Real estate investing can offer strong returns, but tax mistakes can quickly eat into your profits. Many investors—whether beginners or seasoned—overlook key tax rules or miss out on valuable deductions. Knowing which errors to avoid can help you reduce your tax bill and keep more of what you earn. Here are the top tax mistakes real estate investors should watch out for.
Not Keeping Track of Expenses
Failing to maintain organized records of expenses can cause you to miss out on deductions like property taxes, mortgage interest, repairs, and insurance. Use accounting tools or a tax advisor to make sure you capture every eligible cost.
Skipping Depreciation Deductions
Depreciation lets you deduct the cost of your property (excluding land) over time—27.5 years for residential and 39 for commercial. Many investors overlook this benefit, leaving substantial savings unclaimed.
Missing Out on 1031 Exchanges
A 1031 exchange allows you to defer capital gains tax by reinvesting proceeds from a sold property into a new one. This strategy requires strict timing and rule compliance, so consult a professional to use it correctly.
Misclassifying Short-Term Rentals
Short-term rentals, like those on Airbnb, have different tax rules. If you rent for more than 14 days, the income is taxable and certain deductions apply. Misunderstanding these rules can lead to penalties or missed benefits.