely using a 1031 exchange, or eliminated entirely if you hold the property until death and your heirs receive a step-up in basis.

You can catch up on all missed depreciation in a single year by filing IRS Form 3115 (Change in Accounting Method). This is a powerful strategy for landlords who have owned property for years without properly tracking depreciation.

No. Land does not wear out and cannot be depreciated. Only the building and improvements are depreciable. Properly allocating the land value (typically using the assessed value ratio from property tax records) is essential to maximizing your depreciation deduction.

A net operating loss occurs when your allowable tax deductions exceed your taxable income for the year. The excess loss can be carried forward to future tax years to offset up to 80% of taxable income in each future year. NOLs generated after 2017 can be carried forward indefinitely.

Under current law, most NOLs generated after 2017 cannot be carried back — they can only be carried forward. However, farming losses and certain insurance company losses are exceptions. During COVID (2020-2021), special 5-year carryback rules applied.

NOL carryforwards can offset up to 80% of taxable income in any given year. This means if you have $500,000 in taxable income, an NOL can reduce it to no less than $100,000 in that year. The remaining NOL continues to carry forward.

Yes — and this is a legitimate tax planning strategy. By timing large deductions (bonus depreciation, Section 179, cost segregation) in a high-income year, a business can intentionally generate an NOL that offsets income in future years when the business is more profitable.

NOL carryforwards generally do not transfer to the buyer in an asset sale. In a stock sale, the NOLs remain with the corporation but are subject to severe limitations under IRC §382 if there is a change in ownership of more than 50%. Proper planning before a sale is essential to preserve the value of NOL carryforwards.

A 1031 exchange allows you to sell an investment property and defer all capital gains taxes by reinvesting the proceeds into a like-kind replacement property. You must identify the replacement property within 45 days and close within 180 days, using a qualified intermediary to hold the funds.

Yes. Residential rental properties, commercial buildings, raw land, and even some types of personal property qualify. The property must be held for investment or business use — your primary residence does not qualify.

The deferred gain carries forward into the replacement property's adjusted basis. You can continue deferring it through a chain of 1031 exchanges. If you hold the property until death, heirs receive a step-up in basis and the deferred gain is eliminated entirely.

After selling your relinquished property, you have exactly 45 calendar days to identify up to three potential replacement properties in writing. Missing this deadline disqualifies the entire exchange and makes the full gain taxable immediately.

Yes — "like-kind" is broadly defined for real estate. You can exchange a single-family rental for a commercial building, raw land, or a multi-family property. The key is that both properties must be held for investment or business use.

A Cost Segregation Study is most beneficial for newly constructed or recently acquired commercial properties, as well as properties that have undergone significant renovations. While residential rental properties can also benefit, the accelerated depreciation from a Cost Segregation Study is generally more impactful for commercial assets due to the higher basis in depreciable property. The IRS provides guidance on suitable property types in its Cost Segregation Audit Techniques Guide, emphasizing properties with a substantial amount of personal property and land improvements that can be reclassified from 39-year or 27.5-year depreciation to 5, 7, or 15-year property. This reclassification allows for faster depreciation deductions under IRC Section 167.

Yes, certain types of property are excluded from installment sale treatment. For instance, sales of inventory and dealer property generally do not qualify, as outlined in IRC Section 453(b)(2)(B). Additionally, sales of depreciable property to a related person (as defined in IRC Section 1239(b)) are typically not eligible for installment sale reporting, with all payments being deemed received in the year of sale. This is to prevent tax avoidance schemes where depreciation recapture could be deferred. However, there are exceptions, such as if the related person can demonstrate that the avoidance of federal income tax was not one of the principal purposes of the disposition.

The 'step-up in basis' generally does not apply to inherited IRAs or other tax-deferred retirement accounts. These accounts are already subject to income tax upon distribution, and their basis is typically zero for income tax purposes. Instead, beneficiaries of inherited IRAs are subject to specific distribution rules under IRC Section 401(a)(9), which includes the 10-year rule for most non-spouse beneficiaries. There is no reset of the cost basis for the underlying assets within these accounts upon the original owner's death, as they are taxed on the withdrawals themselves, not on capital gains from asset appreciation.

Yes, assets held in a revocable living trust generally receive a 'step-up in basis' upon the death of the grantor, provided the trust is includible in the grantor's gross estate for federal estate tax purposes under IRC Section 2038 or 2039. During the grantor's lifetime, a revocable trust is typically considered a 'grantor trust' under IRC Sections 671-679, meaning the grantor is treated as the owner of the assets for income tax purposes. Upon death, the trust becomes irrevocable, and the assets receive a new basis equal to their fair market value on the date of death, or the alternate valuation date if elected under IRC Section 2032.

If an asset that received a 'step-up in basis' is sold shortly after inheritance, the capital gain or loss will be calculated using the new, stepped-up basis. This often results in little to no capital gain if the sale occurs soon after death, as the fair market value at the time of sale is likely close to the stepped-up basis. For example, if an asset valued at $500,000 at death is sold for $505,000 a month later, the taxable gain would only be $5,000. This effectively eliminates the capital gains that accrued during the decedent's lifetime, as per the intent of IRC Section 1014.

Yes, there are a few limitations and exceptions to the 'step-up in basis' rule. One notable exception is for 'income in respect of a decedent' (IRD) under IRC Section 691, which includes items like unpaid salary, retirement account distributions, and certain installment sale proceeds; these do not receive a step-up. Additionally, if an asset was gifted back to the decedent within one year of their death and then inherited by the original donor, it does not receive a step-up in basis, as per IRC Section 1014(e). This prevents individuals from gifting appreciated assets to a terminally ill person solely to receive a step-up upon re-inheritance.

The application of the 'step-up in basis' to jointly owned property depends on the form of ownership and whether the owners are spouses. For property held as joint tenants with right of survivorship between spouses, one-half of the property's value is generally included in the deceased spouse's estate, and that half receives a step-up in basis under IRC Section 2040(b). For non-spousal joint ownership, the amount included in the decedent's estate, and thus eligible for a step-up, is based on the decedent's contribution to the purchase price, as per IRC Section 2040(a). The surviving owner's original basis for their share remains unchanged.