Ask Real Estate - How Smart Real Estate Investors Are Rethinking Taxes in 2026
In the spring of 2025, veteran investor David Liu was reviewing his portfolio as he did every year. One property in particular—a mixed-use building in Orange County—had generated steady income, but his tax bill kept creeping higher with each passing year despite thoughtful planning. He had developed a solid portfolio over the last decade, yet something about this tax cycle felt different.
In July 2025, a new federal law—the One Big Beautiful Bill Act (OBBBA)—was signed into law, reshaping numerous aspects of how real estate investments are taxed beginning in 2026. David wasn’t alone in feeling the effects; many investors began asking the same question:
How do you navigate the post-OBBBA world and structure your real estate investments to minimize tax exposure without sacrificing growth?
This article breaks down the key strategies that matter in 2026—both timeless fundamentals and new opportunities introduced or expanded by OBBBA.
1. Why 2026 Is a Turning Point for Real Estate Investors
The One Big Beautiful Bill Act, enacted on July 4, 2025, made sweeping changes to federal tax law—with several provisions directly impacting real estate investors, developers, and owners. Many of the changes eliminate previous deadlines or make incentives permanent, giving investors greater certainty for long-term planning.
From depreciation rules to income-tax deductions, OBBBA has redefined several pillars of real estate tax strategy:
Permanent 100% bonus depreciation for qualifying property
Permanent 20% Qualified Business Income (QBI) deduction
Protection of Section 1031 like-kind exchanges
Higher State and Local Tax (SALT) deduction caps
Increased federal estate tax exemption
Enhanced opportunities for Qualified Opportunity Zones (QOZs)
Changes to interest expense deduction limitations
Understanding these components—and incorporating them into a comprehensive strategy—is essential in 2026 and beyond.
2. David’s 2026 Tax Review
Let’s go back to David.
When David sat down with his CPA in early 2026, he expected a predictable conversation about depreciation, cost segregation, and 1031 exchanges. What he didn’t expect was how dramatically OBBBA had changed the playing field.
Instead of having to worry about bonus depreciation phasing out gradually, he found that 100% bonus depreciation had been restored and made permanent—meaning he could expense qualifying capital improvements immediately, instead of depreciating them over decades. Cost segregation studies suddenly became even more powerful tools for freeing up cash flow.
This realization was exactly what many investors needed: a legal, structural shift that required a fresh look at their portfolio and transaction timing.
3. Core Tax-Smart Strategies That Never Go Out of Style
Before diving into OBBBA-specific tactics, let’s review foundational tax strategies every real estate investor should master.
A. Cost Segregation Studies
Cost segregation is a method of reclassifying certain components of real property into shorter depreciation categories (5, 7, or 15 years). This accelerates depreciation deductions and can significantly reduce current-year taxable income.
In the post-OBBBA environment, where bonus depreciation allows immediate expensing of qualified property, cost segregation becomes even more impactful. Investors can enhance the immediate tax benefit by identifying components eligible for accelerated depreciation and expensing them in the year placed in service.
Scenario:
A commercial property with tenant improvements and specialized systems may see hundreds of thousands of accelerated deductions that previously would have been spread over decades.
B. 1031 Exchanges
Section 1031 like-kind exchanges allow investors to defer capital gains taxes by reinvesting sale proceeds into a like-kind property. This tool enables portfolio growth without a current tax hit.
Under OBBBA, 1031 exchanges remain intact and continue to be critical for deferring gain indefinitely as long as qualifying reinvestments are structured properly.
Strategy Tip:
Work with a qualified intermediary early—don’t wait until late in the selling process. The timing and documentation requirements are strict, and advanced planning can make or break eligibility.
C. Entity Structuring and Pass-Through Deductions
Rental income from pass-through entities (LLCs, S corporations, partnerships) may qualify for the 20% Qualified Business Income (QBI) deduction, which effectively reduces taxable income derived from rental activity. OBBBA made this deduction permanent, giving investors a stable planning environment.
Careful structuring of ownership entities can ensure maximum eligibility for the QBI benefit.
4. Post-OBBBA: New and Expanded Tax Strategies
Now let’s turn to the major shifts brought by OBBBA and how investors can capitalize on them.
A. Immediate 100% Bonus Depreciation
One of the most significant changes for real estate investors is that 100% bonus depreciation has been restored and made permanent for most qualified property placed in service after January 19, 2025. This contrasts sharply with the previous schedule that was phasing the bonus depreciation down year by year.
What This Means:
If your project qualifies, you can expense the full cost of eligible property in the year placed in service, dramatically lowering taxable income in that year.
