7 Real Estate Tax Questions Investors Are Asking Right Now

Real estate investors constantly face nuanced tax situations—especially as markets shift, portfolios grow, and tax rules evolve. In this Q&A-style breakdown, Thomas Castelli and Nathan Sosa walk through some of the most common (and practical) tax questions they’re seeing right now, along with the strategies and pitfalls investors should be aware of.

1. “We’re Selling Our Only Rental—How Do We Reduce Capital Gains Tax?”

This question came from a couple approaching retirement who wanted to simplify their portfolio and reduce risk. Several practical options were discussed. Selling in a low-income year can help reduce your capital gains tax bracket and potentially avoid Net Investment Income Tax (NIIT). Seller financing (installment sales) can spread gains over multiple years instead of recognizing everything at once. DSTs (Delaware Statutory Trusts) or 721 exchange structures can allow investors to remain in real estate in a more passive way, though liquidity is reduced. Another option is refinancing instead of selling, which can unlock equity tax-free if keeping the property still aligns with long-term goals. Investors should also consider tax-loss harvesting from stock portfolios and review passive loss carryforwards (Form 8582), which may offset gains. In more advanced cases, allocation strategies (sometimes referred to as “reverse 1245”) may help reduce depreciation recapture exposure, but these require professional guidance.

2. “Private Lenders Won’t Give Me a 1098 or SSN—What Do I Do With the Interest?”

One investor paid over $20,000 in interest to private lenders but couldn’t obtain proper tax documentation. The key lesson is to collect W-9 or SSN information upfront before making payments, as leverage disappears afterward. If a vendor refuses to provide a W-9, this should be addressed before payment—potentially involving backup withholding rules. Whether the interest is deductible depends heavily on facts, including whether the property is a rental, personal use, or mixed-use, and when it was placed in service. Proper classification is critical before claiming deductions.

3. “Does Cost Segregation Apply to New Construction?”

Yes—cost segregation absolutely applies to new builds. Even newly constructed properties contain components that fall into shorter depreciation categories like five-, seven-, and 15-year property. A cost segregation study identifies and accelerates these deductions. Proper documentation is key, as the IRS expects qualified analysis rather than informal or DIY approaches.

4. “When Do My STR Hours Start?”

Material participation hours typically begin when you are preparing the property to operate as a short-term rental—such as furnishing, setting up listings, and handling operational tasks—or once the property is placed in service. Construction and development activities are generally treated separately and do not count toward STR participation hours.

5. “How Do I Track STR Hours Without Using Excel?”

Several tools can simplify time tracking, including RepsLog (designed specifically for REPS and STR tracking), as well as general tools like Toggl or Clockify. The most important factor is documentation quality. Logs should be time-stamped, task-specific, consistent, and supported where possible with documentation such as receipts, lock logs, or mileage tracking. Vague or generalized entries are more likely to be challenged in an audit.

6. “Can STR Hours Count Toward REPS?”

Yes—short-term rental hours can help meet the 750-hour requirement for real estate professional status in many cases. However, those hours do not automatically satisfy material participation for long-term rental activities. Investors must still evaluate each activity separately, and reaching 750 hours alone does not convert all income into non-passive.

7. “Can I Beat My Property Manager on the 100-Hour Test?”

While it’s theoretically possible to meet the 100-hour material participation test and exceed the time spent by a property manager, it is difficult in practice. The IRS often scrutinizes returns that include property management fees, and proving the manager’s time can be challenging. There are also tax court cases where taxpayers lost due to insufficient documentation of third-party time. The practical recommendation is to avoid using a property manager in year one if your goal is to clearly qualify under material participation tests.

Disclaimer: This podcast summary was generated from the transcript and may contain some errors or miss key points from the audio recording.