27. Real Estate Tax Benefits Explained: Pay Less Taxes

Are you tired of seeing a huge chunk of your rental income go straight to taxes? What if I told you there are powerful legal strategies that can literally wipe out your tax bill — making your rental properties work for you, not against you? This episode dives deep into how real estate can transform your financial future with bold, proven tax tactics. In this episode:

• Discover the top tax deductions for rental properties — mortgage interest, property taxes, depreciation, and operating expenses.
• Learn how to leverage depreciation to reduce your tax liability every year.
• Find out why long-term rentals are your best tax friend — passive income, no self-employment tax, and massive depreciation benefits.
• Unveil the short-term rental loophole — turn those Airbnb stays into active income with huge write-offs.
• Get the scoop on bonus depreciation and 1031 exchanges to accelerate your wealth building.

Transcript

SPEAKER_00 0:00

What if I told you that you can make $50,000 in cash flow from a rental property and pay zero dollars in taxes on it? In fact, what if that same property actually lowered the taxes that you pay on your 925 job? Not all rentals are created equal in the eyes of the IRS. In 2026, the difference between a 12-month lease and a three-day Airbnb stay isn't just the difference in cleaning fees. It's also about which tax bucket your money falls into. So today we are going to be breaking down some of the tax advantages of long-term versus short-term rentals. So you can pick the strategy that fits your tax bracket. But before we talk about that, a quick little disclaimer: we are not tax professionals. This is just for general info and entertainment purposes. So definitely talk to a tax professional to ensure that you get the best tax advice for your particular situation. And also don't forget that I do have the Latina real estate cheese made community in school. So if you are an investor or want to get into real estate investing, your lender, realtor, or involved in real estate in some way, then definitely join. I am looking for more Latinas to just come join this group and help support each other, mentor each other, teach each other, and really just some representation. So that way we are, we don't feel like we're the only ones out here. And so I'll have that link down below. It's free to join. So definitely check it out.

SPEAKER_01 1:45

What are the taxed dotions we're talking about? And right from the get-go, we have the three basics mortgage interest. You can you cannot deduct the principal of your loan, the part that pays down your loan, but you can deduct every cent of the interest, especially now on the high interest periods that we have, like 6.5 and above. In 2026, for rental properties, there's no limit on interest deduction. Number two, you can deduct your property taxes. In 2026, salt cap, which means estate and local tax, was increased to $40,000. This is a massive win for investors in high-tax states like myself. Number three, depreciation. The IRS now assumes your building is wearing out over 27 and a half years. You get a massive deduction every year for this phantom expense, even if your property value is actually going up. And this is one of the heavy hitters that takes out most of the cash flow that you would make, for example, monthly basis, at the end of the year, it kind of evens out. Operating expenses. So the rule of thumb is if it's ordinary and necessary for your business to continue, then it's a write-off. Any maintenance or any repairs that you make in your property, such as fixing a liquid faucet, painting a room, mowing the lawn, it's deductible. Any professional service that you use, your CPA, your lawyer, your property manager's 10% fee, that is also deductible. Your property home insurance, it's 100% deductible. The utilities that you pay if you invest in any multi properties, if you pay for the water, if you pay for the trash, if you pay for the Wi-Fi, everything's a deductible. Any marketing that you use for your properties or your business, like Airbnb platform fees, solo listing fees, or professional photography, also deductible.