Who Benefits Most:
Value-add investors accelerating improvements
Developers with significant tenant or structural enhancements
Investors using cost segregation for property components
Important Note:
Some real property components (such as structural elements of buildings) might not qualify for bonus depreciation unless they fall under specific classification rules. Working with a cost segregation specialist and tax advisor ensures you capture the full available benefit.
B. Interest Expense Deductibility Improvements
OBBBA reinstates favorable rules for computing business interest expense under Section 163(j), making it easier for real estate entities to deduct a higher portion of interest relative to taxable income.
Practical Impact:
Investors with leveraged properties can plan financing structures that maximize deductible interest, lowering taxable income without affecting operational cash flow.
Strategy Tip:
Consider refinancing or restructuring debt when possible to take advantage of improved interest expense limits.
C. Higher SALT Deduction Caps
OBBBA increases the State and Local Tax (SALT) deduction cap to $40,000 for taxpayers with adjusted gross income under certain thresholds (phasing out at higher incomes). This is a meaningful relief for investors in high-tax states who previously were limited to a $10,000 cap.
While primarily applicable to individual tax filers, real estate investors with significant property taxes paid on rental property or pass-through income can now deduct more of their SALT liability.
D. Qualified Opportunity Zones (QOZs)
OBBBA makes Qualified Opportunity Zones more flexible by introducing rolling designations, enhancing long-term deferral and exclusion of capital gains when reinvested into QOZ funds.
Strategy:
Realize gain from investment property
Reinvest into a Qualified Opportunity Fund
Defer tax and potentially exclude a portion of future gains
This remains a compelling opportunity for investors looking to reposition or shift capital into long-term growth environments.
E. Estate Planning and Step-Up in Basis
OBBBA increases the federal estate tax exemption (e.g., to $15 million per individual in 2026), offering an opportunity for investors to rethink long-term estate planning around real property holdings.
Real estate investors holding highly appreciated properties may benefit from a step-up in basis at death, eliminating built-in capital gains tax for heirs.
Note: State estate or inheritance taxes may still apply and require separate planning.
5. Practical Tax Efficiency Tools for 2026
Beyond OBBBA, several practical tools help optimize tax outcomes in real estate investing.
A. Cost Segregation + Bonus Depreciation
Pairing cost segregation with immediate bonus depreciation is one of the most effective ways to accelerate deductions.
Example:
A building renovation that qualifies for accelerated depreciation may be fully deducted in year one if placed in service after appropriate classification.
B. Like-Kind Exchanges and 721 UPREIT Contributions
In addition to traditional 1031 exchanges, investors can explore 721 UPREIT contributions, which allow property owners to contribute appreciated property to a REIT operating partnership in exchange for operating units—deferring gain while gaining diversification.
Advantages:
Tax deferral
Liquidity via UPREIT units
Portfolio diversification
C. Passive Activity Planning
Non-active investors often face passive activity loss limits. Strategically grouping rental activities or meeting material participation tests allows the use of passive losses against other income, improving tax efficiency.
D. Strategic Entity Selection
Choice of entity (LLC taxed as a partnership vs. S corporation vs. C corporation) affects how income is taxed, what deductions apply, and whether pass-through benefits like QBI are accessible.
Work with a tax professional to evaluate entity structure based on:
Rental income vs. development income
Liability considerations
Plans for future disposition
6. Timing, Compliance, and Professional Support
The tax landscape for real estate investors in 2026 demands thoughtful planning, meticulous timing, and clear documentation.
A. Timing Matters
When assets are placed in service, when improvements are completed, and when sales are executed can all materially affect deduction eligibility and timing.
B. Documentation is Critical
Cost segregation reports, partnership agreements, debt allocation schedules, and 1031 exchange paperwork all must withstand IRS scrutiny.
C. Collaborate With Advisors
Real estate tax strategies cross multiple domains—tax planning, legal structuring, financing, and estate planning. Engaging CPA, legal, and financial advisors yields better results than isolated action.
7. A Final Word: Tax Savings Are Not Accidents
In 2026, real estate investors operate in a landscape shaped by both time-tested tax strategies and new structural law changes brought by OBBBA. The smartest investors treat tax planning not as a year-end checklist, but as an integral part of investment strategy.
While the principles of depreciation, exchanges, cost segregation, entity structuring, and timing are evergreen, the law you’re operating under has changed—and that creates both risks and opportunities.
Whether you’re a small investor scaling a multi-property portfolio or a developer managing capital expenditures, building a tax strategy that harnesses the full power of current law can significantly enhance your after-tax return and strengthen long-term wealth creation.
Phone: (714) 902-3135
Email: myhome@zengrealestate.com
