Real Estate Tax Incentives for Homeowners and Investors

Federal tax law gives homeowners and real estate investors a stack of ways to lower what they owe, and several of them changed in July 2025 when the One, Big, Beautiful Bill Act became law. If you own the home you live in, the main real estate tax incentives for homeowners and investors that touch you are the mortgage interest deduction, the state and local tax (SALT) deduction, and the capital gains exclusion when you sell. If you own rental or commercial property, the bigger levers are depreciation, 1031 exchanges, opportunity zone investing, and targeted credits for historic rehabilitation and affordable housing. The 2025 law raised the SALT cap, restored full bonus depreciation, and shut down residential energy credits at the end of 2025.

Mortgage Interest Deduction

If you itemize, you can deduct interest on mortgage debt used to buy, build, or substantially improve your primary or secondary home. For loans taken out after December 15, 2017, the deductible debt limit is $750,000, or $375,000 if you’re married filing separately.¹ Older mortgages are grandfathered under the previous $1 million limit. Two homeowners paying identical interest can end up with different deductions depending on when they closed.

Points you pay at closing count as prepaid interest and are often deductible. On a purchase loan for your main home, you can usually deduct the full amount in the year you paid, provided the points reflect standard local practice and the loan is secured by that home. Points paid on a refinance generally have to be spread over the life of the new loan, though the portion tied to home improvements can still be deducted upfront.¹ If the seller paid your points, you treat them as if you paid them, but you have to reduce your home’s cost basis by that amount.

State and Local Tax Deduction

The SALT deduction lets itemizers write off property taxes together with either state income taxes or state sales taxes. The Tax Cuts and Jobs Act capped that deduction at $10,000 starting in 2018. The One, Big, Beautiful Bill Act raised the cap to $40,000 for 2025, with inflation adjustments bringing it to roughly $40,400 for 2026 (or $20,200 if married filing separately).

Higher earners lose the increase on a sliding scale. The expanded cap shrinks by 30 cents for every dollar your modified adjusted gross income exceeds about $505,000 in 2026, and the phasedown stops once you’re back at the old $10,000 floor. For a married couple earning $600,000 or more, the effective cap is close to $10,000 again. The change matters most for middle- and upper-middle-income homeowners in high-tax states.

Capital Gains Exclusion When You Sell Your Home

Most homeowners who sell at a profit owe nothing in federal capital gains tax. Single filers can exclude up to $250,000 of gain, and married couples filing jointly can exclude up to $500,000.² To qualify, you must have owned and lived in the home as your primary residence for at least two of the five years before the sale. The two years don’t have to run consecutively.

If you fall short of two years because of a job relocation, health issue, or unforeseen event such as divorce, disaster, or job loss, you can claim a prorated portion of the exclusion.³ Someone who lived in the home for one of the prior five years, for example, would get roughly half the full exclusion.

Adjusting Your Basis With Improvements

Your taxable gain is not simply sale price minus what you paid. Capital improvements during ownership raise your cost basis and directly reduce the gain you report. The IRS separates improvements from repairs. Adding a bathroom, replacing a roof, installing central air, or building a deck all count as improvements. Patching a roof leak or fixing a broken window handle does not.³

Keeping receipts matters more than most sellers expect. Spend $80,000 on a kitchen and $30,000 on landscaping across a decade, and those costs come off your taxable gain dollar for dollar. One catch: if you claimed tax credits for energy improvements, you have to subtract those credits from your basis, and the same rule applies to insurance reimbursements after casualty damage.³

Depreciation on Investment Property

Owners of income-producing real estate can deduct the cost of the building (not the land) over its useful life, even while the property appreciates in market value. This depreciation offsets rental income on paper and lowers your tax bill without a matching cash outlay. Residential rental property depreciates over 27.5 years; commercial property uses a 39-year schedule.⁴

Bonus Depreciation Back at 100 Percent

The One, Big, Beautiful Bill Act restored 100 percent bonus depreciation for qualifying property acquired after January 19, 2025.⁵ Investors can immediately deduct the full cost of shorter-lived assets, such as appliances, carpeting, and site improvements, in the year they’re placed in service, rather than spreading those deductions across five, seven, or fifteen years. The building shell still follows the standard 27.5- or 39-year schedule, but anything that qualifies as personal property or a land improvement can be written off at once.⁶

A cost segregation study is the engineering-based analysis investors use to identify which components qualify for shorter recovery periods or immediate expensing. Lighting fixtures, parking lots, decorative millwork, and specialized plumbing often get reclassified as personal property or land improvements. On a $2 million apartment building, a well-executed study might reclassify 20 to 30 percent of the purchase price into categories eligible for immediate write-off.