SPEAKER_00 3:51

There's a few other ones that people tend to forget when it comes to your rental properties that you can also deduct. And one of them is the travel and mileage. And I know that's one that I tend to forget. And I don't usually have to use it anyways because most of my rental properties are out of state. But now that I'm going to be self-managing, I definitely have to now like create a log or some way to track my mileage and my travel. And so in 2026, the standard mileage rate is about 70 cents per mile. So every trip to let's say Home Depot or Lowe's or just going to check on the property, even going to pay uh pick up the rent or just checking up on it or whatever, all that you can log and it starts to add up. So make sure you have a way to track it. Usually the easiest way is just to keep a log in your car, whatever car you use, and then just remember to be tracking the mileage, which is usually before you start track your starting mileage, and then when you get there and back, then you try you write down the ending mileage, and then that's the difference. And then that's how you start tracking your miles. The other one that people seem to forget is again, this is a business that you are running, so you probably have a home office, so that way you could manage your rentals, your bookkeeping, your sending rental reminders, just emails, anything like that. Then you have a home office, and that can be deductions of and usually since I just did my taxes, they calculate like the the square footage of where your home office is, and then they have some other like calculations. Again, talk to your tax professional for the actual calculation of how much you can deduct, but also utilities because of course you're using the the internet, your phone, home insurance, like there's a lot of things that can get deducted because you have a home office. The other thing that a lot of people don't think of is education. So Lynn and I, we just went to a um a conference with one rental at a time. And so the the flight, which also falls under travel, and then the the fee for the convention and and things like that during while we were there, we can deduct that because it's part of our education. And one thing, even like a YouTube subscription, like if you have a premium subscription uh or other subscriptions, like maybe you are part of some type of um a network or group and they have a monthly subscription fee, then those can possibly be deductions. So don't forget about those, track those as part of your bookkeeping, so that way you could give it to your CPA and they could deduct that. The technology as well. So, for example, one of the things that I'll be using is like Rent Ready, which a little quick plug too. I do have an affiliate. You know, if you're interested, definitely go ahead and use my affiliate, helps us keep, you know, pay the bills and stuff that we use to do this podcast. So Canva is another one, like any software that you use, those fees, those subscriptions can be deducted as well.

SPEAKER_01 7:24

So, what is a repair or what is an improvement? There is a crucial distinction between these two. For example, you cannot rate off $20,000 of a roof that you install all at once. Fixing something that is broken, that's a deductible now. But adding value or extending the life of the property must be depreciated over over years. And as of 2026, we got a bonus. 100% bonus depreciation is back. So if you buy new appliances or furniture for your rental, you can often write off the entire cost in year one instead of waiting about five years. And this is something that you should double check with your CPA. We are just mentioning again, we're not CPAs, we're not here to uh give you advice, but this is just for intentional medications only. The golden rule is that if you didn't have receipts, it did not happen. Open a separate bank account for your rental. Do not mix your personal and business income together. Don't buy your groceries and your tenant's new toilet on the same credit card. It take, it takes time, a five-minute job instead of a five-day nightmare if you are going to mix your business and personal. And do as I say, not as I do, because uh I'm also have done this in the past and it's been a headache. For I also wanted to mention that for anything that you buy a Home Depot, you can open up a contractor per account for entirely free. And the only thing that you're seeing to Home Depot is that you're a contractor, but you don't need any documentation. And when you do open this account, every time you buy anything at Home Depot, you can assign every single purchase that you have to the house that you're buying it for. So when you get your account, it would be separated per house. And this is a service that's completely free.

