Every November I get the same question from business owners, investors and high earners: "Is there anything I can buy before December 31 that will help my taxes this year?" Real estate can help, sometimes a lot, but only if the strategy fits your situation and the timing works. Here is a plain-English overview of what actually works, and what doesn't.
1. Depreciation: the starting point
When you own income-producing real estate, the IRS lets you deduct the building's cost over time, even while the property may be going up in value. Commercial buildings are depreciated over 39 years and residential rentals over 27.5 years. Land is never depreciated. On its own, that is a slow, steady deduction.
2. Cost segregation: speeding it up
A cost segregation study is an engineering analysis that separates a building into parts that wear out faster: flooring, cabinetry, specialty electrical, parking lots, landscaping, canopies and more. Those parts depreciate over 5, 7 or 15 years instead of 39. With 100% bonus depreciation restored for property acquired after January 19, 2025, those faster parts can generally be deducted in the first year.
Example: on a $2.8 million office building with $560,000 of land, first-year depreciation for a December purchase is only about $2,400 without a study. If a study reclassifies 25% of the building, the first-year deduction can be roughly $560,000. At a combined rate around 40%, that is on the order of $225,000 of federal tax savings in year one. (Illustrative only; actual results depend on the study and your tax situation.)
3. The catch: passive loss rules
For most investors, rental real estate losses are passive. Passive losses can offset passive income, but generally not W-2 wages or stock market gains. Unused losses carry forward. The $25,000 rental loss allowance phases out between $100,000 and $150,000 of income, so most high earners don't qualify for it. This is where many people get disappointed, so it's worth understanding before you buy.
4. Strategies that can work for high earners
- Owner-user purchases. If you own a business and buy the building it operates from, depreciation offsets your active business income. With SBA 504 or 7(a) financing, the down payment can be as low as 10%. See SBA options.
- Short-term rentals. If the average guest stay is 7 days or less and you materially participate, the property generally isn't treated as a passive rental, so losses may offset other income. Check local short-term rental rules first; many Bay Area cities restrict them.
- Real estate professional status. 750+ hours a year and more than half your working time in real estate, plus material participation. Rarely a fit for someone with a full-time job.
- Look-back studies. Already own a building? A cost segregation look-back study can catch up depreciation you missed in prior years, in the current year, without amending old returns.
5. The deadline that matters: placed in service by December 31
To count for 2026, the property must be closed and placed in service, meaning ready and available for use or rent, by year-end. Light work finished in December is fine; a renovation that runs into 2027 pushes the deduction into 2027. Residential purchases can often close in about 15 days. Commercial escrows usually take longer unless there is seller financing or an all-cash buyer.
6. Things to know before you buy
- California does not follow federal bonus depreciation, so the large first-year deduction is mainly federal.
- Recapture applies when you sell; a 1031 exchange can defer it.
- A cost segregation study usually costs about $5,000 to $15,000 and makes the most sense for buildings around $750,000 and up.
- Buy a property because it is a good investment first. The tax benefit should improve a good deal, not rescue a bad one.
Join us on Saturday, November 21
We're covering all of this in a free one-hour workshop, Year-End Tax Strategies with Commercial Real Estate, on Saturday, November 21, 11 AM to 12 PM, at our Fremont office (44840 S Grimmer Blvd) and on Zoom. Bring your questions. Reserve your spot, and you'll get the Zoom link by email.
This article is educational and is not tax or legal advice. Please confirm any strategy with your CPA or tax advisor.