Whether You Can Actually Use Rental Losses

Depreciation only helps if you can claim it against income you actually pay tax on, and the passive activity rules limit that. The IRS treats rental real estate as a passive activity by default, so rental losses generally offset only other passive income, not your salary or business earnings.⁷

Two exceptions matter. If you actively participate in managing your rental (approving tenants, setting rents, authorizing repairs), you can deduct up to $25,000 in rental losses against non-passive income. That allowance phases out once your modified adjusted gross income exceeds $100,000 and disappears entirely at $150,000.⁷

The second exception, real estate professional status, removes the passive limit altogether. To qualify, you must spend more than 750 hours during the year in real property businesses where you materially participate, and that time has to exceed half of the personal services you perform across all your work.⁷ With that status, rental losses can offset W-2 income, investment income, or business profits without a ceiling. Losses you can’t use in a given year carry forward until you have passive income or sell the property.

Depreciation Recapture and the Net Investment Income Tax

Every dollar of depreciation you claim reduces your cost basis, which increases the gain when you sell. The IRS collects on that through a recapture tax. For real property, recaptured depreciation is taxed at a maximum federal rate of 25 percent, higher than the 15 or 20 percent long-term capital gains rate most investors pay on the remaining appreciation.⁸

That’s what makes depreciation a deferral rather than a permanent savings. Buy a rental for $300,000 (excluding land), claim $100,000 in depreciation, and your adjusted basis drops to $200,000. Sell for $400,000, and you owe recapture on the $100,000 of depreciation at up to 25 percent, plus capital gains tax on the $100,000 of appreciation at your applicable rate. Both pieces get reported on Form 4797.⁹

Higher-income investors also face the 3.8 percent net investment income tax on rental income, capital gains from property sales, and interest. The surtax applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $250,000 (married joint), $200,000 (single), or $125,000 (married filing separately).¹⁰ Those thresholds are not indexed for inflation. It’s calculated on Form 8960.¹¹ Rental income from a trade or business in which you materially participate is generally excluded, so a landlord who qualifies as a real estate professional may avoid the 3.8 percent surtax on rental earnings that a passive investor in the same property would owe.

1031 Like-Kind Exchanges

A 1031 exchange lets you sell one investment property and reinvest in another without paying capital gains tax at the swap. The replacement property has to be held for business or investment use, but “like-kind” is read broadly for real estate: you can trade an apartment building for raw land, or a warehouse for a strip mall, as long as both are U.S. real property.¹²

The timelines are strict. After closing on the sale of the property you’re giving up, you have 45 days to identify replacement candidates in writing (up to three), and the whole exchange must close within 180 days of that sale or by the due date of your tax return for the year, whichever comes first.¹² Miss either deadline and the transaction is a fully taxable sale.

You can’t touch the sale proceeds during the exchange. A qualified intermediary holds the funds between transactions. If you receive the money directly, even briefly, the IRS treats the deal as a taxable sale regardless of what you do next.¹³ The intermediary agreement has to bar you from accessing, pledging, or borrowing against the held funds.

Any proceeds you don’t reinvest are called “boot” and are taxable. Boot shows up as cash you pocket or as a smaller mortgage on the replacement property than you had on the old one. Sell a property with a $300,000 mortgage and buy one with a $200,000 mortgage, and the $100,000 in debt relief is boot even if you reinvest every dollar of cash. Full deferral requires the replacement to be equal or greater in both value and debt.

One thing to keep in mind: a 1031 exchange defers tax, it does not erase it. Your basis in the old property carries over to the new one, so the deferred gain stays embedded in the investment. Some investors chain exchanges for decades and rely on a stepped-up basis at death to wipe out the accumulated liability. Sell without exchanging, and the whole deferred gain comes due at once.

Opportunity Zones

Qualified Opportunity Zones were created by the Tax Cuts and Jobs Act to route capital gains into economically distressed communities. Reinvest a capital gain into a Qualified Opportunity Fund within 180 days of the sale that produced it, and the tax on that original gain is deferred.¹⁴

For investors who entered the program before 2027, the deferral ends on December 31, 2026, or when the fund interest is sold, whichever comes first. Taxpayers holding original-program investments will recognize their deferred gains on their 2026 returns, which can produce a sizable tax bill with no matching cash event. If you have an existing Opportunity Zone investment, plan for that liability now.