SPEAKER_00 9:15

I just started an account with uh baseline, and one thing that I did like about that so far is that it created like automatically separate accounts for certain things. So I have my operating account, and then it has like my CapEx account and things like that. I I think we'll do another video of kind of like the tools that we're using because I'm I'm learning a lot, especially again. I'm starting to self-manage, but I do like that baseline has the ability to create like buckets, and each bucket has its own account. So then you can just move stuff around and then um and then each one can be a checking or a savings. But um definitely check it out. Affiliate link um to that as well down below. Going back to the tax uh benefits for long-term rentals because long-term rentals have, well, in my opinion, better uh tax benefits. A long-term rental is considered um at least a year-long lease. So you need to have renters that uh have are going to stay for a year versus short-term rentals that have a shorter time frame. And the thing is that the IRS considers this as passive income. And this is where we get where the deductions and deducting your W-2 tax liability gets a little bit tricky because long-term rental income is considered passive and your W-2 income is considered active, and you can't like kind of you can't mix them to be able to like deduct for your W-2. So, one of the good things about rental income though is that you're not going to pay a self-employment tax, like, for example, your Social Security, Medicare, you're not paying that on the rent versus when you have a W-2 or a side hustle or whatever, you usually have to pay that. And so that's already immediately about a 15% savings compared to your W-2. Again, back to the passive is that when with real estate, you're going to have some years where you are on paper, you know, have a loss. And I had that this past year because I had more repairs and things that I want to update to kind of stabilize some of my rental properties. And so on paper, I have lost money with my rental properties. You can because again, it's passive, I couldn't use that to offset the taxes of my W-2 for that tax year. For this past tax year, I still had some W-2 income. So I wasn't able to do that because there's some rules that go along with that. And I'll briefly mention the real estate professional. Uh, I'm not gonna get too much into it because there's a lot of rules and things that have you have to qualify. But in order to be able to, again, be able to offset your tax liability of W-2, and this applies to your personal W 2 and your if you're married, like your spouse's U2 income, you could do that. But you have to be able to have it as active income. So, and that includes to be able to qualify as a real estate professional, has a few rules that I'll mention briefly. For example, you have to have over 50% of your personal services and over 750 hours in real property business. That means like you're either developing rentals, you're managing, all that. And that's where you majority materially participate, meaning you're doing, you're actively doing and like managing. For example, now that I'm managing my properties, that's considering it because now I'm active in my real estate, whereas before I paid a property manager, so it was more passive. So hopefully I meet this criteria. That's the goal that this year I'm going to meet this to be able to next tax for the next tax season. I'm able to qualify as a real estate professional, which will offset the W-2 income of my husband. And so that's how you start, you know, playing the game of reducing your tax liability, which means more money in our pocket, which means more investments that I can buy. So I don't want to get too much into it because it gets a little bit tricky. So definitely talk to your um uh CPA to if that's a strategy that you want to use and figure out a plan and figure out how to qualify because I'm still in the works of that. So I'm talking, I'm working with my CPA to make sure that I meet that goal this year. The other thing is, of course, the depreciation, which Lynn basically already touched upon, is that it is seen as a business. And with businesses, you have wear and tear because your property is seen as like the product, right? Like so, in any business, let's say you have a mechanic shop or whatever, sometimes you use some tools or whatever, there's wear and tear in that. So, same thing with a rental property, it is something that's being used by the tenant. So there's gonna be wear and tear, and that's what the IRS sees it as, even though over time it appreciates it's it's different things. So you're able to deduct the depreciation, and the calculation is basically over 27.5 years, they divide that of the value of the property minus the land. The land is is not included, so they subtract that and then they divide the leftover value of the property, divide that by the 27.5 years, and then that gives you a number, and that's the amount that you can deduct per year, right? And so that's goes against your your rental income, and then again, that's how you're reducing your tax liability and the taxes that you that you pay.

SPEAKER_01 15:15

So, yeah, uh a lot of benefits there. If you are at the lead to employee and you're not unable to get your professional status as a real estate professional, then listen up because we have the short-term loophole. And this means like when you average guest state seven days or less, Iris doesn't even call it a rental activity. So it's no longer passive, they call it a business, and this is active. It matters because you materially participate, meaning you spend time on the business roughly 100 hours a year, more than anybody else, then your losses now can be called active loss. And this is very important because if you are a WTO employee and then you have a high income, you most likely are paying 30% of your taxes to the government. Once you can materially participate in a short-term rental, your business now has losses that can be written against your WTO income. Another tax benefit that you can get is the 1031 exchange. And then in the IRS, there's a code called 1031, protect and defer, which is a strategy that rolls profits into a new property without paying taxes. Suppose your rental income for the year is about $20,000 and your operating expenses are $10,000, leaving you with $10,000 in profits. And you've been claiming deductions for those 10 years, and you have not claimed, like not pay any taxes for those 10 years from the cash flow that you've been generating because you've taken advantage of those wonderful tax deductions that we talked about. Then now at the time of selling your property, selling for whatever reason that you want, you want to uh roll it on to multi-proper multi-family property. So you want to roll it out into something else, then there it's there's the specific criteria and the tax code, which you can access to at the ferment of that recapture appreciation of that you have of the property, because the government has been giving you deductions for the last 10 years, not allowing you to put taxes on the cash flow that you've been getting. So now at the end of the sale, they're gonna be like, Where's my money? Right? Because I allow you to generate income from this property that you treated as a business for 10 years now, I want my money. But there's an exception. If you move the sale proceed of that house into a 1031, meaning you're gonna exchange that same, for example, debt structure of the property into another property of the same like, meaning that if you are selling a rental house, you're gonna buy another rental house, not just a boat or a building or something else. Then that means the government will let you redefer that recapture appreciation on that cell. So you no longer have to pay Uncle Sam that not only the profits that you make from the cell, because that's a capital gain, but not none of the recapture uh depreciation that you've taken over the last 10 years. And that's a powerful, powerful technique that allows you to scale up and allows you to move your money without incurring any type of taxes in the transaction. For more information, please go and check out SCPA and then make sure that uh all of this information is will be checking out with them as well.