The bigger incentive is the permanent exclusion on new appreciation. Hold the Opportunity Zone investment for at least ten years and any gain that accrued inside the fund is tax-free when you sell, because your basis steps up to fair market value at the time of sale. The One, Big, Beautiful Bill Act preserved the ten-year exclusion and launched a second round of Opportunity Zone investments starting January 1, 2027, with modified rules including a 10 percent basis step-up after five years and reduced substantial improvement thresholds for properties in rural zones.

Historic Rehabilitation and Low-Income Housing Credits

Two specialized credits reward investors who take on preservation or affordable housing work. The federal historic rehabilitation credit is worth 20 percent of qualified expenses for renovating buildings listed on the National Register of Historic Places or located within a registered historic district.¹⁵ The work has to follow preservation standards set by the Department of the Interior, so you can’t gut a historic building and keep the facade. The credit is claimed over five years.

The Low-Income Housing Tax Credit under Section 42 works differently. Developers who build or renovate rental housing and set aside units for tenants earning 60 percent or less of the area median income receive a credit spread over ten years.¹⁶ Most developers don’t use the credits themselves; they sell them to investors who need to offset their own tax liability, and that investor equity funds construction. State housing agencies allocate the credits, and compliance requirements run at least 15 years past the credit period.

Energy-Efficient Property After the 2025 Changes

The energy tax credit picture shifted sharply when the One, Big, Beautiful Bill Act terminated several residential credits that the Inflation Reduction Act had expanded. Both the Energy Efficient Home Improvement Credit under Section 25C and the Residential Clean Energy Credit under Section 25D ended on December 31, 2025.¹⁷¹⁸ Homeowners who installed solar panels, heat pumps, or energy-efficient windows before that date can still claim the credits on their 2025 returns. No new residential energy credits are available for property placed in service in 2026.

The Energy Efficient Commercial Buildings Deduction under Section 179D remains available for qualifying property that begins construction before July 1, 2026.¹⁹ The amount depends on energy savings achieved and whether the project meets federal prevailing wage and apprenticeship requirements. Projects that satisfy those labor standards can claim up to roughly $5.81 per square foot for 2025 (the most recently published figure), while projects that don’t meet them are limited to a base deduction of up to about $1.16 per square foot.²⁰ The fivefold multiplier for meeting prevailing wage and apprenticeship standards makes labor compliance the single biggest factor in how much you can deduct.²¹ Projects that break ground before the July 2026 cutoff lock in the deduction even if construction extends past that date; wait too long and the benefit is gone.

1
Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction
2
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
3
Internal Revenue Service. Publication 523 – Selling Your Home
4
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
5
Internal Revenue Service. Notice 2026-11 – Interim Guidance on Additional First Year Depreciation Deduction Under Section 168(k)
6
Internal Revenue Service. One, Big, Beautiful Bill Provisions
7
Internal Revenue Service. Publication 925 – Passive Activity and At-Risk Rules
8
Internal Revenue Service. Topic No. 409 – Capital Gains and Losses
9
Internal Revenue Service. Instructions for Form 4797
10
Internal Revenue Service. Topic No. 559 – Net Investment Income Tax
11
Internal Revenue Service. About Form 8960 – Net Investment Income Tax Individuals, Estates, and Trusts
12
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
13
Internal Revenue Service. Revenue Procedure 2003-39
14
Office of the Law Revision Counsel. 26 USC 1400Z-2 – Special Rules for Capital Gains Invested in Opportunity Zones
15
Internal Revenue Service. Rehabilitation Credit
16
Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit
17
Office of the Law Revision Counsel. 26 USC 25C – Energy Efficient Home Improvement Credit
18
Office of the Law Revision Counsel. 26 USC 25D – Residential Clean Energy Credit
19
Office of the Law Revision Counsel. 26 USC 179D – Energy Efficient Commercial Buildings Deduction
20
U.S. Department of Energy. 179D Energy Efficient Commercial Buildings Tax Deduction
21
Internal Revenue Service. Frequently Asked Questions About the Prevailing Wage and Apprenticeship Under the Inflation Reduction Act