SPEAKER_00 18:59

That's a great strategy. And when when you're like out here like looking, you'll sometimes see like um properties and they'll put like this is a 1031 exchange or whatever. So definitely also talk to your realtor because I think there's like some steps you gotta do and make sure the logistics are done correctly so that way you can take a benefit. And like you could do this forever. Like I know people just like you know, investors they'll just kind of defer and defer and just continue doing 1031s, and you know, it just keeps going until who knows when. And so that's a great, a great option. I haven't done one, I don't think Lynn has done one either, but um maybe in the future will be an option. But I keep I keep my rentals for long term, so I haven't had to do it yet, but maybe in the future. The other thing, another option that has been renewed is the bonus depreciation. And this is um something that got um renewed from the one big beautiful bill act um that was passed. Um because it was supposed to be phased out by 2026, and you started at like 100%, and then every year just dropped by like I think it was like 20% or whatever until like it it ended. It was supposed to end in 2026, but it got renewed, so now we're back to 100%. Um, and this is uh depreciation. We mentioned that you depreciate the house, the property. Now, this is uh you depreciating uh the equipment, things like appliances and inside the property, you can depreciate that 100% off the bat and use that as a deduction um for your taxes. Now the thing is that um it gets you know triggered by when you put the property in service. So once you put it um for as a rental property, um, and it has to be a property that you just purchased, so you can't just like you know, um have had a property and then all of a sudden, you know, like you know, uh have put it for rent or whatever. It has to be a property that you bought and then you put it in service as a rental property. And so some of the things that you can claim as a bonus uh depreciation is again things like um like furniture. If you have like a property, some people have a what's it called? Furnished rooms for like let's say dorms or whatever. Um, you can depreciate the furniture, appliances, some electronics. Really, if there's a list, go to the IRS website and it'll give you kind of a list of things that you can uh depreciate. Some land improvements may uh be able to qualify, maybe uh fencing, paving a driveway, some land. Landscaping. So I'm gonna check that one out because I like to do landscaping and gardening and stuff. So I'm kind of curious on what I could depreciate on that if I put like a tree or something. And so um those are options to depreciate. Again, you get the full 100% depreciation for the tax year. And so that's another way to deduct um your tax liability, well, to reduce your tax liabilities. Um, for example, let's say you have an Airbnb uh for $500,000. Uh, you can do a cost segregation study, and then you find out that $100K of the furniture, because you have to provide like mattresses and and pictures, appliances, all that. And all of that costs you $100,000 to put in. So you bought it and then you had to furnish it, you had to buy new appliances and all that. So all of that, let's say, cost you $100,000. And then you put it in service, and so now you can take up that a hundred thousand dollar um deduction in year one. And so if you had like a high, high uh income, then that can offset your tax liability for your W-2 incomes. It's a lot of strategy. Again, plan it out with your CPA to make sure that you get the max benefit and you strategize to make sure that you you really take advantage of that. But overall, real estate has so many different ways to reduce your tax liability, which is why it's one of the greatest wealth-building tools and why me and Lynn we love uh real estate and we are learning how to use these deductions strategically. Again, hence why I am deciding to self-manage this year.

SPEAKER_01 23:52

So just to recap, long-term rentals is basically the set it and forget it tax play. You avoid self-employment tax and you use depreciation, dividing the building value by 27.5 years to cancel out your rental income. So you pay zero dollars in taxes on your monthly cash flow. And short-term rentals is the tax shield play. If guests stay seven days or less on the on average and you manage it yourself, you can use the short-term rental loophole to deduct massive paper losses against even your W-2 salary. 2026 has big wins, 100% bonus depreciation, which you can deduct the full cost of furniture appliance and certain building systems in year one. 14-day rule rent your own home for two weeks or less. That income's 100% tax free. If that IRS doesn't even want to hear about it. Mileage. Don't forget to collect the mileage when you're going to that trip to Home Depot. It's worth 0.70 cents per mile of your taxable income. All right. Knowledge has power, but only if you use it. Here are your next two steps. Step number one, watch our podcast every week that it comes out. But step number two, please verify everything that we have said. Word your own CPA or tax professional. You hear everything on the internet, but trust and verify, please.

SPEAKER_00 25:18

Don't forget that we have resources down in the description below. Follow the podcast, subscribe to the YouTube channel, and let us know any questions that you may have. And we will see you in the next episode. Bye.